Insperity Inc (NSP) 2008 Q4 法說會逐字稿

Good day ladies and gentlemen. Welcome to the Administaff fourth quarter 2008 earnings conference call. My name is Chanelle, and l will be your coordinator for today. At this time, all listeners are in listen-only mode. We will facilitate a question and answer towards the end of this conference. (Operator Instructions). As a reminder, this call is being recorded for replay purposes.

I would like to turn the presentation over to Paul Sarvadi, Chairman of the Board and Chief Executive Officer, Richard Rawson, the President, and Douglas Sharp, Chief Financial Officer. Please proceed.

Good morning, this is Doug Sharp. Thank you, we appreciate you joining us this morning.

Before we begin, I would like to remind you that any statements made by Mr. Sarvadi , Mr. Rawson, or myself, that are not historical facts or 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.

Now let me take a minute to outline the plan for this morning's call. First I am going to discuss the details of our Q4 and full year 2008 financial results. Richard will discuss expected trends in our direct costs, including benefits, workers' compensation and payroll taxes, and the impact of such trends on our pricing. Paul will recap the 2008 year, and then discuss our 2009 operating plan. Then I will provide our financial guidance for the first quarter and full year 2009. We will then end the call with a question and answer session.

Now let me begin today's call by discussing our Q4 results. Today we reported Q4 earnings per share of $0.39. These results were below expectations set forth in the Q4 key metrics guidance, due to the continued deterioration in the macro economic environment, which went from bad to worse over the course of the quarter. For the Q4 year-over-year comparison, EPS was negatively impacted by $0.06, due to the declining interest rate environment, and it's affect on our investment income, discounting of workers compensation reserves, and our effective income tax rate.

Now as for the impact of the weakening economy on our key metrics, the average number of paid work site employees increased by 3% for the quarter, to 118,748 below our expected range. While our client prospect base held up well through the initial stages of the economic downturn, conditions deteriorated to the point where their businesses were impacted. These were evident through an increase in net layoffs of work site employees in our client base, and a decline in our sales efficiency. Additionally we lost one large account in December, due to the clients weakened financial condition.

Gross profit per work site employee per month averaged $246 for the quarter, at the low end of our forecasted range. Interest income, fell below the low end of our expected range by approximately $450,000, due to the declining interest rates and a higher concentration of lower yielding, more conservative investments. Helping to partially offset the Q4 shortfalls in unit growth and interest income, operating expenses totaled approximately $73.1 million, which was $1 million below the low end of our forecasted range.

Now in spite of the difficult economic environment, our cash flow remained strong through the quarter, and our year end balance sheet continues to reflect significant liquidity, and no debt. EBITDA plus stock based compensation totaled $22 million in Q4, and $98 million for the full year 2008. We ended the year with $98.4 million of working capital.

Now let's review further details of our Q4 results. Q4 revenues increased 6% over 2007 to $426 million, as a result of a 3% increase in the average paid work site employees, and a 3% increase in revenue per work site employee per month. Looking at Q4 revenue contribution and growth by region, the Southeast region which represents 11% of total revenue grew by 5%, the Northeast region which represents 21% of total revenue grew by 12%. The Central region which represents 15% of total revenue grew by 10%, the West region which represents 20% of total revenue grew by 5%, and the Southwest region which represents 33% of total revenue grew by 2%, and was impacted by the loss of a large mid-market client, due to their weakened financial condition.

Moving to gross profit, gross profit per work site employee per month for the quarter was $246, at the low end of our forecasted range of $246 to $249, but above the $244 reported in the 2007 period. As for our direct costs, benefit costs per covered employee per month averaged $700 for the quarter, a year-over-year increase of only 3.2%, and just slightly above our forecasted costs. Workers compensation costs were 0.68% of nonbonus payroll for the quarter, also just slightly above our forecasted level of point 0.66%.

Actual loss estimates resulted in a $1.9 million reduction in previously reported loss estimates. Payroll taxes a as percentage of payroll costs declined from 5.87% in Q4 2007, to 5.72% in Q4 of this year, primarily as a result of higher payroll averages and bonuses of work site employees.

Now let's move on to operating expenses which totaled $73.1 million for the quarter. This was below our expected range of $74 million to $74.5 million, primarily as a result of lower incentive compensation expense, sales commissions, and certain G&A costs. The year-over-year increase of 10.3% over Q4 of 2007 was due primarily to investments made in the earlier half of 2008, including our sales expansion, new products and services, such as HR tools and our mid market initiative, and the integration of the recently acquired employment screening company.

As for the details, salaries and wages increased 14%, and included costs associated with the growth of our sales force throughout 2008. Training sales reps averaged 322 for the quarter, an increase of 16% over Q4 2007. Stock based compensation increased by 24%, due to the full effect of the three year vesting of our annual restricted share grants, which woe began issuing in 2005. Sales commission costs remained relatively flat, advertising costs increased by 33%, due to both a shift in the timing, and the amount of marketing efforts in the fourth quarter.

As you are probably aware, a deteriorating economic environment negatively impacts our sales closing ratio. Therefore it was important for us to generate a higher level of sales leads, and corresponding sales activity. Additionally, higher advertising rates were incurred during the Presidential election period.

Depreciation and amortization declined by 15%. You may recall that we wrote off $1.2 million of capitalized software costs, associated with the initial version of our HR tools product in the 2007 period. General and Administrative costs increased by just 2%, as certain increases such as rent associated with our sales office expansion, were partially offset by savings in other areas, such as travel costs. Interest income declined by approximately $1.6 million from Q4 of 2007. Due to the declining interest rates and a higher concentration of invested funds and lower yielding taxable government backed funds. This was also a factor in a higher than expected effective income tax rate for the quarter.

Now I would like to take a few minutes to review the full year results, we reported full year 2008 earnings per share of $1.79, a 3% increase over 2007. This increase was net of a $0.19 per share negative impact, from declining interest rates on our investment income, discounting of workers compensation reserves, and our effective income tax rate. Excluding this non-operational factor, 2008 earnings per share would have increased 14%, over 2007.

Revenues grew 10% to $1.7 billion, as a result of achieving 6% unit growth, and a 4% increase in revenue per work site employee per month. As for full year 2008, revenue contribution and growth by region, the Southeast region which represents 11% of total revenue grew by 10%, the Northeast region which represents 21% of total revenue grew by 17%, the Central region which represents 15% of total revenue grew by 13%, the West region which represents 20% of total revenue grew by 6%. And the Southwest region which represents 33% of total revenue grew by 7%.

Gross profit per work site employee per month increased by 6% from $231 in 2007, to $245 in 2008. As for a recap of our direct cost benefit costs per covered employee per month, increased only 2.5% for the year, from $675 to $692, as we managed these costs through plan design, lower administrative costs, and effective pricing to encourage migration of covered work site employees into lower cost plans.

The percentage of work site employees covered under a health insurance plan increased slightly from 73.2% to 73.5%. As expected workers compensation costs as a percentage of nonbonus payroll increased from 0.51% in 2007, to 0.63% in 2008. Payroll taxes as a percentage of total payroll declined from 7.06% in 2007, to 6.94% in 2008, primarily due to the higher payroll average of our work site employees.

Now let's move on to operating expenses which increased 14% over 2007. An increase in cash and stock based compensation costs made up about 70% of the increase in total operating expense dollars. Cash compensation costs increased by 17% over 2007, due primarily to the hiring of sales reps, additional personnel associated with our mid market initiative, and employees of the acquired company USDatalink.

Interest income declined by approximately $4.6 million from 2007, due to declining interest rates, a and higher concentration of invested funds in the lower yielding, taxable government backed funds. This also contributed to a increase in our effective income tax rate of 35.3% in 2007, to 36.4% in 2008.

Now as far our balance sheet and cash flow, EBITDA plus stock based compensation totaled $98 million for the full year 2008. Over the course of the year we returned $50 million to shareholders through dividends and share repurchases. As for our share repurchase activity repurchased 1.7 million shares in 2008, including 974,000 shares during Q4. We currently have 411,000 shares remaining for repurchase under our authorization.

At this time, I would like to turn the call over to

Thank you, Doug. This morning I am going to share the details of the Q4 gross profit results, and then I will update you on the pricing and direct cost trends we are now seeing, and how we believe they will effect gross profit per work site employee per month for 2009. As you know, our gross profit comes from the mark-up that we earn on our HR services, combined with the surplus that is generated when our direct cost pricing allocations exceed the corresponding direct cost. Doug just reported that our gross profit per work site employee per month was $246 for Q4, and was within our forecasted range.

These results came from achieving $199 per work site employee per month of service fees, and generating a surplus of $47 per work site employee per month, or 4.7% of our total direct cost allocations. The pricing on our service fee for both new and renewing accounts increased $3 per work site employee per month over the fourth quarter of last year, these results continue to demonstrate the value proposition that prospects and current clients see in our service.

In fact, our average mark-up was $1 per work site employee per month above our forecast. However, this increase was more than offset by a $2 per work site employee lower surplus in our workers compensation cost center, due to lower interest rates not higher claims. The total number of claims reported for this quarter was 16% lower than the fourth quarter of 2007.

This incident rate is very meaningful when you consider that we had over a 3% growth in the number of work site employees that incur those claims. While the average cost of claims is 30% higher than last year's average claimed cost, it was driven primarily by one large claim. However, this quarter's $2 increase in the cost per work site employee per month was due to the further reduction in the discount rate applied to our worker's compensation reserves, as interest rates declined further in the fourth quarter.

The surplus in the payroll tax cost center came in $4 per work site employee per month better than expected, because the actual payroll tax expense was lower this quarter than we had forecasted. The benefits cost center deficit offset the payroll tax cost centers surplus, total benefits cost for the quarter averaged $700 per covered work site employee per month, which was at the high end of our expected range, but still only increased 3.22%, over Q4 of last year.

The plan design changes and migration we saw in 2008 limited our annual benefits cost increase to only 2.5%, for the full year over 2007. These results continue to demonstrate the value proposition that the Administaff PEO model brings to our small business clients. In summation, we had another very solid quarter of performance at the gross profit line, which contributed to a 6% year-over-year improvement in gross profit per work site employee per month.

Now let's me update everyone on what we expect the gross profit picture to look like for 2009, beginning with the pricing on the mark-up component of our service fee, Considering the economic environment that we are in, we believe that new business sold in 2009, will be similar in pricing to 2008. We are planning to hold the line on increases for renewing customers this year, as we help them work through this difficult economic environment. Therefore we will assume our average mark-up per work site employee per month for 2009 should remain at $198 per work site employee per month, which is the same as our 2008 full year results.

Now let me explain our assumptions for the surplus component of gross profit for 2009 beginning with the payroll tax cost center. We have now received almost all of our state unemployment tax rates for 2009. Allocation changes that we have made to match these costs increases would normally allow us to have a similar surplus as in 2008. However, we to not expect to receive the $1.5 million credit from the state of Texas like we did last year. Therefore our surplus in this cost center will be slightly lower than in 2008.

Now let's discuss the worker's compensation cost center, at the beginning of each policy year, we get an estimate from our outside actuary, as to what the cost of claims could be, based on our size and mix of business. Since we maintain a higher allocation than this estimate, we have a built-in surplus to start the year.

Then each quarter our actuaries revise the estimated claims costs, based on the number and severity of claims filed in the current period, plus they make adjustments to the cost of prior policy period claims as they get settled. So as the year goes by, if our incidents and severity rates are better than forecasted due to safety programs, and our claims personnel settle claims faster and at lower forecasted reserves, then our quarterly expense would be lower than forecasted.

We have had a five-year history of producing better than expected results in the cost center, but we do not build it in to our forecast at the beginning of the year. This year our strategy will be the same as in the past years, so we will conservatively forecast our workers compensation cost to start out at 0.74% of nonbonus payroll for the year, and let any upside develop throughout the year.

Another factor to consider that could produce additional surplus in the workers compensation center, deals with increases in interest rates in 2009. Last quarter I reported because of a declining interest rate, our discount factor applied to reserves was reduced which increased our expenses by $2.1 million for the year. So if interest rates increase in 2009, we would see our workers compensation expense decline. But we are not going to assume that upside in our forecast.

Our last cost center to discuss is the benefits cost center. As I mentioned a few moments ago, we did a superior job last year at managing our health care cost increases to only 2.5% over 2007. Much of that success came because we had made some plan design changes at the beginning of 2008.

Here is what we see for 2009. While we are not making any plan design changes for 2009, United Health Care did. They filed for an amendment to the master policy in Texas, which included modifications to a few of their covered charges. These changes should help reduce our costs for 2009.

Also last quarter I mentioned that we had previously negotiated a slight reduction to our administrative fees beginning in January of this year. When you combine these two factors, our 2009 cost trend should be about 1 to 1.5% lower than the 6 to 9% trend increases being talked about in the marketplace. Another factor that could help us have lower cost increases in 2009, comes from the continued migration of covered work site employees, moving from higher cost, lower deductible plans, to lower cost, higher deductible plans.

To illustrate my point, we introduced the United Health Care $1500 high deductible health plan in Q2 of last year, and today we have almost 2% of our covered work site employees enrolled in the plan. Additionally, we now have another 2%-plus of the covered work site employees enrolled in the United Health Care $3000 high deductible health plan. To maintain our conservative approach this year, we are not going to factor the effects of much migration into our guidance just yet. For now, we are going to assume a 5 to 6% trend increase over 2008.

From a pricing perspective in the benefits cost center, we have been continuing to increase our allocations for new and renewing business to match the trend that we are forecasting. However, we are seeing our total allocations increase at a slower rate, due to the effect of the migration. Therefore for now, we will forecast a lightly lower contribution to gross profit from the benefits cost center.

In summary, when we look at our entire gross profit picture for 2009, and factor in some extra conservatism, we see our gross profit per work site employee per month for the full year averaging $232 to $236. If you compare this forecast to the 2008 actual results by cost center, you would see about $3 of the difference coming from the payroll tax cost center. About $2 of the difference in the benefits cost center, and the balance of the difference coming from the workers compensation cost center.

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

Thank you, Richard. I will begin my comments today with a few thoughts about our overall results for 2008. I will also discuss the economic conditions, and the labor market deterioration we witnessed in the fourth quarter, and the effect on our small business client base. I will finish by providing details on our outlook for 2009, and the conservative approach we are taking, to planning and operating our business in this environment.

The financial bottom line of $1.79 in earnings per share, was just under the low end of our $1.80 to $2.00 range provided at this time last year, when the world looked quite different than it does today. However, with all of the turmoil last year, the single most significant factor affecting our financial results was lower interest rates, which reduced our interest income and increased workers compensation reserves and tax rate. Risk factor alone reduced EPS by $0.19, otherwise we would have come in at $1.98, near the top end of our original range.

Our financial performance was exceptional, as we grew revenues, gross profit, operating income and EPS, in the face of some daunting circumstances. Our operational achievements were equally impressive, as we improved client retention, set record level client satisfaction ratings, and grew our sales staff substantially. We invested in new products and services, and improved our offering to mid market clients, extending our competitive advantage, and we returned over $50 million to shareholders, while maintaining nearly $100 million in working capital.

These results against the backdrop of one economic crisis after another throughout 2008 are truly remarkable. Administaff had an outstanding year by any measure. It is a testimony to our exceptional clients, our amazing employees, our valuable service offering, and our proven business model.

Last quarter I highlighted the resiliency of our client base, representing the best small businesses in America. During Q4, as the economic crisis widened and deepened, the challenges facing the rest of the economy spread to this small business segment, across nearly every business sector in every region of the country.

As the Human Resource department for our clients, we have to benefit of a direct view into employment and compensation, and we were able to watch the client base respond accordingly. The small business community reaction to the apparent economic crisis included an operating expense tightening, reflected in a round of layoffs within our client base, and a spending pullback that affected our new sales.

Prior to Q4, new hires exceeded layoffs every month of 2008 except for September. After a rebound in October with a net gain of 1,200 employees, the layoffs exceeded new hires by 1,800 in November, 900 in December, and 1,000 in January. These 3,700 layoffs represent a 3.2% decline in the size of our clients workforce in three months.

However, a deeper look at the data indicates many clients have responded quickly and decisively, as the economy worsened. Since October, approximately 1,900 clients representing 31% of our client base, reduced their staff by an average of 14%. These companies have adjusted their workforce to a new reality, and for now are less likely to contribute to the layoff number in the near term. This data also revealed that bad news is not bad for everyone.

During the same three month period approximately 1,400 clients, or 22% of our base, increased their employment by an average of 12%. These clients are not candidates for near term layoffs either, because they are unaffected or may even be benefiting from some aspect of the economic turbulence. Another 12% of our client base has turned over at year end. Many of the clients that left were the ones experiencing financial pressures, and may have layoffs in the in term, but they are no longer a part of our base at all.

The new clients that replaced them just made an investment decision to add our service, and are likely to actually grow their workforce as new clients. This leaves 35% of our current client base that remain constant in employment levels over this period. They either have not yet reacted to the downturn, or did so earlier last year, or are lean and mean already and weathering the storm. In any event, this data indicates that we have seen a round of layoffs in 31% of the base, 34% are likely employment gainers in the near term, and 35% could go either way.

The other reaction we saw during Q4 was the hesitancy of business owners to make significant buying decisions, like joining Administaff. Our sales staff did an admirable job through the fall campaign reaching activity targets, but closing rates were at historic lows resulting in a 1.05 sales per salesperson per month. This is below our 1.2 to 1.5 historical range for sales efficiency in the fall campaign. Sales typically require extra calls to close, they did require extra calls to close, and many prospects just could not pull the trigger, due to the economic uncertainty.

The efforts of our sales organization did produce 7,700 new paid work site employees in January, and a pipeline of 3,500 employees to be paid over the next couple of months. The other major factor at year end for Administaff is our client retention of renewing accounts, thankfully we had a tremendous Company-wide effort throughout 2008 to improve in this area. This initiative resulted in a 12.6% improvement for the full year, and a reduction in the employees loss from client attrition in January, from 11,100 in 2008, to 10,100 in 2009.

Another sign of the times was the failure of a large banking clients, which was taken over by the FDIC, this account had approximately 700 employees and left Administaff at the end of November. We reached our high watermark in paid work site employees in October, exceeding 120,400 employees, however, the combination of 3,700 layoffs, and the 2,400 net difference between new sales and client attrition, and the one 700 employee client failure, resulted in a starting point for January 2009 of approximately 113,600 paid work site employers.

One other important activity in the fourth quarter, turned out to be a management team retreat in November, that was focused on an operating plan for 2009, in the event of a lower starting point for paid work site employees for the new year. This provided a framework around decisions to be made, and ranges for operating expense control.

What started as a hypothetical scenario in November, emerged as a reality in January. In our 23 year history as a growth Company, we have had a set back on occasion, experiencing a reduction in the paid work site employee count. This metric is the primary driver to growth and profitability of our recurring revenue model, and any effective plan to respond to a drop in the employee count, includes adjusting operating expenses to the new base, and restarting sequential unit growth.

In light of the unprecedented economic conditions as we enter the new year, we have planned and will operate Administaff in 2009, by taking a conservative approach which balances the interest of the various constituencies of the Company. I will leave details of the operating expenses to Doug in a few minutes, and focus on our plan to resuming sequential unit growth as 2009 unfolds.

The most important factor to drive unit growth is the number of trained sales personnel. We are very fortunate to have the largest sales force we have ever had, with over 335 trained sales reps as we enter 2009, this is a 20% increase over the 278 salespeople we had at this time last year. In this environment we are taking a conservative view of the sales metrics going forward, and using a 0.75 sales efficiency rate for the year in our low case, and a reduction of the average trained salesperson count to an average of 320.

To get to the high end of our range, we have assumed a 0.9 sales efficiency, and maintaining the trained rep count we have today. Our visibility in declined retention shows a continuation of excellent results experienced last year, but we feel it is prudent to anticipate a headwind to our unit growth coming from potential layoffs, and/or business failures throughout the first quarter.

We also feel it is appropriate to assume layoffs will exceed new hires to some degree throughout the rest of the year, and to leave any improvement in the labor market as upside to our operating plans. Therefore we do not anticipate an increase in the work site employee base this quarter, from the January starting point, as we expect the pipeline from new sales to offset client attrition and layoffs, in subsequent quarters in 2009, we expect to range form 1% to 3% sequential unit growth, as new work site employees paid from sales, more than offset layoffs and client attrition, and produce a net gain of 500 to 1,200 employees per month.

So the beginning of this year has presented an interesting and considerable challenge. We responded quickly and decisively with a plan to continue growth and profitability, and our commitment to the clients, employees and families we serve. Administaff is in a unique position help our clients through the difficult period, and I am confident our corporate staff will step up and meet this challenge.

At this point, I would like to pass the call back to Doug to provide specific guidance for 2009.

Thanks, Paul. Before we open up the call for questions, I would like to provide our financial guidance for the first quarter and full year 2009. As Paul discussed earlier, our forecasted unit growth takes into account an expected range of possibilities, from the impact of a weak economy on our sales efficiencies, client retention, and layoffs within our client base.

We are forecasting a level of work site employees in Q1 flat with our January starting point, then sequential growth between 1 and 3% for the remaining quarters of 2009. This results in expected average paid work site employees in a range of 113,400, to 113,800 for the first quarter, and 115,500 to 118,000 for the full year.

As for gross profit per work site employee per month, based upon Richard's earlier comments, we expect to be in a range of $245 to $249 for the first quarter, and $232 to $236 for the full year. As for the quarterly pattern in this key metric, it is typically higher in Q1 because of the surplus we generate on a higher level of payroll taxes, prior to work site employees reaching their wage limits. Thereafter new business coming on creates a drag on the payroll tax surplus. When combined with pricing increases rolling in throughout the year, we typically see a decline in the metric from Q1 to Q2, sequentially flat from Q2 to Q3, and a sequential increase in Q4 over Q3.

Now as Paul mentioned earlier, we have made adjustments to our initial 2009 operating plan, based upon continued deterioration in the economy, and it's impact on our January starting point of work site employees, and unit growth outlook for the remainder of the year. We are forecasting operating expenses to be in a range of $273 million to $276 million for the full year, a reduction of approximately $25 million from our initial 2009 internal budget, which was formulated in the fall of 2008.

This initial 2009 budget included increases over our actual 2000 operating expenses, due largely to a run rate level carried over from the end of 2008, rather than new incremental expenses. Therefore the following actions have been taken to result in significant reductions from those existing run rates. Although we do not contemplate a broad based layoff plan, a reduction in corporate head count is planned through no new hiring, and only limited and targeted replacement of termed employees.

Additionally, corporate compensation will be reduced through a deferral of merits increases of corporate employees, a reduction in the level of stock based compensation, a reduction in the Company's 401-k match, and reduced incentive compensation. We have also reduced the level of marketing and business promotion expense, as you would expect, sales commission expense will be tied to the level of paid work site employee. We have targeted various G&A items for reduction, including travel, training, postage, printing, and other costs. Currently we do not plan to open any new sales offices in 2009.

Now a component of our 2009 incentive compensation plan, will be tied to achieving a predetermined level of operating expense reductions, with further reward to our corporate employees for any incremental reductions. As in prior years the high end of our full year operating expense guidance is tied to additional incentive compensation, which will be accrued only upon achieving higher unit growth and gross profit results, and operating expense reductions.

Now as for the first quarter, operating expenses are expected to be in a range of $72.8 million to $73.3 million. As is our typical pattern operating expenses higher in the first quarter, as compared to the second and third quarters, due to the restart of payroll taxes on our corporate employees, the timing of our advertising, and expenses associated with our annual sales convention and incentive trip. Additionally, planned operating expense reductions are expected to take significant effect beginning in Q2, and result in a sequential decline of approximately $6 million from Q1. Third quarter operating expenses are typically flat compared to Q2, with a sequential increase in Q4, due to advertising surrounding our fall sales campaign.

For interest income and our effective income tax rate, while we feel it is prudent to maintain a conservative investment strategy in this volatile economic environment, unfortunately it results in lower interest income, and a higher effective tax rate. We are forecasting net interest income in a range of $2.5 million to $2.8 million for the full year 2009, and a range of $500,000 to $700,000 for the first quarter.

With our recent shift from tax exempt to more conservative taxable investments, we are estimating an affected income tax rate of 39%, for both the first quarter and full year. The effect of lower interest rates on these two components, combined with the discounting of our workers compensation reserve, is expected to reduce earnings per share by $0.18 per share in 2009, compared to 2008. As for average outstanding shares, we are forecasting 24.7 million for Q1, and for the full year.

As for our capital expenditures, we taken to approach to disclose certain discretionary items, we are budgeting 2009 capital expenditures at $10 million. In addition to having a positive affect on our net cash flow, this lower level of expenditures will have a favorable impact on our depreciation and amortization.

In summary, we have implemented an operating plan, which addresses the expected impact of today's economic environment, while preserving the investments we have made to-date. We have built our plan based upon the expected impact of a weak economy on our unit growth, and what we feel are conservative pricing and direct cost assumptions going into the year.

Our key metrics guidance results in an implied EPS, with a mid-point of about $1.39 per share, and a range of $0.25 from the low to the high end. Once again, it is important to point out that our 2009 forecast includes an $0.18 per share reduction from the 2008 EPS, due strictly to the unprecedented low interest rate environment, a factor outside of our operations.

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

Ladies and gentlemen, (Operator Instructions).

Our first question is from Tobey Sommer of SunTrust Robinson Humphrey, please proceed.

Thank you very much. Thank you for all of the details, very helpful prepared remarks. I wanted to ask a question about the sales force. You had a tremendous amount of growth in the trained salespeople.

I wanted to see if in the course of the fall campaign, or maybe in 2009, how you think about the mix of advertising, versus kind of feet on the street? What has been successful for you, and maybe any changes you would have, looking at how you would allocate that kind of effort in 2009, versus kind of more stable growing years in the economy?

Thank you Tobey, appreciate the question. Really, I am very enthused about what is in front of us in '09 from sales standpoint. Because as you know, we grew the sales staff dramatically, a 20% increase last year, and the fall campaign although the closing rates were not good, the activity remained high, which means all of the new sales staff got a lot of good experience through the fall campaign. And that is really what you look, for those sales opportunities so they can hone their skills through that time period.

On the advertising front, even though we are lowering our advertising spend, and some of our business promotion expenses, we actually think we are going to be able to buy the same or maybe even a higher number of gross rating points through this period, because you don't have an election year, and really the economy has dramatically lowered advertising rates.

So we think we are positioned well to support our sales staff, in a lean process, providing qualified leads, although they are more experienced than they were last year, we are still going to be conservative, and actually estimate a lower efficiency rate, even than we experienced last year.

Thanks, and if I may ask a follow-up for happens Richard if you could help, several of the things you discussed in terms of the mark-up, and the different areas of surplus, it sounded like you built in conservatism, if you were to net those different metrics out, in terms of the opportunity for continued development, how would you quantify that looking forward in 2009?

Well Tobey to your point, we did build in what I would call a little bit more conservatism. As we think about in the payroll tax cost center, we had already built in the beginning allocation rates in the very end of last year for 2009, and then we got in the state unemployment tax rates, so those seemed to match with what our expectations were, the only the difference as I said in my prepared remarks, was $1.5 million credit, that we won't be getting in 2009 from the state of Texas. So that surplus I believe we just kind of nailed, I don't think it is liberal or conservative, I think it is just where we expect to be.

Obviously on the workers compensation cost center, our expense there, we are forecasting a little, some increase over 2008 at this point. But in the very first quarter of this policy year, which starts in October, and runs through September, the first quarter results were really pretty strong, we had a 16% reduction in claims, now that should translate into some very, a lot lower costs. But we just can't tell how much that could be. I mean it could be quite a bit over the next three quarters.

On the health care side, the migration, we believe can produce some upside there. We are baking in the lower allocation right now, and usually what happens is it takes a few months for the cost to decline, so we can see quite a few dollars per work site employee per month additional surplus, coming from both the workers compensation and the health care cost centers for the year. And actually instead of them being a drain, they could actually become a contributor. It is just hard to pin the number right now, so that is why we said, we have got to go with what we know.

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

Your next question is from Jim Macdonald of First Analysis.

Hi guys. Continuing on the workers comp discussion, if interest rates were to rise, how quickly would that impact your discount rate decision, or is that set each October?

No. We actually adjust it every quarter. So if they went up this quarter, we would start to see the effect of that next quarter.

You mentioned there was a big claim that increased your severity by 30%. Presumably If it was that big, it tripped over your $1 million cap, so is 30% the right number to think about, or was it capped out really?

I mean, the reserve hasn't hit the cap yet, but it was pretty close in the total reserves. Obviously if it goes over a 1 million, it is not our issue to deal with. So we are only responsible up to 1 million. Yes, the 30% is abnormally high for us in a given quarter. Certainly is, and this was just one of those unfortunate incidents.

And it is actually comparing the Q1 of two different policy periods. So that one claim would have an inordinate effect, but it can't have that effect on both.

Right.

On interest rates, could you talk about kind of where you are invested now, and a similar question, how quickly if interest rates were to rise would that impact you, have you been able to invest in any longer term higher rate type of instruments, or what is your total sensitivity on interest rates.

We have currently apportioned our investments between taxable and tax exempt, although the course over the past two years, it has been much more highly concentrated in the taxable government backed, the Treasuries, the Agency funds, and it has been very short-term based on the yield curve, but it is something that will be looking at closely over the course of this year. Figuring out whether it makes sense to take a little bit more risk, but a measured risk to earn a higher yield depending upon the environment.

At this point, we are fairly heavily into the Treasury and Agency funds, which are earning as you know, very little at this point in time. There is again, it depends on the economy and the climate out there, but I think there is at this point only room for upside in the yield, based upon where we are.

So we have kept things very short-term for the moment.

You don't even have 10% or 20%, in kind of any long-term instruments?

No, for the current moment, we have kept things fairly short-term, rather than laddered them into the long-term.

That is an item, Jim, that our finance risk management and audit committee is going to review in our next meeting, and make a new assessment based on where we are today, compared to where we were a quarter ago, when the crisis was a little bit more severe.

Thank you very much.

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

Thanks a lot. I was wondering if there was any potential change to your pricing approach, that being the bundling, or if you are finding ways to convey information to prospects and existing customers, around how some of the components are changing?

Yes. Michael, we first of all, the bundled approach is still our approach to explaining the pricing of our service fee, our point of view, you either have an HR department, or you don't. We really are showing to cost of adding a sophisticated HR function to a Company's business.

But we have over the last few, I think I mentioned a quarter or two ago, with our mid market customers, we are able to provide some information about the components of our service fee, indicating how much our cost is for the payroll side of the business, how much our cost is for benefits administration, or safety services, basically all the of the breakout of the mark-up component of our service.

The $198 that Richard talks about, when you break that out as to how much we spend for the different aspects of the HR function, that information is really providing some insight for our clients to be able to see that wow, if you add up all those components, what a great bargain, because you can go compare components to other payroll services, or benefits administration services, or those kind of things. I think that is giving some help to clients who are digging in in a tougher economic environment, and really wanting to watch every penny.

That is helpful. Another question I had over the years you broadened your service offerings, so if you did have a client deciding at some given point that they might not want the full offering, that there was some potential tradedown opportunity, just wondering given the attrition that you have seen, can you give us some sense of how many traded down to a lower fee element?

We have not had a lot of that yet, we are getting a little more in our retirement services area. But the bigger impact on that front will come when we complete the HR tools rewrite, which will be at the end of the summer or so, or in the fall of this year we will be testing, and probably doing the beta test. And when that happens, then there will be a layer of technology functionality that operates the software as a service component, that I think will be very sticky for keeping customers, but also when they leave, we should be able to have a fairly significant portion of our operating income for work site employee that stays in place.

Michael, this is Richard, I was also going to add, that in terms of what we seen customers do this year, especially as they come into the renewal cycle, we are seeing them look at the total cost of the service and saying, while I still want the total package that you have, we are going to change our benefits plan for this next year, we are going to increase the deductibles, that and go to a plan with a higher deductible, and a lower cost to me, the business owner. And so we expect to continue to see that trend taking place to the scale that it is right now, kind of throughout 2009, because it does help the business owner make the decision to stay with us, even though they are not going to have quite as rich of a health plan.

That is part of a broader program to help our customer control costs through the downturn, and we are able to actually consult with them. This is when you need HR consultants, if you are doing a layoff, you need to made to make sure you keep the right folks, and have the other right ones leave.

Sometimes you need to look at your organization design, and figure out new ways to do things, we have folks that can do that. Also there are some practical things you can do, you can lower your actual base pay level, but introduce a variable pay component, with incentives around key metrics of your business that will drive your growth and profitability, and actually create some upside for employees, even though you are reducing the base pay levels, there are ways to keep people aligned, or even energize employees around a cost saving environment. There are other things that we are preparing to go do with our customers as they renew, to help them think through, being in a cost saving mentality.

But those are all kinds of the things that you get when you have a bundled service offering. If you were buying the payroll from here, and buying the benefits, and buying this that and everything else separately, you wouldn't get this cohesive game plan like we provide.

You would just have to figure it out on your own.

Had one other question for you, Richard, given the impact of the economy, I was wondering if you have a sense of how that is impacting utilization on the health care side, or is it still too early to assess that given normal claims lags?

Sure, actually I do have an answer to that question. We were looking at out from several perspectives, and one of the ways that we talked about it was in terms of higher health care kinds of activities, where their planned surgeries and stuff like that, and so we went back and asked United Health Care to give us a little bit of history, since they have been doing this for a long, long time. I don't remember exactly but I think it was about 40 years they went back, and looked at their results, and certainly in an economic downturn, the incident rate of health claims goes down.

Because people postpone activities. Postpone surgeries, that also works on the workers compensation side as well, we found that out when we had a report in December from our company that manages all of the workers compensation claims. And so we do see a potential reduction in the cost, because of a lack of incidents.

Thanks for the updates.

Your next comes from the line of Mark Marcon of R.W. Baird.

Good morning. Obviously a really difficult economic environment. I was wondering if you could talk a little bit about the client retention rates that you saw, if you could split it out for Q4, in terms of what you ended up seeing in terms of between your traditional smaller clients, relative to your mid market clients, and then I had some follow-ups?

Sure. First of all, we had a for the year, a dramatic improvement in our mid market retention, driven by the investment we made in our mid market services. And we actually had an over 30% improvement in our retention over that period. So those were pretty dramatic results.

It went from what to what?

I don't know if I got that number right in front of me, but for the full year I think we lost somewhere between 4,000 and 5000 employees the year before, and we lost 35 or 600 over this year. So we really saw some great results there. We had in Q4 though we saw in the mid market customers some decline in employment, from layoffs and new hires, and we had the one large customer go away, a bank that was taken over by the FDIC. So that is one we couldn't do much about.

In the small business community as well we just across the board had some really great results last year, to have a 12.6% improvement in client retention, in a year that we were experiencing last year, I think was pretty amazing. Even in the month of January, you had a 1,000 fewer go away on an 11,000 base, so 9% or whatever, improvement in the month of January, those are outstanding results, and I really think we have quite a bit of upside going forward, because a lot of the changes that we made, we made as the year progressed more towards the latter part of the year, and we are going to be able to extend those things across the base this year, and hopefully continue to make some improvements.

This year we will have our incentive compensation plan focused on three items at the corporate level, that will be our normal operating income per work site employee, but we will have another component tied to client retention like we did last year, because we think there is more room to gain, to leverage the changes we made last year. Then we will probably have about 25% of our incentive plan focused on meeting operating expense budgets, and improving on those targets.

So were you running at kind of an 80% retention rate for Q4?

We don't usually look at it as a rate within the quarter, no, in the quarter we had --

I meant just year-over-year?

Year-over-year rate?

Yes.

I haven't even looked at that yet. But I would say it was a little lower than that, but not much it was a great year.

Okay. In terms of the assumptions going forward, what would you expect your client retention rate to stay steady relative to '08, with improvements in servicing offsetting the weakness that we are seeing economically, or given the magnitude of the downturn, would you expect that client retention drops in '09?

To be conservative, Mark, we actually budgeted in a little worse retention than what we experienced last year, to factor in some potential for business failures, et cetera, and we also factored in layoffs exceeding new hires more considerably as we finish off this first quarter, and then still maintaining a headwind, but not quite as much as we seen in the last few months.

So are you assuming that as we look out towards Q2 and Q3, you are assuming lower layoff rates?

Yes, we are still assuming layoffs exceeding new hires, but not as much as they get over this past three months in the next, or February March in our forecast.

Okay, what are you seeing as the commissions out of the commission payments out of your clients?

Yes, we haven't released our quarterly survey information yet, but I can comment on that component. If you recall in Q3 last year, we saw a dramatic decline, over 8% reduction in commissions paid year-over-year on our base, as I look back at the dialog we had last quarter, we were talking about whether that would produce a round of layoffs, it did, as we have certainly seen.

In Q4 the commissions were not off as bad, nearly as severe as they were in the third. They were down around a little over, between 2 and 3% for the quarter, which is still down, it may have been a little closer to 3%, I don't have the number in front of me, but it was around 3%. Obviously better than the 8% decline. But I am not sure it is enough to encourage a lot of folks.

Okay. Then, I will jump back in to queue, but can you talk a little bit about just the pricing environment that you are currently seeing out there, there is one large player in the space that has admittedly become a little bit more aggressive, and so I am wondering if you can just talk about what is happening from a pricing perspective, and what percentage of your new sales would you say are still kind of the missionary single bid situations, as opposed to kind of a more competitive situation?

It is still pretty significant that we are still mostly greenfield, but there has been more of what I call price based competition, we have focus more on the value proposition that we provide, the reality is most of the players out there when they come in and compete on price, are really talking about a base rate, and then when customers need services, or need more services than what is in that base rate, they end up paying, they get nickel and dimed, and cost goes up a lot. So we have to demonstrate that, and be able to level that playing field with the facts.

But in terms of just our overall strategy for this year, in the market component, we are just planning on kind of a steady state, we did see an increase in the mark-up from new business in 2008 over 2007, because we put some pricing increases there. We are not putting any pricing increase out for the mark-up component for 2009.

And we are going, the game plan is to renew existing customers at similar rates that they currently have. Some will get an increase, some will get a decrease, so the game plan is to try to maintain that $198 per work site employee per month average for the whole book of business, every month throughout the year.

Great. Thank you for the color.

I would now like to turn the call back over to Mr. Paul Sarvadi.

Thank you all very much for participating today, and we look forward to getting back together next quarter, after we hopefully see some improvement in the marketplace. Thank you very much.

Ladies and gentlemen, that concludes the presentation, thank you for your participation. You may now disconnect, have a great day.