Insperity Inc (NSP) 2009 Q4 法說會逐字稿

Good morning. I will your conference operator today. At this time, I would like to welcome everyone to Administaff's fourth-quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session. (Operator Instructions). Joining us on the call today is Mr. Douglas Sharp senior Vice President of finance, CFO and treasurer' Mr. Richard Rawson, President; and Mr. Paul Sarvadi, Chairman and CEO. Thank you. Mr. Sharp, you may begin your conference.

Thank you, we appreciate your 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 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.

Now let me take a minute to outline our plan for this morning's call. First I'm going to discuss the details of our fourth-quarter and full-year 2009 financial results. Richard will discuss expected trends in our direct costs, including benefits, workers' compensation and payroll tax and the impact of such trends on our pricing. Paul will recap the 2009 year and then discuss our 2010 operating plans. I will provide our financial guidance for the first quarter, and full year of 2010. We will then end the call with a question-and-answer session.

Now let me begin today's call by discussing our fourth-quarter results. Today we reported a fourth-quarter loss of $0.11 per share, The shortfall from the EPS range implied from our Q4 key metrics guidance was a result of higher-than-expected deficit in our healthcare program. Excluding this factor, we would have earned approximately $0.15 per share for the quarter. Now, for our key metrics. Paid worksite employees averaged $107,025 for the quarter, slightly below our forecasted range of $107,250 to $107,750. Gross profit for worksite employee per month averaged $191 for the quarter. The shortfall from our forecasted range of $220 to $222 is attributable to the higher-than-expected healthcare costs. Operating expenses totaled $65 million, within our expected range, and an 11% reduction from Q4 of 2008. Our balance sheet continues to reflect significant liquidity and no debt. We ended the year with $128 million of working capital.

Now let's review the details of our fourth-quarter results. Fourth-quarter revenues declined by 7% from 2008 to $396 million, as a result of a 10% decline in the average paid worksite employees, partially offset by our 3% increase in revenue per worksite employee per month. As for the worksite employees, net hires versus layoffs in our client base were relatively flat during Q4, which was consistent with that experienced in the prior quarter. Client retention continued to hold up well, averaging 98.6% for the quarter. This was consistent with both forecasted and historical levels. However, we experienced a slight decline in worksite employees during Q4, as sales continued to be a challenge in this economic environment and we're not at a level necessary to offset those worksite employees lost through client attrition.

Looking at fourth-quarter revenue contribution, and year-over-year change by region, the southeast region, which represents 11% of total revenues, declined by 4%; the northeast region, which represents 23% of total revenue, increased by 1%; the central region, which represents 15% of total revenue, declined by 5%; the west region, which represents 20% of total revenue, declined by 9%; and the southwest region, which represents 31% of total revenue, declined by 12%. Larger declines in the west and southwest regions were primarily a result of a disproportionate number of large clients that termed for financial reasons in Q1 of 2009.

Moving to gross profit, as mentioned earlier, we experienced a $30 shortfall in gross profit per worksite employee per month compared to the midpoint of the Q4 forecasted range. This shortfall was entirely attributable to a higher-than-forecasted deficit in the benefits area, as other areas of gross profit contributed $4 of gross profit per worksite employee per month over and above forecasted levels. Now the $34 per worksite employee per month shortfall attributable to the benefits area was a combination of higher-than-expected healthcare costs of $31 per worksite employee, and $3 of lower pricing. As for the cost side, higher-than-expected COBRA claims contributed $19 of excess costs, and a higher level of healthcare utilization of our active worksite employees contributed approximately $12 of excess costs. As for the pricing side, migration of worksite employees into lower cost plans was the primary reason for $3 per worksite shortfall.

In a few minute, Richard will provide some additional color on the recent factors contributing to our higher healthcare costs and discuss the range of outcomes going forward, so for now let's move on to other direct cost areas. Workers' compensation cost were 0.67% of non-bonus payroll for the quarter, slightly below our forecasted level, level of 0.68%. Actuarial loss estimates resulted in a $1.1 million reduction in previously-reported loss estimates. Payroll taxes as a percentage of total payroll costs declined from 5.72% in Q4 of 2008 to 5.63% in Q4 of 2009, primarily as a result of higher payroll averages and bonuses of worksite employees.

Now shifting to operating expenses, cost reduction efforts implemented at the outset of 2009 have resulted in an 11% decline in Q4 2009 (sic) operating expenses versus the fourth quarter of 2008. As for the details, salaries and wages declined by 12% as a result of a reduction of corporate headcount, a 50% reduction in the Company's 401-k match, and the elimination of merit increases of our corporate employees. Additionally, incentive compensation expense declined from Q4 of 2008. General and administrative costs declined by 10% as a result of cost reductions in various areas, particularly those that are variable with worksite employee and corporate headcount levels. Sales commission costs declined by 9% from Q4 2008, consistent with the decline in paid worksite employees and lower sales production. Advertising costs declined by approximately 11% as we took advantage of lower advertising rates and eliminated the least productive business promotion efforts in 2009. Depreciation and amortization declined by 4% due to a reduction in 2009 capital expenditures in response to the economic downturn. Interest income for the quarter totaled just over $200,000, at the low end of our expected range; however, declined by approximately $750,000 from Q4 of 2008, due to declining interest rates.

Now, I'd like to take a few minutes to review our full-year results. We reported full-year 2009 earnings per share of $0.66. These reported earnings were net of approximately $12 million, or $0.28 per share of incremental COBRA healthcare costs. Our revenues declined by 4% to $1.7 billion as a result of a 7% decline in average paid worksite employees, partially offset by a 3% increase in revenue per worksite employee per month. As for full-year 2009 revenue contribution and year-over-year change by region, the southeast region, which represents 11% of total revenue, remained flat; the northeast regionm which represents 23% of total revenue, grew by 2%; the central region, which represents 15% of total revenue, remained flat; the west region, which represents 20% of total revenue, declined by 7%; and the southwest region, which represents 32% of total revenue, declined by 9%. Gross profit per worksite employee per month declined by 10% from $245 in 2008 to $221 in the full-year 2009. The year-over-year decrease of $24 per worksite employee per month was the result of a $2 decline in the markup for our HR services, and $22 of lower surplus in our direct cost areas, including $18 attributable to the benefits area.

As for recap of our direct costs, benefit costs per covered employee per month, including the $12 million of incremental COBRA costs, increased 8.6% for the year from $692 to $751. Workers' compensation costs as a percentage of non-bonus payroll increased slightly from 0.63% in 2008 to 0.64% in 2009. Actuarial loss estimates resulted in a $5.7 million reduction in previously-reported loss estimates in 2009 compared to a $9.8 million reduction in 2008. Payroll taxes as a percentage of total payroll remained relatively flat from 6.94% in 2008 to 6.96% in 2009.

Now let's move on to operating expenses, which declined 6.4%, just slightly less than our unit decline. Cost reductions efforts resulted in a 10% decline in general and administrative costs, a 9% decline in advertising costs, and a 6% decline in corporate salaries and wages. Depreciation and amortization costs increased by 7%, but due primarily to capital expenditures made throughout 2008. As I mentioned earlier, capital expenditures were scaled back to $8 million in 2009. Interest income declined by approximately $5.4 million from 2008, due to declining interest rates and a higher concentration of invested funds and lower-yielding taxable government-backed funds. This factor, along with the impact of non-deductable items on lower pretax income, contributed to an increase in our effective income tax rate from 36.4% in 2008 to 42.1% in 2009. Z for our balance sheet and cash flow, EBITDA plus stock-based compensation totaled $55 million for the full-year 2009.

As for our balance sheet and cash flow, EBITDA plus stock-based compensation totaled $55 million for the full-year 2009. Cash outlays included cash dividends of $13 million and the capital expenditures of $8 million. While we did not repurchase any shares in the open market during the year, our balance sheet remained strong, with working capital of $128 million, allowing us to resume buying shares as opportunities arise. And as we announced today, our board has authorized an expansion of our share repurchase program to 1.4 million shares.

At this time, I'd like to turn the call over to Richard.

Thank you, Doug. This morning I'm going to give you the details of the fourth-quarter gross profit results, then I will update everyone on the details of our gross profit recovery plan for 2010. Our gross gross profit comes from the service fee component of our markup combined with a typical surplus that is generated when the direct cost pricing allocation components of our markup exceed the corresponding direct costs. This quarter we had a better-than-expected service fee of $197 per worksite employee per month, which was offset by the $6 per worksite employee per month deficit, taking our gross profit per worksite employee per month down to $191. Looking at the service fee on our business for the full year of 2009, the markup was down only $2 per worksite employee per month, which I believe is very good considering this terrible economic environment that we were in. It is as bad economic environment, coupled with the extended federal COBRA premium subsidy, that led to the dramatic spike in healthcare costs. These factors drove our benefit costs per covered employee to $803, or a 14.75% increase over Q4 of 2008.

Let me add a few additional remarks to the results that Doug shared with you a few minutes ago. In order to understand this increase it's necessary to understand the statutory changes that have taken place in 2009 relating to COBRA. During our last two conference calls I have shared with you the uncertainty that we have had regarding the potential impact on employers' healthcare costs, of the newly-passed federal legislation called ARRA, American Recovery and Reinvestment Act of 2009. Under this new law, which was effective March 1st of 2009 employers were required to offer healthcare benefits under COBRA to any involuntary terminated worksite employee retroactively back to September of 2008. Those employees, as well as currently terminated employees, have an opportunity to purchase health insurance coverage for 35% of the premium costs while the taxpayer subsidizes the remaining 65% as part of the stimulus package. These subsidies were supposed to last nine months for each COBRA participant and then begin to expire on November 30th of 2009. In December, Congress lengthened the eligibility period from December 31, 2009 to February 28, 2010. In addition, the subsidy period for all participants was extended from nine to 15 months. This means more people are eligible for the COBRA subsidy and the costs will continue for a longer period of time.

First let's look at how the statutory change contributed to the $803 per covered employee benefits cost in the fourth quarter for us. For several years prior to the recession we had averaged about 3.6% of covered worksite employees that had elected COBRA. This percentage stepped up over the course of 2009 to an average of 7.2% that were on COBRA in the fourth quarter. Also, if you remember, we have reported that each COBRA participants healthcare claims cost is about double that of a regular participant's healthcare claims costs. So in Q2, we had estimated that our incremental increase in healthcare costs for 2009 would add about $2 million each quarter for Q2, Q3, and Q4, for a total of $6 million. Now, with the benefit of hindsight, we can see that the number of participants and the cost per participant resulted in a total of a $12 million impact from COBRA for year. This led to the $6 million of additional expense in the fourth quarter.

If that wasn't enough, we saw another $3.8 million of additional expense coming from the active healthcare plan participants utilizing the plan, as well. The fear of losing coverage from either losing their job, or proposed healthcare reform legislation has certainly been a contributor to this higher utilization, which is consistent, by the way, with reports from many of the nation's health insurance carriers. If we look back at the benefits costs and just excluding the effect of the $12 million increase and the cost of COBRA, our annual trend would have increased 6.8%, which was a lot more in line with our earlier forecast. Both the COBRA extension and the spike in utilization are temporary; therefore, our costs will at some point return to more predictable levels. But in the meantime, we will have to make some changes to reduce this substantial deficit in the benefits costs center. I will come paint to this point in a few minutes after I finish commenting on the other direct cost center results.

On the workers' compensation cost center we had a slightly better-than-expected surplus offset by a slightly less-than-expected surplus in the payroll tax cost center. You may remember that our workers' compensation policy renewed on October 1, 2009, so for this first quarter of our new policy, we had a 4.7% reduction in the number of claims filed compared to the same period last year. This lower incident rate is due to a fewer number of worksite employees that file those claims coupled with the continuation of our effective safety service programs. The severity rate, which is the average cost of these claims, was 7.95% higher than the same period last year. These results did produce a $1 per worksite employee per month better-than-expected surplus. In summary, federal statutory changes and a marketplace filled with uncertainty torpedoed our fourth-quarter and full-year gross profit results.

Now, let's discuss what we are going to do in 2010 to return to historical gross profit levels, beginning with the benefits cost center. To attack the cost side of the equation we have done a few things. First of all, we have made a few plan design changes, which went into effect in January and should help to reduce our costs. Second, the administrative fee charge by United Healthcare has been reduced slightly from the 2009 rate. And third, we will be changing the client service agreement to reduce the number of new COBRA participant that is currently stay on our plan when a client leaves, which should also help to lower our expense.

Now, let's address the COBRA-related costs for 2010. Here is what we know. First, we know the number of current COBRA participants, which has leveled off over the last couple of months. Secondly, with nine months of claims experience we know the degree to which participants claims exceed the COBRA premium that we collect. Third, since we are the COBRA administrator we know when each participant's expires and coverage ends under the current law. Fourth, we also know that eligibility for the subsidy for new enrollees is due to expire at the end of this month. Based on this information, we can now calculate the impact we expect to have on our healthcare plan expenses from COBRA to be in a range of $11 million to $13 million for 2010. If, however, the new legislation further extends the subsidy, then we would expect the costs to be in a range of $13 million to $16 million for 2010. We also believe that the spike in utilization of the active participants, which added about $8 million of additional costs to our 2009 benefits expense, should return to normal levels throughout 2010. When we consider all of the factors known today, we estimate that benefits costs per covered employee should increase about 10% to 12% in Q1 of this year, and 7% to 8% for the full year.

Now, on the pricing side of the benefits cost center equation we are making some additional changes to our previous pricing assumptions. In Q2 of last year we had decided that absorb the additional COBRA-related costs because at that time it was difficult to determine the full impact of this new federal subsidy program until participation and claim experience could develop in this new program. Additionally, we wanted to be sensitive to the difficult economic environment that our small business clients were experiencing. In Q3 we notified our clients of our intent to absorb an estimated $6 million of the COBRA -related healthcare costs. Also, we began to implement pricing increases to match the expected increase in trends related to these costs. Since the actual cost was $12 million in 2009 and the midpoint of 2010 expected cost range is $13 million, we have decided to implement a new pricing plan to cover this additional cost related to the statutory change. You may remember that our client service agreement has a provision that allows us to pass along statutory increases to our customers during the term of the contract. Since the COBRA legislation and subsequent extension fall into that category, we expect to recover most of this cost increase in 2010 and the balance in 2011. Therefore, with the benefit cost assumptions we have made, combined with the additional allocation increases, our deficit in the benefits cost center should improve each quarter throughout 2010.

Now, let's discuss the payroll tax cost center surplus for 2010. As I mentioned last quarter, the state unemployment tax funds had been severely depleted and we knew there were going to be large increases passed on to employers. We have now received most of the state rates for 2010 and the out average increase per state is about 60%. So while the cost of payroll taxes per worksite employees will go up about $23 per worksite employee per year, so will the allocations. Looking at this cost and corresponding surplus on a quarterly basis, you will see that the cost declines each quarter as employees reach their specific wage limits and so will the surplus. Therefore for the full year our surplus on a worksite employee per month basis should be about the same as the 2009 surplus was.

The last direct call center to discuss is the workers' compensation cost center. Last quarter I shared with you that our allocations in this call center had been declining and that we had not seen workers' compensation insurance companies raising their rates. Well, I am pleased to report that our allocations have stabilized, but we still do not see the insurance carriers raising their rates, so we will be keeping our allocations the same for 2010 as where they are right now. On the expense side of this cost center we just ended a good quarter at 0.67% of non-bonus payroll. Therefore, we'll continue to forecast a 0.67% to 0.69% of non-bonus payroll for each quarter in 2010. At this point, we would anticipate that our surplus in this center would decline by about $5 per worksite per month for the full year. However, if claims develop out better than actuarial estimates, the ultimate cost would be lower and the surplus higher, which is like what we have seen for the last several years.

The final factor affecting gross profit for r 2010 is the service fee component of our market. We do not expect the operating environment for small business to substantially improve in 2010, so we're not building in an increase in the service fee for renewing customers into our forecast. The pricing of our service fee for new accounts sold in the fourth quarter was $185 per worksite employee per month, $5 per worksite employee less than the business sold in Q4 of 2008, which I believe continues to reflect the difficult sales environment. However, the pricing on our renewed business increased $2 per worksite employee per month over the last year and continues to demonstrate the value that our customers see in our service. Since our pricing on new business in Q4 was lower than the original forecast, I think it best to assume that same level of pricing in 2010 for new business. When you blend the two together we should see our service fee decline about $2 per worksite employee per r month throughout 2010. In summary, when we consider all of the pricing and direct costs factors, our gross profit per worksite employee per month should be in a range of $212 to $220 for the full year.

Now, I'll turn the call over to Paul.

Thank you, Richard. Today, my comments will cover three topics. First. I'll discuss 2009 results and the stress test the economic and regulatory environment imposed on Administaff. Secondly, I will describe specific actions taken to reestablish our growth and profitability in the second half of 2010. And lastly, I'll discuss plans to evaluate alternatives to reduce our healthcare risk and continue our adjacent business development plan. 2009 presented an array of challenges that were like a rifle shot at our small business client base and our specific business model designed to support them. First, the financial crisis deepened the recession and dried up small business lending, changing the financial operating framework for small business. Secondly, government response to the financial crisis, including bailouts, government takeovers and massive increases in federal spending and debt, froze many business leaders in their tracks. Next, more proposed government programs, such as cap and trade and healthcare reform made it much harder for small business owners to make long-term or significant decisions, including capital investments and hiring. Moreover, government regulation extending COBRA and the fear of loss of healthcare coverage due to the recession and the healthcare reform debate, presented a direct assault on our health plan, one of our primary direct costs in our business model, as you just heard Richard and Doug discuss.

Now, in spite of this labor market and healthcare nightmare, Administaff generated $55 million in EBITDA plus stock-based compensation, and increased working capital by more than $29 million, so we did weather the storm. However, the level of stress placed on the business [file] in 2009 did take a toll on both profitability and growth. Early in the year growth was affected by layoffs exceeding new growth dramatically, as clients shed jobs to the tune of nearly 3,000 employees in the first quarter of the year. This number dropped to less than 1,000 in the second quarter and then flattened to no net gain or loss over the last half of the year. Our client retention numbers for the year were just slightly in 2009 in spite of the economy, as we retained 74% of worksite employees compared to 75% in 2008. Our service to clients was a highlight for the year, as our service teams were heavily utilized and client satisfaction rates were high throughout the year.

The factor limiting our growth that reflected the most stress in 2009 was sales of new accounts. Our sales for the year were 78% of our forecast for both the full year and fourth quarter of 2009. In spite of an increase of 7% in trained sales personnel, our census count, which tracks our sales opportunities, was down over 9%. Sales efficiency, which is the number of sales per sales person per month, was 0.64 for the year, and 0.93 for the fourth quarter. This level of sales productivity was our lowest on record and reflected the fox hole mentality of the prospect base I discussed last quarter, and an unsuccessful effort to overcome this mentality in our fall selling campaign. Over the year, paid worksite employees from new sales were not enough to offset client attrition and layoffs in our paid worksite employee base declined 9.9% year over year in Q4. This pattern continued through the year-end transition and although client attrition was lower than last year in December and January, new paid worksite employees from sales of new accounts were not enough to offset the attrition. So, as we turn the page into the new year, we've acted quickly, and decisively to implement a growth and profitability recovery plan for 2010.

On the growth side, our outlook for client retention for this year looks more favorable than it has in some time. We lost 700 fewer paid worksite employees from client attrition in January than we did last year, and our notices received for coming months are well below historical levels. Layoffs and new hires offset over the last half of the year and since the new year began we've seen an approximately 30% increase in new recruiting requests above last year's level. So with these two factors turning positive, the focus of our growth recovery plan has been on improving our sales results. We've completed an in-depth analysis of each aspect and component of the sales process. We've made leadership and organizational changes to allow for quicker response and more accountability within the sales. We've identified the top sales objections for perspective clients over the last quarter and are formulating specific training to address these issues for our sales convention coming up later this month. We've identified opportunities to improve performance and expect to see improving activity and results throughout the year. As these changes take hold we expect to see an increase in the average monthly paid worksite employee.

We will start the year with a Q1 2010 expected range of $102,500 to $103,000 paid worksite employees average. We expect to begin sequential unit growth in Q2, as new sales increase and we begin adding a new gain of 800 to 1,000 in paid worksite per month beginning in May. One particular bright spot to highlight from 2009, which we expect will contribute nicely to growth in 2010, is the mid market segment of our business. This segment, which includes clients with 150 worksite employees or more, did not decline in January year over year in total worksite employees, in spite of the economic climate. The combination of substantially-improved retention and nearly doubling new sales in 2009 over 2008 staved off a decline in this new segment and provides optimism regarding future growth. Another factor that brightens the outlook for growth is the sales recovery beginning to appear in our client base. Our best indicator of our clients' businesses are improving comes from watching the commissions we pay on behalf of our clients to their sales personnel, which are based upon new sales within the client's business.

The quarterly trained and year-over-year commission levels are starting to tell more favorable story. In Q1 of 2009, this number was -9%, then 0% or flat in Q2, followed by a positive 4% and 6% respectively in Q3 and Q4. If small business owners are starting to see a real recovery in their sales, they will start to feel better about making decisions to improve their business, and we should see some improvement in our own sales activity in closing rates. We have 310 trained sales people going into the new year and expect to average around 320 for the year. Our turnover rate has been low and our tenure for the sales staff has increased to our highest level for both sales and sales management. We have our plan to increase sales and expect to get this team mobilized and alive with this plan at our convention coming up in go weeks.

In order to rebound in profitability in 2010, we have focused on two primary objectives. First, we have addressed the healthcare cost issue, as Richard described, through pricing and policy changes. Secondly, we have addressed further reductions in operating expenses, including right sizing our organization in light of the paid worksite employee decline we've experienced over the last year. Since the beginning of 2009, we followed a plan to allow attrition to reduce the overall staffing level, and only hired targeted necessary replacements. This plan reduced our staff by approximately 5% over 2009. Since we are start this year down nearly 10% in worksite employees from one year ago and down 14% from peak levels in 2008, we are conducting a reduction of force of an additional 5% of our corporate staff. This process is expected to be completed this week. We're also bringing our best healthcare delivery minds from inside and outside our Company together to complete a healthcare risk reduction plan. This group will be charged with identifying viable options to change policy ,contracts, plan design, or any other alternative to continue to deliver the best possible health plans to our small business clients, yet reduce the risk and volatility of our current structure. Many ideas have already surfaced as the healthcare reform legislation formed and moved through Congress. Although we expect major risk reduction changes will take place over an extended period, there are some items that have been identified that can have an effect in the near term.

Also a part of our 2010 strategy is to complete a formal adjacent business development plan designed to leverage PEO assets into additional profitable HR service businesses. This plan will focus on monetizing both the tens of thousands of PEO prospects we see face to face each year that do not become clients, and former clients who, for whatever reason, depart the PEO relationship. We have a variety of current and targeted services and products that will be part of this plan, including our background screening and recruiting services and our HR tools software product afterings in a software-as-a-service model. We expect to add services that compliment the PEO by improving sales and retention of PEO clients, but can also stand on their own and serve a broader customer base.

In conclusion, let me say that we have been through a tumultuous time and have recently been affected considerably by the regulatory and economic climate. We are not at all, however, discouraged and in fact, are more certain than ever we have the right strategy, plan and people to take the necessary short-term corrective action steps and move the business forward on our long-term plan. We will remain strong as a Company financially, and in our capability to grow our business, improve our business model, and recover from the recent events.

At this time I'd like to pass the call on -- back over to Doug.

Thanks, Paul. Now before we open up the call for questions I'd like to provide our financial guidance for the first quarter and full year of 2010. As Paul mentioned, we have set out a plan to return to normalized growth and profitability levels, including appropriately right sizing the Company to correspond to current worksite employee levels. While we have already taken steps toward the implementation of our plan, we expect to see the full impact on our financial results in the second half of 2010. We are forecasting nearly breakeven bottom-line results in the first half of 2010, and more normalized earning levels in the range of $0.20 to $0.30 per share for each of the third and fourth quarters. As for our key metrics guidance, based upon Paul's earlier comments regarding our sales recovery plan and the fact that new worksite employees sold generally roll into paid worksite employees in the subsequent quarter, we are forecasting average paid worksite employees in a range of $102,500 to $103,000 for the first quarter. Thereafter we expect sequentially growth between 1% and 3% for the remaining quarters of 2010. So we are forecasting a range of $105,000 to $106,000 for the full year.

As for gross profit per worksite employee per month based upon Richard's comments we expect to be in a range of $207 to $215 for the first quarter and $212 to $222 for the full year. As for the quarterly pattern in our gross profit, key metric is typically higher in Q1 because of the surplus we generate on a higher level of payroll taxes, prior to worksite employees reaching certain wage limits. We expect a decline in Q2 f about $5 per worksite employee, as new business coming on creates a drag on the payroll tax surplus. Thereafter, we expect sequential increases of approximately $12 in each of Q3 and Q4, as pricing increases roll in throughout the year. As for operating expenses, we have targeted further reductions given the decline in worksite employees throughout 2009 and into January of 2010. We are forecasting operating expenses to be in a range of $250 million to $255 million for the full year, a reduction of approximately $8 million, or 3% from 2009. This reduction comes off of a 6% decrease in operating expenses in 2009 as compared to 2008. Now similar to prior years, the high end of our full-year operating expense guidance is tied to additional incentive compensation, which will only be accrued upon achieving higher operating results.

Now for the first quarter operating expenses are expect today be in a range of $67.5 million to $68.5 million. Q1 operating expenses will include a charge of approximately $1 million, comprised primarily of severance payments related to the right sizing of our corporate employee base. Additionally, as is our typical pattern, operating expenses are 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 the annual sales convention and incentive trip. Planned operating expense reductions are expected to take effect beginning in Q2 and contribute to a sequential decline of approximately $7 million. We expect a further sequential decline in Q3, then a sequential increase in Q4 few to advertising surrounding our fall sales campaign. We are forecasting net interest income in a range of $800,000 to $1.3 million for the full year of 2010, and a range of $200,000 to $300,000 for the first quarter. We are estimating an effective income tax rate of 42%, for both the first quarter and the full year. As for average outstanding shares we are forecasting 25.2 million for Q1 and for the full year, excluding the impact of any future share repurchases. We are budgeting 2010 capital expenditures at a level similar to 2009, of approximately $8 million to $9 million, as we continue to invest in key technology projects.

In summary, we have implemented a game plan to address the issues that arose out of the macro economic and regulatory environment over the past year-and-a-half, and we look forward to reestablishing our growth, profitability and return to shareholders. At this time, I would like to open up the call for questions.

(Operator Instructions). Your first question comes from the line of Michael Baker of Raymond James.

Richard, I was wondering if you could give us some color on the healthcare costs as it relates to the actives. What was a cost trend related to the actives in 2009, and what's your expectation for 2010?

Yes, hi, Michael. We looked at the dollar cost of that extra utilization and it was about $8 million, or about 9% trend increase, which is obviously higher than our normal trend on the whole book of business has been for as long as I can remember. For 2010, we believe that -- that utilization you can only only go to the doctor so many times for whatever, and so our health carriers have all told us that they expect to see some of that spike in the utilization to return to more normal levels, as well. So while I'd love to be able to tell you we think it's going to happen at the beginning of year I think we'll just have to see how it rolls out, but I think that you'll see it decline over the next couple of quarters.

Then I had a follow up. As it relates to the different plan designs and plan types, obviously you've had a migration to the lower-premium, higher-deductible plan, have you seen a change in the seasonality of utilization related those different plans? In other words, is utilization over time becoming a little bit more back-end loaded?

No. Actually what we -- we have seen the migration that has taken place even the average for the fourth quarter through even the month of January. On the utilization, there's obviously -- there's this lag that goes and we don't get our results until after the period has ended, so we can't -- I can't really give you an answer to the utilization of the people migrating into these lower-cost, higher-deductable plans as of yet, because we haven't the trend to that yet. But certainly by the time we get to our next call, we will have quite a bit more information about how that's trended out.

And then, on the COBRA pricing, dynamic, when did that start, and when do you expect to finish that and what's been the initial response from a client retention perspective?

Sure. We actually started this increase in the fall of last year and people didn't like it but they understood it, and of course then additionally we're going to be adding some more to that number. That's going to start rolling out in the next -- we're working on the implementation of it right now to start rolling it out in about four weeks.

So I just had one final question as it -- Paul, you mentioned some items that you're thinking about on the risk side of things as it relates to healthcare. I was wondering if you could give us a general sense of some of the alternatives you're looking at?

Well, we've got a pretty wide array of ideas and each one of them have different legal, regulatory and operational consequences, or factors to consider, so we have this group formed, we are going through a you process and I'd really rather ferret them out first before we start talking in detail. But there are very good options to consider, some which affect short-term risks and very good options for the long haul. So I'm feeling real good about going through the right process to land on a structure and operational plan that squeezes out some of this volatility and reduces our risk.

When do you think you will be more prepared to give us more color on that?

I'm hoping by next quarter we will be able to report back about how that process is going.

Thanks a lot.

Thank you.

Your next question comes from the line of Tobey Sommer of SunTrust Robinson Humphrey.

It's Frank in for Tobey. A quick question about the change in the client service agreement, can you describe or give us some color on the client reaction to that so far?

We're actually in the process of that right now so we really can't give you much feedback on the reaction, but the part that we're implementing right now relates to new customers coming on and I really don't see any issue there. Essentially the change to the contract is, we bring COBRA coverage employees on -- former employees of the client when you come on as a customer, but the contract will say that when you depart as a customer you take them back with you or pay a fee. It's reasonable, it's fair. We take them when you come on, you take them when you go off, and I don't really see any push back on that.

Okay. And my second question is looking forward what are your expectations about pricing for new business as the economy hopefully recovers here?

Well, I said in my remarks that we did see the new business pricing in the fourth quarter was down about $5 per worksite employee over the fourth-quarter sales in 2008 and so we're just going try to assume that is a base level for 2010. And then, of course, as we see the economy start to improve, then we can -- our folks will be able to generate more markup. I think what's impressive, though, is that the customer base that renews we've actually seen an increase this year, in our renewal business for the full year. So we feel like that we're on pretty solid ground, that we're not going to have some further pricing pressure.

I would also add on the sales side with we have dug in considerably on where that pressure came from and what type of objectives specifically led to negotiations and how those were handled and we have, I think, a good plan for some training coming in our sales convention that's going to address our whole pricing strategy, and how we'll help our sales staff to understand that better and how to communicate more effectively with the customer on that front.

Great. Thank you very much.

Your next question comes from the line of Mark Marcon of Robert W. Baird & Co.

Morning. I was wondering if you could talk a little bit more about just the pricing that you're going be offering to new clients, as well as the renewals based on the adjustments with regards to COBRA, as well as the higher utilization rates with regards to the healthcare costs. On average how -- when we think about renewing clients, what price increase would they face?

We had last fall -- or excuse me -- last quarter I talked about the fact that we were estimating a trend on the cost side -- of course, that was before the fourth-quarter results -- but in the 9% to 10% range and so those were the basic allocations that we were building in for all new and renewing business. And now that we've seen that that's obviously not going to be enough, we're looking at adding a few dollars on a -- to the allocations for current business, as well as when they renew. So we're trying to make up a deficit in going-forward scenario in 2010 that we expect the effective COBRA to be around $13 million. So when you divide that out it's not going be a lot of basis points in the rate for any particular customer and the rate is that it's not like some 15%, 20%, 30% kind of increases that we, as a Company, had to pas on a few years ago, so we feel like that this should be not a really huge event. Nobody's going to like it, but they understand what's happening and how it's taken place and it's just part of socializing the cost of COBRA . That's what happens and everybody's going to see it if they're not with us when they renew their health plan this

Yes, I think it's a good point to make about how we compare the marketplace because that's really what we have to communicate with the customer. And I would also just point out that this is going to happen in two different forms, as Richard's been describing. We have been successful in passing on the rate increases that we were trying to pass on related to COBRA over the past several months. At the targeted cost we thought it was going be before you could see the mature claims and the participation levels appear in the plan. So that's been going on and we contract through the price change and see how much it's generated and we're on track there on the renewing business. But the second component is now that we can actually attribute and estimate, literally calculate the actual COBRA costs related to the statutory change we have a right to pass that through in a -- not waiting for renewal but in a more holistic fashion. So we're working on the implementation of that to start coming in more of a step up in the second quarter as we get that communication worked out and go to the customers and give them time to absorb that and understand it. So, it's coming in two different ways and, again, we're real confident that we can present this properly and like Richard said, nobody's going to love it but I think that everyone will understand it.

I appreciate that. So when we look at that, the percentage increase roughly speaking between the two factors on the healthcare would be how much?

Well, it is going to vary quite a bit by customer, but probably 12%, 13%, 14% something like that.

Okay. And what sort of impact have you seen in terms of the -- you had one price increase this year, roughly in that 9% to 10% range, what was the impact on renewals in terms of that price increase?

We actually had -- I think Paul reported that our retention at the end of the year and coming into this year was really solid. (inaudible) we were at 74% versus 75% a year prior.

Yes.

What's very exciting to me is the most recent information, which was really executing on January and then the -- what we have visibility into coming forward is looking very favorable.

And then the -- when we think about the guidance as it relates to worksite employees for the year, what sort of efficiency rate does that assume for the sales folks?

It assumes we start to move it up in the second quarter after we get folks in and redirect it, mobilize and align with the game plan is. But it's, frankly, moving it up barely to acceptable levels, 0.75 and then get up to 0.8 from that 0.64 number. So it no great shakes, it's just the combination of a little better retention, not having the layoffs like we did last year, and a little better sales as we start moving again.

Great. And then do you think -- would you anticipate from a longer-term planning perspective that the COBRA period goes back to what it historically has been, or you think we've reset to a permanently higher level, at least until unemployment declines materially?

No, I think as soon as this subsidy ends you will start to see an immediate drop off in people that are on COBRA . We actually got a little snapshot of that in the month of December. What happened was in the middle of December is when the legislation got renewed, if you will, and extended, but there were people actually were dropped off the plan on November 30th because that's when their subsidy ended and we literally saw them bail out. But then when the extension was given and granted, it went back and so then we -- in January we started seeing some of those people that had dropped off come back on. So I think it is pretty clear that when they're having to pay 100% of the COBRA premium as opposed today 35%, they're going to be

Now, the question then comes in how many times will Congress extend this right and have the government pay 65% -- or taxpayers, I should say, paying 65% of COBRA premiums. We've factored it in both ways. If it ends when it's scheduled end, but then we also looked at what if it continues on through the end of year. Now the way we're looking at it we're trying make sure that the way we've done things from a pricing standpoint we've built that in so if it continues we build the higher COBRA participation level and then if things do decline in future we won't have to pass on as big of a normal annual increases as that runs off. So we're ready for either way.

Great. Thank you.

Your next question is a follow-up question from the line of Tobey Sommer of SunTrust Robinson Humphrey.

Just wanted to follow up the question you just dealt with. In terms of the guidance, is the low end of the guidance considering additional COBRA extensions to more people and for a longer time and the high end contemplating just what we already know to be passed?

Yes, that's correct, Tobey.

Okay, thank you very much.

Your next question comes from the line of Jim Macdonald of First Analysis.

Hi. I think I missed a couple of metrics or maybe not, but could you give us the healthcare cost per covered employee in the fourth quarter, and your current -- or in the fourth quarter number of trained sales reps?

Yes, Jim, the healthcare costs in the fourth quarter were $803 per covered employee. I believe the trained sales rep count was around 320 or so.

320. And could you talk about your plans for the sales force? I know you had a bunch of office, closings, what are your plans for offices and how you're thinking about that?

Well, we actually had -- we only -- we actually closed one office up in Cleveland and just relocated it to Columbus to serve the Ohio marketplace. But we are -- normally this time of year you see reduction in the sales staff as you look at performance over the last half of the year and decide -- make your decisions about whether or not to bring folks in for the sales convention. So that's taken place so we're going to be down to around 310 average for the first quarter and then over the year we'll probably average in the 320 or so range as you move up little by little to maybe 330 or so at the end of the year.

Okay. And shifting gears just quickly, we've talked about these pricing issues but we haven't talked about competition, is that a secondary feature, or what are seeing with competition in the market right now?

Well, I think that -- we've seen competition out in the marketplace and I think the bigger issue with competition had more to do with that pricing component on the markup. Richard reported that our average markup on these sales was down about 5% year over year. I think that was more related to more customers at least feeling like they had the bid deals out, and look at things that way. But, again, that's an area that we've dug in on in this deep dive review on the sales effort and we've got new opportunities to address that at the sales convention. We have everything from customer testimonials that have gone and come back, and there's a real focus on that just in our -- both our marketing and our sales training for the convention.

And just thinking about the competition with -- in the healthcare area, your competition may have been subsidized last year by an Aetna or whatever who couldn't raise their prices quickly enough. Are you seeing, therefore, your competition having to raise prices even more dramatically than you're having to raise prices this year?

Yes, that's -- I really believe that is the case. I think if you look at what health insurers reported out over this last couple of weeks, they saw this utilization and the COBRA and also they were being more competitive in the marketplace throughout last year. Some markets were ridiculous in some of their pricing strategy, but just about across the board they started talking about more substantial increases. I also think with the health reform legislation, that has a lot to do with -- for carriers holding costs down. Now that that's -- the imminence of that has passed it's not necessarily going to happen. If it does it won't have the same form it was in, that you'll see their pricing -- I think they'll be more ag -- trying raise rates more significantly.

Just another point on that. As it relates to this whole COBRA situation, we are aware that some of our competitors are already dealing with this issue about trying to shut off new COBRA participants entering in the plan. So, everybody's aware of it, we're all going have to deal with it about the same. Different people's healthcare contracts expire in different months throughout the year, so whenever there's a curve they'll get it.

So basically what you're saying -- so healthcare reform didn't -- was still active in December when a lot of your competitors would have been out there pricing, so maybe they didn't see the increases at the end of last year but maybe it's going to come later.

Yes, absolutely.

Okay. Thanks very much.

Thank you.

Ladies and gentlemen, we've reached the end of the allotted time for questions. Mr. Sarvadi, do you have any closing remark.

No, I think that's all for today. Thank you, everybody, for participating and we look forward to getting together again next quarter and reporting some better results.

This concludes today's conference. Thank you for your participation. You may now disconnect.