Insperity Inc (NSP) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Administaff third quarter 2008 earnings conference call. (OPERATOR INSTRUCTIONS). Speaking on today's call we have Paul Sarvadi, Chairman and Chief Executive Officer; Richard Rawson, President; and Douglas Sharp, Chief Financial Officer. I would now like to turn the presentation over to the host for today's call, Mr. Doug Sharp. Please proceed.

Thank you.

We appreciate you joining us this morning. Before we begin, I would like to remind you any statements made by Mr. Sarvadi, Mr. Rawson or myself that are not historical facts are considered to be forward-looking statements within the meaning of the federal securities laws. Words such as expects, intends, projects, believes, likely, probably, goal, objective, outlook, guidance, appears, target, and similar expressions are used to identify such forward-looking statements and involve a number of risks and uncertainties that have been described in detail in the Company's filings with the SEC. These risks and uncertainties may cause actual results to differ materially from those stated in such forward-looking statements. Let me take a minute to outline our plan for this morning's call. First I will discuss the details of our third quarter financial results. Richard will discuss trends in our direct costs including benefits, workers' compensation, and payroll taxes, and the impact of such trends on our pricing.

Paul will add his comments about the quarter, and our outlook for the remainder of the year. I will return to provide financial guidance for the fourth quarter of 2008. We will then end the call with a Question and Answer Session. Now, let me begin today's call by summarizing the financial highlights from the third quarter. As most of you are aware, we reported preliminary third quarter results on October 17th to provide early commentary on our solid results and current market conditions. Additionally, early reporting allowed to us resume our share repurchase activity at attractive price levels.

Today we reported third quarter earnings per share of $0.46, the same as that reported in our preliminary release. As for the year-over-year comparison, Q3 EPS of $0.46 increased from $0.45 in the 2007 period. However, bear in mind that lower interest rates negatively impacted investment income, discounting of workers' compensation reserves, and our effective income tax rate by $0.05 per share in the 2008 period when compared to Q3 of 2007. Our quarterly results were driven by the following key metrics, the average number of paid work site employees increased just over 6% for the quarter to 119,389, just below our expected range. Gross profit per work site employee per month averaged $239 for the quarter, above our forecasted range and more than offsetting the shortfall in paid work site employees.

Operating expenses were at the high-end of our forecast range and interest income fell below our expected range primarily due to a higher concentration of lower yielding, more conservative investments in response to market conditions. We have generated year-to-date EBITDA plus stock-based compensation of $76 million and ended the quarter with $109 million of working capital. Now let's review the detail of our third quarter results. As I just mentioned, the average number of paid work site employees per month increased just over 6% compared to the third quarter of 2007 from 112,496 to 119,389.

In a few minutes Paul will provide the details behind our third quarter unit growth including sales, client retention, and net change within the existing client base and also comment on our outlook for the remainder of 2008. Third quarter revenues increased 10% over 2007 to $422 million as a result of the 6% increase in the average paid work site employees and a 4% increase in revenue per work site employee per month. Looking at third quarter revenue contribution in growth by regions, the Southeast region which represents 11% of total revenue grew by 10%. The Northeast region which represents 21% of total revenue grew by 16%. The Central region which represents 14% of total revenue grew by 13%. The West region which represents 20% of total revenue grew by 10%, and the Southwest region which represents 33% of total revenue grew by 5%.

Moving to gross profit, gross profit per worksite employee per month for the quarter was $239, significantly above the $222 reported in the 2007 period. These results were also above the high-end of our forecasted range of $233 to $235 with the upside primarily due to lower benefit costs. As for the specifics, benefit costs per covered employee per month averaged $693 for the quarter. This was sequentially flat from the second quarter in a year-over-year increase of only 1.5%. Richard will discuss the details in a few minutes including how these results and forecasted trends provide a pricing advantage beneficial in the current market conditions. Workers' compensation costs were 0.63% of non-bonus payroll for the quarter.

This was just under our forecast of 0.65% as we continue to successfully manage the frequency and the severity of claims. Actuarial loss estimates continue to reflect these favorable claim trends and resulted in a $2.8 million reduction in previously reported loss estimates. Payroll taxes as a percentage of total payroll costs declined from 6.55% in Q3 of 2007 to 6.44% in Q3 of this year as a result of lower state unemployment tax rates and a higher payroll averages and bonuses of work site employees. Now let's move on to operating expenses which increased 15.8% over Q3 of 2007 just above expected levels. You may recall that an expected 15% increase included investments in our sales expansion, new products and services such as ATAR tools and mid-market initiatives, and the integration of the recently acquired Employment Screening Company.

As for the details, the majority of the operating expense increase was reflected in our salaries and wages as we continued to successfully grow our salesforce. Trained sales reps averaged 307 for the quarter, an increase of 16% over Q3 of 2007. Sale commission costs increased just over 3%, general and administrative costs which included rent associated with our sales office expansion and development costs related to our HR tools initiative increased by approximately 7%. Advertising and depreciation costs remained relatively flat. Interest income declined by approximately $1.2 million from Q3 of 2007 and came in about $300,000 less than our forecast. As you may recall at the outset of Q3, the majority of our investments were held in a tax exempt money market fund.

Due to some uncertainty surrounding the liquidity of these funds, we liquidated a large portion of these securities during the quarter and reinvested the monies in lower yielding government backed funds. We will continue to adjust our investment strategy to the changing market dynamics with principle preservation a priority. Now let's review several key balance sheet and cash flow items. EBITDA plus stock-based compensation totaled $23 million for the third quarter and $76 million year-to-date. Additionally, we were reimbursed approximately $20 million in excess workers' compensation claim funds during the quarter. As of today we have returned $44 million to shareholders through dividends and share repurchases. As for our year-to-date share repurchase activity, we have now repurchased 1.5 million shares and currently have 614,000 shares remaining for repurchase under our authorization.

In summary we're very pleased with our third quarter activity and results, particularly in light of current market conditions. At this time I would like to turn the call over to Richard.

Thank you, Doug.

This morning I will share the details of our strong third quarter gross profit results, and I will update you on the pricing and direct cost trends we are seeing and how they will affect gross profit for worksite employee per month for the fourth quarter and into 2009. Our gross profit comes from the markup that we earn on our HR services combined with the surplus that is generated when our direct costs pricing allocations exceed the corresponding direct costs. Doug just reported our gross profit per worksite employee per month was $239, which is above the top end of our forecasted range. These results come from achieving $197 per worksite employee per month of service fees and generated a surplus of $42 per worksite employee per month or 4.3% of our total direct cost allocations.

The pricing on our service fee for new business increased $11 over the third quarter of last year while renewal pricing increased $5. These facts continue to support the value proposition that we bring to prospects and current clients. This quarter's better than expected surplus of $5 per work site employee per month came primarily from better than expected results from our payroll tax and benefits direct cost centers. Additionally, our workers' compensation cost centers surplus contributed slightly to the better than expected results. Let's begin with payroll taxes.

Our better than expected surplus in this cost center came as a result of having a spread between our allocation and the actual payroll tax expense applied to a larger amount of taxable payroll than what we had forecasted. This spread is consistent with what we saw in the second quarter's positive results and continued to contribute almost $2 of additional surplus to the gross profit per work site employee per month for this quarter. The other primary contributor to the better than expected surplus came from our benefits cost center which added $3 of additional surplus to the gross profit per employee per month. As Doug mentioned a few minutes ago, our benefits costs per covered employee per month was $693 which was below our estimate of $696.

On the pricing side of this cost center we achieved our allocation targets, therefore the additional $3 surplus was a result of better than expected costs. The plan design changes that we made at the beginning of 2008 coupled with the migration of participants to lower cost plans have caused our trend in healthcare costs to increase only 2% this year over last. This is part of the value proposition that the Administaff PEO model brings to small business. Now, the remainder of this quarter's additional surplus came from our workers' compensation program which continues to produce great results. The total number of claims reported for the policy year which ended on September 30 of 2008 is the same as the 2007 policy year.

This incident rate is very meaningful when you consider that we've had over a 6% growth in the number of work site employees that incur those claims. the average cost of these claims is 13% higher than last year's average higher claim costs. Considering marketplace medical cost trends of about 10%, and wage inflation of about 3%, this increase is in line with what we would have expected. These results continue to showcase the great job our safety and claims management professionals do. In summation we had another very solid quarter of performance at the gross profit line. Now let me share with you what we expect gross profit per work site employee per month to be for the fourth quarter beginning with pricing.

We believe that renewals for the balance of the year will continue to add markup dollars to our service fee, and we would expect to see an increase in our markup on new business sold similar to what we saw this quarter. Therefore our average markup per worksite employee per month for Q4 should be about $198 which would continue to be impressive in the current market environment. In addition, we anticipate the surplus component of gross profit to be in the range of $48 to $51 per worksite employee per month for the fourth quarter which is up a few dollars from where our previous forecasts were of the let me explain how we get there. The surplus generated from the payroll tax cost center typically declines each quarter throughout the year. However, when we have slower growth later in the year, our costs are lower and the result is more surplus.

Therefore we should add an additional $1 to $2 per work site employee per month to the surplus in the fourth quarter. Now let's discuss the workers' compensation cost center. We renewed our workers' compensation policy with Ace Insurance Company beginning on October 1, 2008, and secured a nominal decrease in the administrative fees for this policy year. The claim costs have increased slightly for the reasons that I mentioned a few minutes ago. In addition, the discount factor applies to workers' compensation reserves continued to decline slightly.

Therefore we now estimate the workers' compensation cost to increase about one basis points from last quarter's estimate to 0.66% of non-bonus payroll for Q4. When combined with our pricing allocations, we are expecting a surplus similar to the third quarter. Now the remaining upside to our surplus in Q4 should come from the benefits cost center. We are continuing to increase our allocations on the pricing side to match normalized trend increases and further reduce the deficit in this cost center. On the cost side we still see the same three factors positively affecting the benefits cost center in Q4.

The first factor was planned design changes that took effect in January of 2008. The second factor was migration of covered worksite employees moving from United Healthcare Plus Choice 250 plan to lower cost higher deductible plans, and the third factor that would reduce our costs was the reduction in administrative fees from United Healthcare that also took effect in January of this year. All three factors are still contributing to the lower cost of benefits compared to last year. So for the fourth quarter we believe that total benefits cost per covered employee should only increase about 3% over Q4 of 2007.

This combination of allocation increases and reduced costs should add an additional $4 to $6 per worksite employee per month to our surplus for the fourth quarter. In summation, we should see gross profit per work site employee per month increase to a new range of $246 to $249 for the fourth quarter and punctuate another very successful year. While it is still early to forecast specific line items for 2009, I would like to share with you a few details that we already know about for next year. First of all, we are planning to have a very nominal price increase in the service fee component of our total markup for new and renewing customers in 2009.

Second, even though unemployment claims have been increasing, there is a lag of more than a year on the effect of unemployment tax rates. Our client contracts allow for an immediate price increase when a statutory rate change occurs. Therefore, the surplus that we have earned throughout 2008 should continue into 2009. Third, we will not be implementing any planned design changes for our health plans for 2009. However, we will be getting a reduction in our administrative fees from United Healthcare.

Therefore, we're forecasting only a 6% to 9% increase in benefits costs for next year and we are continuing to increase our allocations for new and renewing business to match these increases. Last, our workers' compensation cost center should continue to produce positive surpluses next year even if our costs trends upward. If interest rates go back up at any time in 2009, the discount factor that we apply to our workers' compensation reserves will cause us to recoup some of the $2.1 million additional expense that we had to take in 2008. We're not going to count on that until it happens. So in summary, we feel good about our capability to effectively manage pricing costs at the gross profit line for 2009.

At this point I would like to turn the call over to Paul.

Thank you, Richard.

Today I will provide information on our growth drivers in key initiatives in the third quarter. I will also discuss our fall selling campaign and the important year end transition which becomes the foundation for our 2009 plan. I will wrap up my comments with some detail regarding our target market client base and our expectations as our clients react to the current economic climate. Our unit growth in the third quarter was driven by strong client retention and sales continuing at the same pace in the first half of the year. This growth was offset by some layoffs experienced in the client base toward the end of the third quarter.

Our average client worksite employee retention percentage for the quarter was excellent at 98.6%. The average number of employees lost per month due to client retention in the third quarter was 1.4%, of the worksite employee base. This is considerably better than the same period last year at 1.7% and lower than the historical average for this period of 1.5%. As I mentioned earlier in the year we have a Company-wide initiative surrounding improvement in client retention throughout 2008 and into 2009. This includes established retention improvement targets as part of the annual incentive compensation plan for all employees in the Company.

Since the initiative began in February of this year, we've experienced a 21% improvement in client retention over the same period last year. Of course the highest concentration of renewing accounts and year end terminations are still ahead of us, but if we can extend these results through the next few months, this will contribute substantially to the starting point for paid worksite employees in 2009. The sales effort throughout 2008 has reflected lower closing rates indicative of uncertainty in a sluggish economy. Sales for the third quarter and year-to-date on our core business has been approximately 75% of our internal targets. These levels were produced by census to First Call rates in line with previous periods just under 50% combined with closing rates of approximately 16% down from 20%.

Year-to-date sales per salesperson per month was 0.70 which is off 25% from historical levels for the first three quarters of the year. Our highest efficiency occurs each year in the fourth quarter in connection with our fall selling campaign. Our range in sales efficiency for this period has been approximately 1.2 in economic climate similar today to 1.7 sales per salesperson per month in a more robust economy.

Now, in anticipation of a difficult sales environment, our plan for this year included a targeted increase in the number of trained sales staff of 15%. As Doug mentioned earlier we have exceeded this target with an increase in trained sales staff of 16%. This will be very beneficial as we muscle our way through the current economic environment. Our pricing on new business has remained solid throughout the year and through the third quarter.

So as we enter the fall campaign the impact of the economy on sales has been on the volume sold rather than pricing and margins. Our annual fall selling campaign had an interesting start this year to say the least. Each year we bring the entire sales staff to the corporate office for a kick off meeting to introduce our marketing initiatives and goals for the campaign. This year we had an unexpected visit from hurricane Ike over the weekend prior to the scheduled kick off which of course was then canceled. In addition, over the same weekend the economic turbulence became very apparent with the demise of Lehman Brothers, the first bailout of AIG, and the combination of Merrill Lynch into Bank of America. Due to the hurricane we implemented our disaster recovery plan and operated on backup power and essential staff in our corporate office in Houston and moved other staff and operations to our Dallas and other regional facilities.

We are very pleased to report we continue to meet client and work site employee needs throughout the storm and the extended power outage and disruption Ike caused. However, these conditions did provide a rough started for the fall campaign lead production. The first two weeks of the campaign in September reflected the uncertainty in the marketplace and the disruption from the hurricane which affected our out bound call center operations in Houston. Fortunately our sales team made adjustments on the spot, and when the kick off was canceled, sales teams held their own prospecting competition and replaced the lead production deficiency with their own cold calling. To replace the fall campaign kick off, our senior sales leadership began a nationwide tour to have regional meetings that included each sales office throughout the country.

Our marketing plans were initiated, and lead production and First Call appointments have improved since the rocky start. In addition to our successful radio TV ads featuring Arnold Palmer, this year marketing efforts included direct mail and a "We Want You Back" program directed towards 2,100 targeted former clients. At this point in the fall campaign activity and attitudes are where they need to be. What remains to be seen are the closing rates and the reaction of our target client base to the current economic climate. Our target client base is unique in the marketplace.

We serve companies that fit our characterization as the best small to medium-sized businesses in America. These companies are set apart by both qualitative and quantitative distinctions. They've been screened through a selection process at Administaff to qualify them from both a demographic and a psycho graphic assessment to fit our profile. Our clients have typically been in business more than seven years before joining Administaff and have a level of profitability that is reflected in pay rates and benefits provided to employees. They care about their people and connect to the role their people play in reaching their company goals.

Most importantly these businesses have a definitive getting better agenda that is in the form of a written business plan. These client owners are focused on improving, growing, and developing their businesses and taking advantage of opportunities. They have taken risks before, learned from their failures and have an intuition about opportunities. Their own experience is a success story of persistence in the face of significant challenges and defying the odds.

They have a level of success and a base of experience that makes them uniquely qualified to be opportunistic in the exact conditions we find the marketplace today. Their level of profitability and agility make them exceptional in responding to changes in the marketplace. There is a distinction between our 10% of the best small businesses in America and the other two segments, large Corporations and the other 90% of the small business community. Large Corporations respond to major marketplace shifts by lowering revenue estimates and quickly cutting costs by trimming the fat, matching staffing and spending levels to the new revenue targets.

The layoff announcements we heard over the last several months is the typical corporate response. For most small businesses outside our target base, their financial limitations and dependency on key customers or vendors make them vulnerable to market shifts. Their reaction is also abrupt in similar to large Corporations in cutting costs. However, with no fat to cut and no reserves to call on, many of these small businesses fail.

Now our target client base in contrast is the only segment of the business community in a position to remain opportunistic and find ways to benefit from difficult economic conditions. Although they do cut back and layoff personnel as required as conditions change, their reaction is typically more measured and less severe than large Corporations or typical small businesses. The reason for this is their pipeline for new business is usually more substantial than other small businesses and their staffing levels are usually less bloated than large Corporations.

Our experience of our client base reaction to the economic turbulence is layoffs start later than large Corporations, and weaker small companies. This also occurs after a more prolonged period of sluggish sales. Additionally, our target clients can take advantage of the stronger financial condition to be inquisitive or add new lines of business or new markets as others fail. This means they are also more likely to see things get better sooner once the economy stabilizes. Now layoffs in the marketplace at large have been increasing throughout the year.

We did not see layoffs increase in our client base until September although some of this was summer help going away and some was related to hurricane Ike, there may be some effect from the economy reaching our base at this time. This fact is supported by the compensation data that we track from month to month. Average compensation increases, bonus compensation, overtime pay, and commissions are all down from the second quarter. The most important number is the commissions paid to work site employees which reflects the pipeline for new business for our clients.

Commission levels in the third quarter were down 8.3% from the same period last year and down 6.5% from the second quarter. Still in this environment our client base is optimistic and opportunistic about 2009. The business confidence survey we released today shows clients are not changing their goals but rather their plans on how to achieve them. 75% of respondents to the survey expect to grow as fast or faster in 2009 than 2008. Nearly the same percentage expects staffing levels to remain the same or increase next year as well. This is not because they're failing to see the turbulent economy but rather because they respond differently to such challenges.

81% of those surveys rated the economy as their biggest concern, yet 61% expect their capital spending to increase or remain the same next year. This reflects attitudes of intentions to gain a competitive advantage while large Corporations and less healthy small businesses shrink, fail, or just stand still. With the current economic conditions we have an interesting range of possibilities as we enter our year end sales and renewal cycle. Retention has been strong, sales have been an uphill battle, but with our increase in the number of sales staff and the fall campaign in high gear, we have reason to be optimistic.

On the other hand, our target prospects and current client base are reacting to the economic weakness yet remain optimistic. As we roll these factors into our starting point for worksite employees, we see a wider range than normal for this time of year. We see no advantage to providing specific guidance for next year at a time when the range is this wide, and when the actual starting point will be known in a short period. t will have to suffice for today to say we have scenarios for next year's unit growth that bracket this year's unit growth rate. We can see a dollar scenario with unemployment rates at 8% to 10% that could slow our unit growth rate by several percentage points from this year.

We can also see a scenario where the size of our sales staff, our retention improvements and our client base resiliency could result in growth acceleration into next year. We do expect to grow through this period unlike 2002 and 2003 period which included the jobless recovery following 9/11 in the burst of the technology bubble. In that period we had our own corporate crises including a margin squeeze and a 15 month repricing effort on the healthcare component on our entire client base. We had to redirect the sales team to renewing accounts and new sales efforts. Even with all that difficulty we declined by only 4% year-over-year in that period. We are in a very different situation today.

Even though the economy may be the same or even worse, we are poised to continue to demonstrate growth and profitability. The size of our sales staff today, the resiliency of our business model, our financial strength, and our unique client base position Administaff to grow and remain opportunistic in the face of a recession.

At this point I will pass the call onto Doug to provide specific guidance for Q4 and his thoughts about 2009 profitability.

Thanks, Paul.

We are essentially reiterating our full year and Q4 implied earnings per share ranges with some adjustments among the key metrics. As for the details of our fourth quarter guidance, we expect average paid worksite employees per month to be in a range of 120,500 to 121,000. As a reminder, clients sold during the fourth quarter of any year and in particular during our fall sales campaign are typically converted to paid work cited employees during the first quarter the following year.

As for gross profit per worksite employee per month, we expect to be in a range of $246 to $249 for Q4 and expected sequential increase in this metric over Q3 is associated primarily with the benefits area. Benefit plan design changes have positively impacted costs while we have passed through appropriate price increases over the course of this year. Fourth quarter operating expenses are expected to be in a range of $74 million to $74.5 million.

This is sequentially up from the third quarter operating expenses by approximately $5.3 million and includes approximately $3.3 million of additional advertising costs focused around our fall sales campaign, $1 million in higher G&A costs, primarily associated with fall sales campaign travel, and HR tools development, and $700,000 in compensation expense primarily associated with additional sales personnel. We expect Q4 net interest income to be between $1.4 million and $1.6 million and are forecasting an effective income tax rate of 36.2%. We are also forecasting 25 million average diluted outstanding shares for the fourth quarter and 25.6 million shares for the full year 2008.

In summary, we believe our business model has performed exceptionally well in the face of a weakening economy. In fact, if not for an $0.18 per share negative impact of lower interest rates on our investment income, discounting of workers' compensation reserves, and effective income tax rates, the expected full year 2008 implied earnings per share would be at the high-end of the range we set at the beginning of the year.

Now before we open up the call for questions, I would like to briefly comment on 2009. We are currently working on next year's operating plan and financial budget. As you are probably aware our unit growth is impacted by the number and efficiency of our sales reps, client retention which can be impacted by financial defaults, and hiring our layoffs within our existing client base. Our gross profit per worksite employee is impacted by our pricing and direct cost management.

We have maintained some flexibility in our 2009 operating plan to incorporate a range of outcomes in each of these factors. These areas of flexibility include among other things staffing levels of our sales and service personnel, number of sales office openings, advertising and business promotion spending, and G&A spending. We will finalize our plan and budget based upon the results of our 2008 fall sales campaign and our year end client renewal period also incorporating the expected impact of economic climate. In summary, we expect a budget for earnings growth under either an improving or relatively flat unit growth scenario. Detailed 2009 guidance will be provided during the next quarter's conference call to be held in early February.

At this time I would like to open up the call for questions.

(OPERATOR INSTRUCTIONS). We will now open the line for Q&A. Your first question comes from the line of Toby Summer of Suntrust Robinson Humphrey.

Thank you. A lot of good detail in your prepared remarks. I am interested in asking you a question about the commissions you're seeing in the customer base? They did come under a little bit of pressure in the quarter. I was wondering if you saw a noticeable trend within the quarter, whether that decline that you quoted was kind of more material in September when the overall economy seemed to grind to a halt with the credit crisis?

Yes, it was. It did deterioriate throughout the quarter and ended up in the 8.3% range for the quarter.

Paul, from your perspective when you look at things historically, you mentioned that being perhaps one of the better indicators you can look at for your customers kind of health or at least near term. How does that kind of rate of decline compare to what you've seen in previous slowdowns?

You know, it is unfortunate we don't have as good of data back historically. Our information is so much better today that we're able to see things at a real very granular level. Unfortunately we really don't have a good comparative back during that period, but I also like to just say that that is one factor, to me it is a big one that, affects the mindset of the business decision maker, but it is one data point that we use against several others, and fortunately most recently we had our annual large hospitality event where we're able to really sit face-to-face with many of our clients and get a direct feel for their attitudes and their actual actions that they're taking, their plans, and we found our client base's attitude to be inspiring in terms of how they were upbeat and opportunistic even though they were recognizing some real economic turbulence.

Thanks. One last kind of housekeeping question, and I will get back in the queue. The press release says you repurchased 1.5 million shares I think year-to-date if I am correct, in your guidance implies I think continued share repurchase. How much will you have repurchased if you get to a 25 million outstanding share counted by the end of the year?

The 25 million just assumes what we repurchased to date, so it doesn't assume any further repurchases.

Okay. Thank you very much. I will get back in the queue.

(OPERATOR INSTRUCTIONS). Your next question comes from the line of Jim Macdonald of First Analysis Securities. Please proceed.

Good morning, guys.

Good morning, Jim.

You talked about frexibility going forward on expenses. Have you taken any actions, currently given the situation?

Well, Jim, no, we have not. Simply because first of all we fully developed a range of possibilities, but it is not time to pull the trigger on anything until we see how things go. We're right in the middle of the point of where things could -- we could actually end up with accelerating unit growth in the next year or we could see growth that is a little slower than this year, so we're in that point where we're going to see what happens but we've got a variety of plans in place ready to take action if necessary.

Okay. Could you talk -- so you have seen something in October so far. Obviously October has been a pretty different kind of month. What can you tell us about October layoffs and what you're seeing currently?

Well, inconsistent with what I have been saying about our client base and the distinction from the rest of the marketplace, we did not see layoffs continuing dramatically into October, and obviously we're still evaluating that because the month just ended and we're digging down in the weeds and feeling the onion -- peeling the onion back a little bit, but it is a little bit in conflict with the commission level being off that much, so that's why we say we want to be cautious but we're also optimistic.

Okay. And just one more. Last couple of weeks there have been some dislocations in a lot of the interstate type of things. Did you do anything to take advantage of that or do you stay totally safe in Treasury science.

We have a little bit of I mix, but I would say for the most part we're staying safe in Treasury up to this point, but it is something that we revisit going forward.

You didn't look at some of the high yielding units during that period?

We still have some of our investments in the tax exempt money market funds, but the majority are in the government-backed funds.

Okay. Thanks very much.

Your next question comes from the line of Michael Baker of Raymond James. Please proceed.

Thanks. Of I was wondering if you could give us a little bit of color on what you're seeing in the mid-market versus the core PEO business?

Sure. We're continuing to make good progress in the mid-market. Our focus this year has been converting more and more clients to the mid-market service model, and at the end of the quarter we had 60 clients in that model. We're having great results there with service satisfaction and also with our steward ship meetings where we're going in and laying out the detail, the economics of the relationship. That's all going well. As we move into this fourth quarter, we still have a good percentage like we do even on our core business of customers that are in the renewal process. I think we have much better visibility there than we have had in previous periods, and then also that's on the renewal side. On the sales side we have a pipeline that is ramped up throughout the third quarter, and we have some good opportunities there for new business, but in the current economic climate those types of decisions are pretty significant for these companies, so it is kind of hard to tell part of this equation that we have of a wide range of possibilities here for year end.

Okay. Then I had a question for Richard. Any early read on up take of the health benefit as you get towards the renewal process?

You talking about trends for next year?

Well, I am talking about actual signing up for the benefit in light of all of the other constraints that consumer might feel at this point?

Okay. Yeah. We're obviously starting renewal process and the one that is we renewed so far,some customers will increase the deductibles and go to a higher deductible plan within our current range of opportunities, but over the last two quarters we've seen kind of the migration flatten out in terms of the richer plans, and so we're expecting to see just kind of a steady as you go for 2009, and I would expect to see some people migrate into the higher deducted I believe plans just from a cost side, but don't see any crisis going on there, and certainly starting in January we'll start the second year of a three-year contract with United Healthcare, and as I mentioned in my remarks, we will be getting an additional reduction in the administrative fee component of those costs for 2009 over 2008, so we already have gotten the renewals for the non-United Healthcare plans. We've already baked those into kind of our early forecast for 2009 and our pricing. All of those increases seem to be pretty nominal, so I think we're set to go.

And then just one final question on the health benefit. In terms of the high deductible option are you seeing any difference in seasonal utilization, in other words, utilization kind of being more back ended in the year once they hit the deductible?

No. With the 2% year-over-year trend increase, we have seen utilization at kind of a normal rate, what we would have expected. We haven't seen seen any huge step up in the utilization, and so I mean we're forecasting about a 3% year-over-year cost to contemplate a little bit of that in the fourth quarter, but we haven't seen a huge step up, no.

That's helpful. Thank you.

Yes.

Your next question or comment comes from the line of Mark Marcon of Robert W. Baird. Please proceed.

Good morning. Can you mention the specific impact of the United Healthcare reduction in terms of the administrative costs?

Yeah. We renewed that contract in 2007.

Right.

And it began in January of 2008 and 2009 and then through 2010, and as part of that agreement, we got a reduction in the administrative fee component of that contract each year, and it declined from Oregon it's gone down and will go down in 2009 from 2008 and will go down a little bit further in 2010 from 2009.

Right. What I was wondering is if you could remind us what that actual reduction is in '09 relative to 2008?

Well, I would submit to you that I am not allowed to do that. Thanks for asking.

It is all factored into the total benefit increase. Right. Yeah.

Whether we go back and relook at that 8-K, you did talk about what the total benefits would be be. Is there a much bigger benefit in 2009 relative to 2008 than --

Well, I think if you go back to the press release that when we released this in '07 --

Right.

We talked about the benefit over three years being 17 plus million dollars.

Right.

So there will be some benefit, and we have factored that into your pricing floor for 2009.

Okay. And what percentage, Richard, of the client employees ended up using the benefits?

It is right at -- it is actually all over 90% of the eligible, but in terms of the raw math, it is about 73% of total covered employees.

Okay.

On a plan at any given time.

Got it. And in terms of looking towards next year, whether we think about the sales efficiency ratio, you mentioned earlier that, you know, the 1.2 to 1.7 kind of being the range. I am assuming that was for the forks, right?

That was for fall campaign sales periods in the past.

Okay. What would you anticipate on a full year basis given the macro environment or how should we think about that as being a range for a full year?

I think if you look at years that were more difficult, we ended up in the .90 to .934, somewhere in there, and in the best years we've had you're in the 1.2 to 1.25 range.

Okay. All right. Then what are you seeing actually in terms of bankruptcies or things of that nature? Doesn't sound like you've seen much of a change yet.

Up through this point we haven't seen a lot of that yet, Mark, as far as the financial defaults related to a bankruptcy.

Okay. Have you heard anything from any of your clients just in terms of having a tougher time accessing capital or anything of that nature?

I wouldn't say to a large extent. There have been a few cases, but not to a large extent through this point.

I think that actually, Mark, and other distinction in our target base, they're more profitable, and they actually are less debt capacity related, in terms of their operating plan. We haven't heard any outcry about oh, my gosh, the credit market seized up and we can't operate.

Great. In the west you ended up having an acceleration with regards to your growth rate. Can you talk a little bit about what you're seeing there? Is it just that you're going up against easy comps or have things actually improved?

I am sorry. What was the first part of that question?

Just in the west, your revenue growth?

In the west.

Yes.

Nothing dramatic, just this always goes back to more where we put the sales staff, where you grow, where you add markets and all of that kind of thing. That's usually what dictates more one area of working better than another. Other than times we'll have a particular market or particular sales office with manager change over or something like that, but we haven't seen anything on a regional basis that gives us any pause or that we're directing any particular attention to.

Great. I will jump back in the queue.

Due to time constraints this concludes the Q&A session. I will turn it back to Paul Sarvadi for closing remarks

We wanted to thank everyone for your participation and look forward to a strong year end performance and once we go through that we'll provide information about our plans for 2009. Thank you very much.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnected. Have a great day.