Insperity Inc (NSP) 2007 Q1 法說會逐字稿

Good day, and welcome, ladies and gentlemen, to the first-quarter 2007 earnings conference call. My name is Audrey, and I will be your conference coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS) As a reminder, ladies and gentlemen, this conference is being recorded for replay purposes.

On today's call, we have Mr. Richard Rawson, President of the Company, Mr. Paul Sarvadi, Chairman of the board and Chief Executive Officer, and lastly, there Mr. Douglas Sharp, Chief Financial Officer. You may proceed, sir.

Thank you. We appreciate you joining us this morning. Before we begin, we would like to remind you any statements made which Paul Sarvadi, Richard Rawson or myself that are not historical facts are considered to be forward-looking statements within the meaning of the Federal security laws. Words such as expects, intends, projects, believes, likely, probably, goal, guidance, appears, target and similar expressions are used to identify such forward-looking statements and involve a number risks and uncertainties that have been described in detail in the company's filings with the SEC. These risks and uncertainties may cause actual result to differ materially from those stated in such forward-looking statements. Now let me take a minute to outline our plan for this morning's call.

First I am going to discuss our first-quarter financial results. Richard will discuss trends in our direct costs including benefits, workers compensation and payroll taxes and the income of such trends on our pricing. Paul will add his comments about the quarter and the outlook for the remainder of the year. I will return to provide financial guidance for the second quarter and the remainder of 2007. We will then end the call with a question-and-answer session. Now let me begin by summarizing first-quarter financial results which are consistent with that provided in our release from last week. We reported first-quarter earnings of $8.4 million or $.30 per share. This was below our expectation primarily as a result of higher-than-expected health care costs. These higher health care costs contributed to an average gross profit for employee per month of $216 for the quarter below our forecasted range of $224 to $230.

The average number of work site employees paid increased 9% for the quarter, slightly less than our forecasted growth of 10%. Operating expenses increased 8% below forecasted levels, and declined on a per work site employee basis from $186 in Q1 of 2006 to $184 in Q1of 2007. Now let's review the details of our first-quarter results. As I just mentioned the average number of paid work site employees per month increased 9% over the first quarter of 2006 from 96,006 to 104,881. While work site employee growth was relatively flat through the first two months, we ended the quarter paying just over 106,000 work site employees in the month of March.

In a few minutes Paul will provide our details behind our unit growth drivers, including sales, client retention and net growth within the existing client base. First-quarter revenues increased 13% over 2006 to $408 million, primarily as a result of the 9% increase in the average paid work site employees and a 4% increase in revenue per work site employee per month. Looking at first-quarter revenue contribution in growth by region, the southeast region which represents 10% of total revenue grew by 11%, the northeast region which represents 20% of total revenue grew by 25%. The central region which represents 14% of total revenue grew by 10%, the west region, which represents 22% of total revenue grew by 7%, and the southwest region, which represents 33% of total revenue grew by 12%.

Moving to gross profit, gross profit per work site employee per month for the quarter was $216 down from $236 reported in Q1 2006 and below our expectations. As you recall from last quarter's conference call, we experienced a high number of large health care claims during the fourth quarter of 2006. With this in mind, we provided an estimate of 2007 full-year health care cost increases in the range of 7% to 9%. Claims incurred during Q1 of 2007 increased year-over-year at the high end of our Q1 expected range.

Additionally, the large claims incurred in 2006 developed at a higher cost than estimated and, therefore, resulted in additional first-quarter costs. When you combine the impact of these two components, benefit cost per covered employee per month increased 13% over the first-quarter 2006 to $685. Just over 73% of the work site employee base was covered by our medical plans during the first quarter, resulting in a cost of $502 on a per work site employee per month basis. In a few minutes, Richard will discussion the recent claims activity, expected trends going forward, and how these costs trends will impact pricing.

As per our other direct costs, payroll taxes are the total of payroll costs declined from 9.46% in Q1 2006 to 8.93% in Q1 of this year as a result of lower state unemployment tax rate and higher payroll averages and bonuses of work site employees. Worker's compensation costs were .60% of non-bonus payroll for the quarter below our forecast range of .85 to .90%. Actual lost estimates favorable claim trend and resulted in this quarter $6 million in previously reported loss estimates.

Richard will discuss the drivers resulting in this positive reserve adjustment in a few minutes. Now let's move on to operating expenses which increased 8% over Q1 2006 to $58 million slightly below our expected range. Per work site employee per month basis, operating expenses declined from $186 in Q1 of 2006 to $184 this quarter as expected increases in cash and stock-based compensation were more than offset by lower general and administrative depreciation and advertising costs. As for net interest income, we reported approximately $3 million for the quarter. We are now estimating an annual effective income tax rate of 35.4% reflecting a higher percentage of tax exempt interest income.

Now let's review several key balance sheet and cash flow items. We generated approximately $17 million of EBITDA during the quarter. Cash outlays during the quarter included share repurchases totaling 346,000 shares at a cost of $12.7 million. Cash dividends of $3.1 million. And capital expenditures of $1.8 million. As a result, working capital declined slightly from $128 million at December 31, 2006 to $120 million at March 31, 2007. As of today, we have 953,000 shares remaining for repurchase under authorization. Now before providing our financial guidance, I would like to turn the call over to Richard.

Thank you, Doug.

This morning I am going to discuss the details of our first-quarter gross profit results. Then I will explain how our pricing strategy and direct cost trends should shape our gross profit per work site employee per month for the second quarter and beyond. Let me remind you that our gross profit comes from the mark-up on our HR services combined with the surplus that is generated when our direct cost pricing allocations exceed the corresponding direct costs. For this quarter, as Doug just reported, our gross profit for work site employee per month was $216 and below our forecasted range. These results came from achieving our targeted average mark-up for the quarter of $200 per work site employee per month and generating a surplus of $16 per work site employee per month.

The surplus came from contributions in payroll tax and worker compensation direct cost centers offset by higher-than-expected costs in the benefit cost center. Here are the details. The surplus in the payroll tax cost center came from better than expected state unemployment tax rates that we received near the end of the quarter compared to our pricing allocations that we adjusted for last fall. This surplus was higher than what we had forecasted last quarter.

Our second contributor to the surplus in this quarter came from our workers' compensation program. As Doug reported a few minutes ago, our workers' compensation expense was reduce primarily by a $6 million reduction to our reserve for claims. We have been seeing a $2.5 million to $3 million reduction to our reserve each quarter for the last couple of years. So these better-than-expected results continue to come from our people being able to settle workers' compensation claims for amounts lower than expected. The other factors that affect a lower-than-expected cost are the incidents and severity rates associated with the current policy year. This quarter, the incidents' rate was down more than 7% on a work site employee growth base of 9%.

The severity rate associated with these claims is down almost 8% over last year, and also contributed to this quarter's lower-than-expected cost. As we have previously announced, the benefits cost center did not contribute to gross profit surplus. Specifically, health care claims during the quarter were $15 per covered employee higher than what we had forecasted as the top end of our range for the quarter. This excess primarily related to higher costs associated with prior period health claims that got paid in this quarter. Excluding these prior period claims, our first-quarter trend was 9%.

In the fourth quarter, we experienced a rather large increase in health-care claims that exceeded $50,000 each. And I had said that if this was -- that -- excuse me -- that if this was a trend, than our costs will be increasing 9% over 2006. The good news is that the large claim increase in the fourth quarter was a spike, and this quarter we settled back into a much more familiar pattern in both the number and dollar amount of large claims. So the 9% trend increase came from normal utilization and health care inflation.

In summary, the other direct cost surpluses offset the 9% trend in health care costs, but could not absorb the increased dollar amounts associated with the prior period claims. Now I would like to update everyone on the changes of gross profit per work site employee per month expectations for Q2 and the remainder of 2007. Let me explain each component beginning with pricing. Our plan is to continue to increase the average mark-up from the 2006 average of $198 per work site employee per month to $201 per work site employee per month for 2007. The demand for our service is still very high and renewal pricing in the first quarter increased slightly more than $3 per work site employee per month.

The second component of our gross profit for work site employee per month comes from the surpluses that we generate by managing the direct costs so that they are lower than what we allocate in our pricing to cover those costs. As for the payroll tax cost center, we should continue to generate a surplus from the lower unemployment tax rates we have received from the state.

As a result of continued low unemployment level, state funds are continuing to generate surpluses, and we anticipate statutory requirements will mandate the return for these surpluses to employers through lower rates and or tax credits. Because of how payroll tax expense in the corresponding billing allocation in our model work, we shall see a nominal surplus in Q2 and Q3, and then increasing to a moderate surplus in Q4. These expectations remain unchanged from last quarter.

As for workers' compensation, we see a surplus contribution continuing throughout the balance of 2007, generated by the difference between our allocations and the ultimate cost of the program. Last fall, we begin to lower our allocations to match the lower costs associated with our workers' compensation program and have no plans to further reduce this allocation. Excuse me.

In addition, we have had an increase in the percent of white-collared workers which have lower pricing allocations. But we expect our costs to trend downward from the previously forecasted range of .85% to .90% of non-bonus payroll to a new range of .75% to .80% of non-bonus payroll. This lower rate is further substantiated by the refund of approximately $25 million coming to us from AIG during the second quarter. This return of excess funding is the result of our losses being lower than AIG's original loss on the prior year's policies.

Bottom line is, we still expect to see a nice surplus contribution to gross profit from this cost center. Now as for the benefits cost center, we have some deficits that need to be reduced. The last several quarters, we have observed that our claim costs of -- that -- we have observed that our claim costs above our expectations has come from participants enrolled in the Choice Plus 250 plan. This plan is the lowest deductible, highest cost plan that we offer through UnitedHealthcare and was available to all employees. Therefore last Fall, we began to increase our allocations for this particular plan at much higher amounts than our other types of offerings.

Additionally, in January, we changed our offering to limited enrollment in the Choice Plus 250 plan by restricting access only to employees of clients that use our richest PPO offering. If our efforts are successful, we should see a reduction to the current 9% trend in health care costs as people migrate to a lower cost, higher deductible plan. Historically, when we have made these types of adjustments, there has been a couple of months lag before we see claim costs improve. So to be conservative, we will forecast a 9% increase per covered work site employee over 2006, except for the second quarter.

As you may remember last week we announced a renewal of our health care contract with UnitedHealthcare for three years beginning in 2008. One of the provisions in this new agreement included a credit to administrative expenses of $3.3 million for the second-quarter 2007. The second-quarter's expense will reflect this credit therefore and our trend for Q2 should be lower than 9%.

In summary for the balance of 2007, we continue to see the average mark-up per work site employee per month to gradually increase throughout the year from an average of $198 to $201. We should continue to see surpluses generated two of our three direct cost centers. Therefore, the surplus percentage of gross profit for the full year could be in the $22 to $27 per work site per employee per month or approximately 2.5% of the dollars allocated within our pricing to cover the direct costs. Now I would like to turn the call over to Paul.

Thank you, Richard. In my part of the call today, I'll discuss three topics of importance to Administaff and investors. First, I will comment on each of the drivers to our unit growth in the first quarter, sales of new accounts, client attrition, and the net effect of new hires and layoffs within the client base. I will also provide details surrounding systemic improvements that are under way to reinvigorate each of our growth contributors. Then I will conclude with our outlook of growth in both the near and long term.

Our announcement last week included the average number of paid work site employees for the quarter and the actual number paid in March. As you can tell from these numbers, we experienced two weak months in unit growth and then finished the quart with a nice increase in work site employees in March. Several factors combined to produce these results. First, the total number of work site employees lost from attrition of current clients was slightly higher than historical numbers in the first two months of the quarter.

As I mentioned last quarter, the number of accounts terminating has actually been below historical levels; however, the average number of work site employees associated with terminating clients has been higher than historical levels due to mid-market termination. The net effect has been a slightly higher total number of work site employees for terminating clients coming out of the employee count. Our typical monthly attrition rates are 6% to 7% of work site employees in January, 2.5% to 3% for February, and approximately 1.5% for March through the balance of the year. This year, we will above our range at 8% for January. At the high end of our range of 3% for February. And then right on our historical numbers for March at 1.5%.

Secondly, enrollment in -- in first payroll on new clients sold during the fall campaign extended further into the first quarter than we experienced in the past. The large number of new accounts sold in the fall campaign typically more than offset the year-end client attrition. Of course the work site employees associated with terminating clients come out of the employee account immediately and new accounts not well into the count until the first payroll runs. The timing between terminating accounts and slower enrollment of new accounts in the queue also contributed to a lower-than-expected average work site employee count for the quarter.

Another factor in our work site employee count is the net effect of new hires and layoffs within the client base which reflects the economic climate and more specifically the job market within the small business community. Although new hires are exceeding layoffs, we continue to experience a lower number of new hires than we would expect considering the economic climate. This reflects the continuing challenge we see for small businesses and finding qualified employees for open position. In addition, new sales during the first quarter were below budget largely due to two process improvements we are making to improve our visibility and our growth projections.

The first improvement is our mid-market re-engineering process initiated after the year-end transition yielded at more client terminations and fewer sales than expected within this segment. During the first quarter, we conducted an in-depth analysis of our strength, weaknesses, opportunities and threats within our sales, service, and infrastructure for our mid market segment. We have identified specific obstacles, leverageable strengths, and target opportunities which we believe will lead to a step up in both sales and retention of clients in this segment. These changes will be implemented throughout the second quarter and begin to affect results in the second half of 2007.

Although I will not discuss the specific changes we are making in the mid market on this call for competitive reasons, I am very encouraged by the creative solutions from this process and the likelihood of improving results. In addition, many improvements that have emerged from the mid market re-engineering process are likely to improve sales and retention in our core small business segment. The second systemic improvement we are making is to -- is to address better throughput from sales of new client to enrollment and payment of new work site employees on an accurate timely basis. In order to accomplish this, we have tied sales compensation and rewards such as qualifying for the annual incentive trip to the actual payment of employees sold in new accounts.

Previously sales credit was awarded on certain current accounts that added a new line of business or acquisition and on accounts sold before the first payroll was run. This change aligns the entire organization around enrolling new clients and should reduce the shrinkage we experienced historically between employees sold versus employees paid. Another systemic change that we are investing in at this time is designed to reinvigorate the internal growth within our client base. During first quarter we reorganized our recruiting organization to respond to changes in the labor market and improve our clients competitiveness in finding qualified new employees.

We have formed recruiting specialty units for the top seven types of employees our clients have used our recruiters to find in the past. This includes sales, technology, professional, administrative, health care, accounting, finance, and light industrial recruiting segments. Each of these units have dedicated staff working together and focused on recruiting their specialty employee category. We have also redesigned job functions separating candidate interaction from administrative tasks to increased sufficiency to speed up the recruiting process.

We've also developed new and deeper alliance relationships to leverage our collective buying power into significant discounts on services utilized in the recruiting and selection process. These alliances include Career Builders with job posting, higher right for background check needs, sycometrics for pre-employment testing, and a variety of National advertising alternatives. We also introduced skill-based testing through reliant in order for clients to validate the skill levels of applicants who identify gaps to fill available training programs. We have made these changes due to the shortage of qualified people available in an environment with historically low unemployment rate in changing demographics.

We believe these changes will help our clients to win the race to attract and retain the best employees in today's competitive labor market and help Administaff grow as our clients grow. Each of these three growth initiatives are focused on improving long-term growth prospects for the Company. These initiatives are expected to combine with our accelerated expansion plan and lower sales personnel turnover to return the Company to our historical double-digit year-over-year unit growth rate. While these changes are taking hold, we believe the current number of trained sales personnel will produce sales at a rate that when combined with expected client attrition should produce a net increase of 1100 to 1300 work site employees per month.

At this level, we return to double-digit growth by the fourth quarter this year. We average 251 trained sales personnel for the first quarter and achieved a record low turnover rate at approximately 30%, the percentage of sales staff with more than 18-month experience with the company also increased to 47%. Now our expansion plan for this year includes eight office openings. Two in new markets and six in existing markets. We have opened two offices in the first quarter and have three more opening in the second quarter.

By the end of the year we expect a total of 49 sales offices in 24 markets. This expansion of offices and associated trained sales staff is the lead indicator of our future growth. Another important contributor to our long-term growth outlook is our recently announced renewal of our health care coverage with UnitedHealthcare. In spite of recent higher-than-expected claims activity, our health plans continue to outperform the marketplace and create a competitive advantage for our clients. The administrative efficiencies and cost reductions we negotiated create the opportunity for this competitive advantage to continue in the future.

One final note I would like to make concerns our second press release today regarding a change at the senior level within our organization. Administaff has had the high honor of having John Spurgeon (ph) as our Vice President, General Counsel, and Secretary of the Corporation for the last 10 years. It is difficult to describe the value of his contribution to the success of the Company leading us through the legal and regulatory maze of establishing an industry-leading company in a brand-new industry. It will have to suffice to simply say we have all been well-served.

John will be resigning from this role this week, opting for a well-deserved slower pace of life, but we are pleased to announce he will remain available to the Company in the role of Special Counsel. His experience and insight will continue to be invaluable to the Company and our new General Counsel. In a typical demonstration of John's professional capability, he has prepared well for his succession. He will be replaced by Dan Harink (ph) from within our organization.

Dan has been with the company for seven years and played a critical role in successfully defending the Company, reducing our litigation docket and associated expense, and advising our property and casuality group on our workers compensation plan and other coverages. He is an excellent lawyer, recognized by his peers and we look forward to Dan's contribution to the company and the management team in his new role. At this time I would like to pass the call back to Doug to summarize our guidance for the balance of the year.

Thanks, Paul. At this time, I would like to provide financial guidance for the second quarter and an update to our full-year forecast. As for work site employees, we expect to average 107,250 to 107,750 for the second quarter and add an average of 1100 to 1300 each month for the latter half of the year. As Paul just mentioned client attrition is expected to return to historical levels over the balance of the year and sales are expected to ramp up from our spring sales campaign. This expected net monthly growth results in a forecasted range of 109,000 to 110,000 for the full year.

As Richard mentioned, we now expect full-year guidance for gross profit for work site employee per month to be in a range of $223 to $228. This is the combination of an expected average mark-up on our HR services of $201 and surplus on our direct cost programs in the range of $22 to $27. As for the second quarter, we expect gross profit per work site employee per month to be between $221 and $225, which includes the impact of the $3.3 million reduction in administrative costs, negotiating under the new UnitedHealthcare contract.

When forecasting this metric over the remained of the year we expect Q3 to be relatively consistent with Q2 and a 5% sequential increase of Q4 over Q3 as payroll tax declines and price increases continue to roll in through the remainder of the year. As for operating expenses, we now expect to be in a range of $237 million to $239 million for the full year with the high end of the range including additional incentive competition tied to achieving higher unit growth and gross profit goals. Cost savings from our previous guidance includes a reduction in salaries and wages of approximately $2.8 million related primarily to less incentive compensation based upon our updated 2007 outlook and approximately $700,000 less in G&A costs.

When combined with our 2007 expected range of average paid work site employees, operating expenses on a per work site employee per month basis are now expected to decline from $183 in 2006 to approximately $181 for 2007. As for the second quarter, operating expenses are expected to be in a range of $57.75 million to $58.5 million. This is slightly above Q1 operating expenses as anticipated sequential declines in cash compensation and G&A of $1.2 million each are expected to be offset by additional advertising costs of approximately $1.5 million, and additional stock-based compensation of approximately $1.2 million.

As a reminder, cash compensation is typically higher in Q1 of each year due to the restart of Corporate payroll taxes while first-quarter G&A costs include expenses associated with our annual sales conference and employee incentive trip. During the second quarter, we increased our advertising spend surrounding our spring sales campaign, and particularly grant restricted shares to our employees and Directors resulted in higher stock-based compensation.

We now expect net interest income to be in a range of $12.5 million to $13.5 million for the full year and a range of $3 million to $3.3 million for the second quarter. We are now forecasting $28 million average outstanding shares for Q2 and for the full year. We have estimated our annual effective income tax rate of 35.4% and our annual capital expenditures budget remains at approximately $15 million.

Finally, as Richard mentioned a moment ago, working capital is expected to be positively impacted in the second quarter by the return of approximately $25 million in excess funding in our workers compensation program. Now at this time I would like to open up the call for questions.

Thank you, sir. (OPERATOR INSTRUCTIONS) Please stand by for our first question. And our first question will come from the line of Tobey Sommer with SunTrust Robinson Humphreys. Please proceed.

Thank you. I wanted to ask you a question about the spring marketing campaign, and if you have any plans to do anything different this go around. I know it is partially under way and under your belt, but any changes you can describe will be useful. Thank you.

Sure, thank you, Tobey. We actually really refined our Spring campaign program last year had a very strong campaign. We have pretty much mirrored what we did last year. Our advertising is up and running and generating the leads that we want to. You know, so things are going fine in that respect. We did have our sales convention during the first quarter. Very successful and attitudes are good, and with the advertising, et cetera, we are boosting activities to the levels that should produce the results we are looking for.

Now we are always changing a few things and working on some things. We actually came up with a contest where we actually are providing capital to a small business that qualifies in the contest and one of the things they have to do is actually watch the seven-minute video about our service online, and that has been very successful in the first -- once we launched it in terms of how many folk are getting through that process and how often that turns into a first-call opportunity. So we are always tweaking things, but we have done a great job in that area and are expecting good results from the Spring campaign.

Could you walk us through some of the metrics that you typically describe in terms of the sales funnel and I apologize if you have already gone through some of those productivity measures but if you can repeat them, that would be terrific.

Sure. We generally quote somewhere between 45% and 50% of the accounts that we make first calls on. And then we close anywhere from 20% to 23% of the accounts that we have an opportunity to bid. And obviously those numbers are affected somewhat by the growth in the sales staff in the tenure of our trained sales Reps.

As I mention on this call we have done a great job in the hiring and training of our reps and the turnover rate which peaked at a little over 40% last year is down over the last half of last year and the first half of the first quarter of this year down to 30%, and we are really feeling good about that, and of course in that respect, the number of trained reps that have over 18-month experience has risen to 47%. So we expect to have good results on those key sales metrics of the number of first calls and how they convert into bids and how those convert into sales, and that should affect our sales efficiency numbers.

I will ask one more question and get back in the queue. Can you refresh us on the number of trained sales reps and hired now and maybe what your target is as you enter the fall campaign thanks.

We are at 251 average for the first quarter and of course that is ramping up. We are actively hiring and having training classes and so forth. It is an exciting time in that respect and we should ramp up somewhere between 280 to 300 as we get into the latter part of this year and then we will be in great shape for '08.

In the then we will be in great shape for '08. In the number of hires you have already?

I believe it is around 280 or so.

Thank you very much.

Our next question will come from the line of Jim McDonald from First Analysis. Please proceed.

Hey, guys. I wanted to dig into the health care a little more. Are you going to raise prices in general, faster or maybe call out some higher cost accounts or anything else other than the Choice Plus stuff you talked about?

Yes, Jim, the answer to your question, the first one is, yes, we already started back last fall as we observed the cost of this particular plan. And with the change that we made at the beginning of the year, we see that the migration of those customers coming out of that plan because -- to a certain extent they will seek a lower cost plan with a higher deductible.

So -- and we are continuing to increase pricing for that particular plan, as well as some -- a normal -- nominal increases in some of the -- in the rest of our program. Because trend, you know is -- inflation -- health-care inflation is alive and well. And we have been historically for many, many years a lot lower on the trend side of costs than -- than the market at large. And so with -- with the pricing strategy we have, we will -- we should be able to continue to select the right kind of customers. And give them a great benefit at the same time.

Jim, I would like to add to that that also at renewal, we do look at each individual account. And, you know, it is part of our normal process. And we use an approach that we call a partial pooling approach where certainly everyone gets the benefit of being a part of a much larger group, but you do not ignore each entity's contribution to the total, and so those who have higher incidents of large claims will see higher rates. And so that's all part of our normal process.

Just kind of a follow-up. Were you caught up at all it sounds like UnitedHealthcare was surprised themselves. Were you getting good information from UnitedHealthcare? Or -- was their guidance also maybe a surprise to you in terms of properly pricing plans.

Yeah, Jim, that is a good question actually. After -- hearing UnitedHealthcare's conference call, what they were talking about that was a surprise to them was they have a fairly large book of business in the small business market segment that -- that the employees or clients are enrolled in the high deductible health plan, and so what -- that was the part that was kind of different for them because that deductible expires at the end of the year and so according to their -- according to what they said on their call, that -- that part of their small business book was a surprise. And, therefore, that's why they increase their reserves I think $170 million or whatever.

So for us, the customers that we have in the high deductible health plan, we have -- and I am going to be pushing the envelope -- maybe 1.5% of our base is in a high deductible health plan. And that really wasn't a specific area that drove our cost. The data and information that we get from United is certainly, you know -- is -- we do annual audits of our plan with United. And their rate of quality in -- in -- in paying claims and reporting claims accurately is -- is very close to 100% in most cases and so that isn't an issue of us just getting data late. It is a matter of, in our case, having claims that were incurred in a prior period that just took a long time to get paid. And, you know, that's the nature of -- unfortunately, that is a little bit of the nature of health care.

That's why we have to -- in each period look at the incurred and not reported claims and come up with what that amount is. And it was just more than what -- you know what we were expecting.

Just one more and I will finish here. Paul, you mentioned that the sales inform Q1 was below plan. Can you say how much below plan?

Yes, it was actually below our budget, but it was still higher than last year on a comparable basis. So it is nothing for us to be excited about. In fact, it is probably just enough for us to, you know, be able to really beat the drum and get everybody really focused properly on -- on getting back on target not just for a second-quarter budget but being back to where we were in the first quarter. So nothing to be concerned about there. But, you know, a little ahead of last year. Although we are ahead of last year in number of trained reps, so should be more than last year. So -- but, you know, things are going fine there, but I do expect things to ramp up even more now with the Spring campaign.

Thanks very much.

Our next question will come from the line of Mark Marcon with Robert W. Baird. Please proceed.

Good morning. I was wondering if you could give us just a little more color in terms of what you are seeing with the mid market. Obviously that was an area that was a little bit softer during the fourth quarter and I am just wondering to what extent that carried over to the first quarter. You mentioned there was a number of accounts that -- there were still no decisions on. I am wondering how those panned out.

Yeah, I sure can. First of all, announced that we will take a deep dive into -- you know the sales service -- service infrastructure for those accounts, and when you do that, you do have some suspension and put some things in abeyance on how you are moving forward with specific accounts. It is pretty much on an account-by-account basis. But as we dug into it, we have found what I believe to be some, you know, very -- very effective improvements in each of the components.

How we sell, how we serve, and, you know, what the underGIRDing infrastructure is for meeting the expectations of those accounts. So we didn't sell very much in the mid market in the first quarter. That is also part of being below budget, because we didn't take it out of the budget just because we were going to re-engineer the processes, but I think it is not unusual to expect that when you are doing that you are not going have -- a lot of the sales staff was in working on these changes in the service team working on these changes, and so, you know, we have been kind of in -- in the foxhole together working out the next strategy and so that's kind of understandable, but we are ready to start to deploy these new things.

We have several things that will take the second quarter to put in place. And then we will start, you know, actually using the new processes in the third quarter which -- we are trying to ramp all this to be effective in the latter half of the year as you have a lot of customers renewing and -- you know a lot of new accounts making decisions.

And when we take a look at the -- you know the January and February performance relative to budget, to what extent was that due to mid market as opposed to your traditional client base?

It was about half and half.

Half and half. Okay. And then can you talk a little bit about regional differences, and specifically, you know in the west, what are you seeing there in terms of that west region and growth prospects going forward and anything that may have impacted growth during this last quarter.

I think I mentioned last go around that over the past year and a half or two, we really had to rework the whole San Francisco all the way up to not only District Managers but a Regional Manager change. Pretty much a whole sales change out. We have done that in fine fashion. They are doing fine up there now and we will start to see those numbers come around soon. We are all excited about the West region. We will open up a couple of other new offices out there. We will open up another Phoenix office. We will open up another L.A. office, so you know we are doing fine out there in terms of demand is strong.

No change in competitive environment?

No, none that we've -- that we've seen to, you know, hurt our game plan; however, we are doing -- we have really made a move to be more aware of other options. I know you may have seen an announcement last fall of adding a new senior person on our team to help us on the strategy side. In fact formally in the -- in the research business, Mark Allen, who is now our VP of Strategic Planning and, you know, he is helping us keep good tabs on what's happening in the competitive environment from the big picture.

We also have you know quite a bit of activity just making sure that our sales staff is fully equipped to point out differences when we are in a competitive bid situation, which is still not that often, but you want to make sure people are prepared that when that happens we can really come out on top.

Great. Last question. Just on the health care, just to be clear. It sounds like the health care costs -- the primary reason for the higher health care costs this quarter was primarily a -- the spillover effect from the prior quarter where things were a little bit higher. In terms of looking ahead -- and then, of course, there is this adjustment with regard to -- to the low deductible plan.

In terms of the -- in terms of spilling over into this quarter, should -- should we see any of those -- the effects from the first quarter spill over into the second quarter? And I am talking about specifically the above 50,000 type claims.

No. Mark, we should not. We saw this, you know, kind of phase out over the first quarter. And when we look at our large loss claims that were in excess of 50,000, they were almost -- I mean almost to the number in line with growth of our business from the third quarter of 2006 to the first quarter of 2007. Just applying a normal growth. The dollar amount was up compared to the third quarter of 2006.

The claim amount was up compared to the third quarter of 2006, but they were certainly a lot lower than what we had experienced in the fourth quarter. So we are in the safe zone again. We don't expect to see any spikes in that -- in the large loss claims. You know they do happen and stuff that you just can't -- you know you just can't know that is going to take place, but based on where we are right now, we don't see that.

Okay, great, thank you.

Our next question comes from the line of Tom Giovine with Giovine Capital Group.

Hi, guys.

Hi, Tom.

Hi, Tom.

Just in regards to share count buyback and capital plan. I guess I find it a little frustrating why we are not being a little more aggressive with the buyback. And I understand that there are buyback rules and you put in a -- what is it -- a plan. But why have not the Board maybe been a little more aggressive in considering a dutch tender and I haven't historically been a big proponent there, but with a stock like yours where you have a relatively short window because of material information, it seems like you could tender for 2 million, 3 million shares and still have plenty of capital to execute your strategic plan as contemplated and allow shareholders to benefit from -- from reducing the -- the shareholder base here at a relatively depressed level.

Yeah I think -- Tom, you bring up a good point, and obviously we have been trying to execute a buyback game plan. You know, obviously with the limitations and unfortunately with a relatively thin trading on our shares, you know, does make the limitations quite restrictive, and we actually did fairly well during our open period and then put a 10B51 plan in place for our quiet period, but not much was able to be executed during that game plan. So we are going to revisit that and we have a board meet tomorrow and will talk more about that. As you know even from putting that plan in place, we have designated significant dollar amount to be utilized to buy back our own shares because we believe this is a tremendous value. Of course our window will open back up again shortly. So we should be able to be active again like we were, but we will revisit that tomorrow and I am not sure when we will land on it, but we were not happy with being able to acquire so few number of shares over the last quarter.

Great to hear. Thanks.

All right

Ladies and gentlemen, this does conclude our Q & A session. I would now like to turn the call over to Mr. Paul Sarvadi, Chairman and CEO. Sir, please proceed.

Thank you very much and once again thank you everyone for participating on the call today. And we will look forward to better results in the second quarter. Thank you.

Ladies and gentlemen, at this time the call has concluded. You all may disconnect and enjoy the rest your day.