Insperity Inc (NSP) 2010 Q1 法說會逐字稿

Good morning. My name is Heather and I will be your conference operator today.

At this time I would like to welcome everyone to the Administaff first 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).

Thank you. At this time, I would like to turn the call over to today's speakers, Paul Sarvadi, Chief Executive Officer, Richard Rawson, President, and Douglas Sharp, Chief Financial Officer. Mr Sharp, please go ahead.

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 are considered to be forward-looking statements within the meanings 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 first quarter 2010 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 then add to his comments about the quarter and our plan for the remainder of the year. I will provide our financial guidance for the second quarter and an update to our full year guidance. We will then end the call with a question and answer session.

Now, let me begin today's call by discussing our first quarter results. Today we reported first quarter earnings per share of $0.09. These results were significantly above our expectations due to favorable results in all of our key metrics. Day worksite employees averaged 103,009 at the high end of our forecasted range of 102,500 to 103,000. Gross profit for worksite employee per month averaged $235 for the quarter, significantly above our forecasted range of $207 to $215. Favorable results were achieved in all three direct costs areas. Additionally, renewing business, which is more highly concentrated in Q1 of each year, was priced at better than expected levels. Operating expenses totaled $68.9 million for the quarter, exceeding the high end of our forecasted range of $68.5 million due to an additional accrual for incentive compensation because of the better than expected operating results. Operating expense controls resulted in savings from Q1 forecasted levels in various areas of our business. Our cash flow remained strong through Q1 and we ended the quarter with $130 million of working capital.

Now, let's review further details of the first quarter results. As I mentioned earlier, paid worksite employees averaged just over 103,000 during Q1. Client retention averaged 96.1% for the quarter, an improvement over the 95.9% retention achieved in Q1 2009. Client retention for the month of February and March of 98% and 99.1% were above our historical pre-recession levels. The number of paid worksite employees during Q1 was also favorably impacted by net hiring our client business. Although hiring and lay off activity is still at minimal levels, it is positive sign when compared to the significant net layoffs experienced in our client base in Q1 of last year.

Worksite employees paid from sales came in at forecast. In a few minutes Paul will discuss several initiatives in this area which are expected to further improve our sales results beginning in Q2. First quarter revenues declined by less than 1% compared to Q1 of 2009 to $458 million, as a result of 7.8% decline in the average paid worksite employees, mostly offset by a 7.5% increase and revenue per worksite employee per month. Looking at first quarter revenue contribution and year-over-year change by region, the northeast region, which represents 24% of total revenue, grew by 7%. The southeast region, which represents 11% of total revenue declined by 2%. The central region, which represents 15% of total revenue also declined by 2%. The southwest region, which represents 31% of total revenue, declined by 3%, and the west region, which represents 19% of total revenue, declined by 4.5%.

Moving to gross profit, surpluses achieved in each of our direct costs program exceeded expectations and when combined with slightly higher service fee pricing, resulted in gross profit for worksite employee per month, $24 above the midpoint of our forecasted range. As for our direct costs, benefit costs per covered employee per month increased 9.4% over Q1 2009 to an average $782. This compares favorably to the forecasted increase of 11.3%. Approximately 75% of worksite employees were covered by one of our health plans during Q1. In a few minutes, Richard will provide some comments on the lower than expected Q1 health care costs and our expectations over the remainder of the year.

We continue to experience favorable cost trends in our workers' compensation program. Workers' compensation costs were 0.61% of non-bonus payroll for Q1 of 2010, below our forecasted level of 0.69%, and the Q1 2009 costs of 0.67%. Actuarial l loss estimates resulted in a $2.1 million reduction in previously reported loss estimates in the first quarter of 2010, which compares to a $2.5 million reduction in Q1 of the prior year. Higher state unemployment tax rates, which were anticipated in the weak labor market, resulted in an increase in payroll taxes as a percentage of total payroll. However, the increase from 8.7% in Q1 2009 to 9.4% in Q1 of this year was lower than expected as higher payroll and bonus levels resulted in worksite employees exceeding their wage limits earlier than anticipated.

Now, let's move on to operating expenses which totaled $68.9 million, a 2.5% decline from Q1 of 2009. We continue to effectively execute our cost control measures during the quarter, and this is more evident by a 7% decrease in operating expenses from Q1 of 2009, when excluding incentive compensation expense from both periods and costs of $1.2 million associated with the reduction in force in February of this year. As for some of the details, salaries and wages increased by 1.4% over Q1 of 2009, however declined by 7% when excluding incentive compensation expense and severance costs from both periods. Stock-based compensation expense declined by approximately $1 million from Q1 of 2009 due primarily to forfeitures associated with the reduction in force. Commissions declined by approximately 15% due to lower worksite employee levels and lower sales production. Advertising declined by 3% from Q1 of 2009; however, as Paul will discuss in a few minutes, we expect to further invest in marketing initiatives over the remainder of the year to boost sales. General administrative costs where managed to budgeted levels declined by 2% compared to Q1 of 2009. Depreciation and amortization decreased by 9%, due to a lower level of capital expenditures throughout 2009 and Q1 of this year.

Now, for interest income, we reported an expected decrease of approximately $370,000 from Q1 of 2009 due to declining interest rates, and as expected our effective tax rate increased from 39.4% to 42%, due primarily to the impact of non-deductible items on lower pre-tax income. As for our balance sheet and cash flow, EBITDA plus stock-based compensation totaled $9.5 million for the first quarter, cash outlays included capital expenditures of $800,000, re-purchases of approximately 96,000 shares at a total cost of $1.9 million, and cash dividends of $3.4 million. Working capital increased by $2.5 million during the quarter to $130 million at March 31st.

At this time, I would like to turn call over to Richard.

Thank you, Doug. I would like to begin my remarks this is morning by saying what a difference a quarter makes. Last quarter it seemed that we had nothing but bad news to report, and this quarter has nothing but good news to report. So let me outline the plans for sharing the good news. First, I will give you the details of first quarter gross profit results followed by an update on our gross profit recovery plan, and how it changes our outlook for Q2 and beyond. Then, I will end my remarks with a few comments about the new health care reform legislation that was passed in March.

As you know, our gross profit comes from the service fee component of our mark up combined with the typical surplus that is generated when the direct cost pricing allocation components of our mark up exceed the corresponding direct costs. This quarter the service fee component of our mark up was $194 per worksite employee per month and the surplus was $41 per worksite employee per month which produced the $235 gross profit per worksite employee per month that Doug just reported. The service fee component was $2 per worksite employee per month better than expected, and the surplus component was $22 per worksite employee per month, better than our forecast, and included positive contributions from all of our direct cost centers. The service fee on business that was renewed during the quarter was approximately $2 per worksite employee per month better than our forecast. Our renewal department continues to do a superior job in demonstrating the value of our service to clients at renewal time.

Now, let me give you some of the details of the much better than expected surplus, beginning with the benefits cost center. As you know, from our last quarter's conference call, we spent a lot of time talking about the impact of the COBRA stimulus program on our health care costs for 2009 and 2010. At that time, I explained we had experienced an increase in COBRA participants from 3.6% of total participants to 7.2% and that each COBRA participant's claims cost twice that of a regular covered worksite employee. In our forecast for 2010, we had assumed that as COBRA participants' subsidies ran out they would leave our plan and we also assumed those participants health care claims would continue to be twice as much as a regular participant's claims. This quarter, the number of COBRA enrolled COBRA participants did drop from 7.2% of the covered worksite employee base to 6.9%, and the cost of COBRA participants claims dropped from 2 to 1.7 times a regular participant's claims, which was largely driven by a lower dollar amount of large claims in COBRA participant base. We also began to see a decline in the utilization of benefits by regular covered worksite employees. It appears that the fear of a job loss, which created a large spike in utilization last year is now going away. These factors drove the deficit in the benefits cost center down $9 per worksite employee per month lower than our forecast.

Now let's discuss the workers' compensation cost center surplus results which was also better than expected. The additional surplus was driven by both lower incident and severity rates. For this policy year-to-date, we had an 11.09% reduction in the number of workers' compensation claims filed compared to the same period last year. This lower incidents 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 dropped 11.34% from the same period last year. These results produced a $7 per worksite employee per month better than expected surplus.

Moving to the payroll tax cost center, we experienced a better than expected contribution to the surplus of $4.00 per worksite employee per month; this additional surplus was due to the fact that both the average pay and bonus payrolls of worksite employees were higher than expected which caused employees to reach their wage limits earlier this year than we expected. When that happens, the spread that we earn as employees reach those wage limits gets moved up earlier in the year. Also, the actual spread turned out to be slightly larger than originally forecasted because some of the state unemployment tax rates came in lower than we had expected. In summary, all the components of gross profit produced better than expected results, demonstrating that our gross profit recovery plan is well on its way.

Now, let's talk about gross profit expectations for the balance of 2010. As for the pricing of our service fee, although we are seeing some improvement in the economy, we are not going to forecast any increase in the service fee for renewing customers right now, even though our renewal department has had great success in Q1. The pricing of our service fee for new accounts sold in the first quarter was $188 per worksite employee per month, which is $3 per worksite employee higher than the new business sold last quarter. So, we are assuming that the $194 per worksite employee per month that we generated in Q1 on the entire client base will continue throughout the balance of 2010.

Looking at the surplus component of gross profit, here is what we see for the balance of 2010, beginning with payroll taxes. You may recall that our payroll tax cost center surplus declines as employees reach their specific wage limits. In addition, as we start to grow, the allocation that we get on new business has to be pro-rated and the spreads are not as much as they are in the first quarter of each year. Since we plan to grow this year, our surplus in Q2 will be lower than Q1, but for the full year, the surplus expectations for this cost center should be slightly better than our original forecast due to the better than expected results in Q1.

Moving to the workers' compensation cost center, here is what we see. On the expense side of this cost center, we just entered a good quarter at 0.61% of non-bonus payroll because of low incidents and severity rates. But to be conservative, we will continue to forecast the costs of 0.67% to 0.69% of non-bonus payroll for the balance of 2010, in line with our previous guidance. However, if claims develop out better than the actuarial estimate, the ultimate cost would be lower and the surplus would be higher than the forecast. On the pricing side though cost center, I reported to you last quarter that our allocations has stabilized and would continue to be stable throughout Q1. Until we see workers' compensation insurance carriers raising their rates, we will be keeping our allocations at the current level.

Now let's talk about the benefits cost center beginning with the expected costs. The better than expected results in Q1 certainly helps us in forecasting our cost trend for balance of 2010, but we still have the few competing factors to consider. First, we have the issue of the federal government continuing to extend is subsidy period for newly eligible COBRA participants one or two months at the time. Today the subsidy is due to expire May 31st, but our sources think that Congress will extend the date to December 31st, 2010. This could cause an increase to the number of participants on COBRA and we know that's not good for us. Second, if the cost per COBRA participant returns to the historical level of two times the cost of a regular health care participants cost, that would also adversely affect our trend. Third, while the utilization of plan participants in our base improved in Q1, it is still higher than the historical levels. Should that utilization return to those historical levels, our costs could be significantly lower and favorably affect our trend. And last, we continue to see substantial migration of plan participants moving to the lower cost, higher deductible plans which should also lower our costs. Considering all of these factors, we now expect our benefits cost per covered employee to increase in the range of 6% to 7% for the full year, instead of our original forecasted range of 7% to 8%.

Now, on the pricing side of the benefits cost center equation, last quarter, we outlined some changes that we were going to make to our pricing policy for 2010. Those changes included a special allocation to cover the additional COBRA-related health care costs. Our team was successful in implementing this allocation increase which began in April and will ramp up over the next several months. Therefore, our deficit in the benefits cost center should improve each quarter of 2010, if our cost trends remain at the levels we are now forecasting. In summary, when you combine our first quarter's results with all of the factors that I just talked about, our gross profit per worksite employee per month should increase from our initial range of $212 to $220 for 2010 to a new range of $221 to $226 per worksite employee per month for the full year.

Before I turn the call over to Paul I would like to comment on the new Health Care Reform Bill. Since its passage in March, we have had a number of people, benefits experts, as well as benefits lawyers studying this 2,400 plus page bill and analyzing how this bill will affect our clients and Administaff. There are many, many, many unanswered questions that won't get answered until regulations are written. There are a number of provisions that go into effect in 2010 and 2011. Our current analysis of the bill concludes that we should not be adversely affected in the near term and that there may be some longer term upside for us. We will certainly have some additional operating costs this year, as we make changes to our IT platform to comply with new reporting requirements for employers. And we will also incur some additional outside legal and benefits consulting fees, as we digest the many pages of regulations that come from this bill.

From a health care cost perspective, it looks like the cost of health insurance premiums in 2011 will be going up as health insurance companies begin to pass on new taxes that they have to start paying, as well as passing along their increased compliance costs associated with this bill. Additionally, some plan design features that insurance companies will be required to add to their policies will also drive up the cost off coverage. A number of these new mandated plan design features and the associated costs are already incorporated into our plan. Therefore, we do not expect the same level of cost increases that will be experienced by other small business health plans. I could go on, but in the essence of time, I would like to say that we are confident in our ability to help our clients navigate through this very complex set of new employee benefits.

Now, I would like to turn the call over to Paul.

Thank you, Richard.

This morning I will provide some commentary in three primary areas. First, I will discuss our quick turn around we are experiencing, directed toward a return to historical growth and profitability levels, as we progress through the last half of 2010. Secondly, I will provide insight into the small business community sentiment regarding the economy, and the outlook for the near term implied by recent realtime compensation and employment activity, and our quarterly client survey. Then, I will conclude my remarks with our view of the growing demand for our services and specifically, the Administaff co-employment solution in light of the recent health care reform legislation and the growing burden of government regulation on business.

The last quarter, I mentioned we had responded quickly and decisively to the combination of economic and regulatory disruption that was evident in our fourth quarter results in 2009. The actions we have implemented through the first quarter, appear to be on point in achieving the desired results. Client retention results were the best we have seen many years in the first quarter. Our reported January client retention results last quarter which was a 700 worksite employee improvement in line on a percentage basis year-over-year. For February and March our historical attrition expectations are approximately 2.5% to 3% of worksite employee base for February and 1.5% for March. This year the numbers were 2% and 0.9%, respectively. These retention rates of 98% for February and 99.1% for March were major contributors toward turning our growth engine back on earlier than expected.

The other factor that was helpful was the net effect off new hires versus layoffs in the client base. As you know, layoffs exceeded new hires dramatically in the first half of 2009 and began to even out and offset as last year ended. Last quarter, I reported a small but noticeable uptick in new job openings in our client base reported by our recruiting division early in the new year. This activity produced a small net gain in February and a slightly larger increase in March, which may indicate the wind has shifted to our back on this issue. The centerpiece of our growth recovery plan announced last quarter was to conduct an in depth analysis of our selling system and implement the necessary changes to return to consistent, predictable sales results we expect from a high power sales organization. This overhaul was extensive and thorough and more like rebuilding the engine than just a tune up. This was completed in the first quarter and we are optimistic regarding future sales results.

Changes were made in leadership and organization, marketing and communications, pricing and prospect targeting and expectations and accountability of the entire sales team. New specific training and role play was conducted and completed at both the sales and sales management levels. Individual sales plans have been developed for each salesperson and a monitoring and support system has been implemented to help sales staff reach their goal. As these changes were implemented, our sales results were modest as expected, but we did achieve 100% of our forecast for the quarter. The real test for our overhaul will come as sales momentum builds in Q2 and over the balance of the year. As a result of improved client retention, some net gains from growth in the client base and the re-tooling of our sales engine, our growth recovery plan is certainly on track. The other major focus from last quarter was the profit recovery plan which is also been effective. The two primary components, our reduction in force and our COBRA cost recovery initiative, were both completed successfully. The combination of successful implementation of this plan and better than expected profitability in the first quarter has improved our odds of achieving our 2010 growth objectives and created an opportunity to raise our guidance for profitability targets for the year.

The second subject I want to address today is also an important factor related to our outlook going forward. This is the small business owner sentiment regarding the timing and strength of an economic recovery. In order to gauge this sentiment, we analyze two types of data. First, we look at actual realtime transaction data, related to employment and compensation within our client base during the quarter, then we couple this data with our quarterly client survey conducted at the end of the quarter to sink up the business owner sentiment to the real time actions that are taking place within the client company. The most forward-looking indicator in our data is the commissions we pay through our payroll system to sales staff of our client companies. Trending the year-over-year commission data provides insight to the sales pipeline of our client company. Historically, we know increasing sales of our clients' products and services is a major driver to business owner sentiment and more importantly, decision making.

This was commission metric was a strong positive in the quarter, increasing 8% year-over-year. In Q1 of 2009, this number was minus 9%, then 0% in Q2 of last year, followed by a positive 4%, and 6% respectively in Q3 and Q4. When sales are improving, business owner attitudes also improved and the paralysis of uncertainty is replaced with decisive action and optimism.

In addition, client requests for recruiting services increased 29% sequentially, background screening services increased 19% and our compliance group reported a 35% decrease in unemployment claims over the same period last year. Average compensation data has also begun to expose the early signs of a recovery. Average pay for the same group of employees increased 1.8% in the first quarter, which is up from approximately 0.8% in each of the last three quarters. Overtime as a percentage of regular pay within the client base was 7.5%, well below historical levels of 10% to 11% during periods reflecting a strong labor market. This number continued to show ample capacity take on new business through use of overtime before necessitating new hires within our small business client base. Our survey results also showed measured signs of recovery, but business owner outlook was tempered. The year started off on plan according to 44% of those surveyed, while an equal number of 28% were ahead and behind their plans for the year. 31% of the respondents expect to add employees while 60% expect to maintain the same level and only 9% expect to lay off employees over the balance of 2010.

Another positive was 55% of those surveyed expect sales to increase and 30% expect sales at least at current levels for the balance of the year. In spite of some improvement, the economy remained the most significant short term concern for business owners; however, government expansion and the effect on business topped the list of long term concerns and this issue represents a tremendous opportunity for Administaff which I will discuss in a moment. The bottom line from all this date is the economy is showing signs of a modest recovery and business owners appear to be coming out of their fox holes and looking to make their world better even if their recovery is slow. This is a welcome sign for our sales effort and well-timed with our re-tooled sales operations.

The last area I want to discuss today is the increasing demand for our services we expect as a direct result of the recent health care reform legislation and the growing burden of the government regulation at all levels on employers. There are three documents that make up what we refer to as the Health Care Reform Legislation, The Patient Protection and Affordable Care Act, the Managers' Amendment, and the Reconciliation Bill formally known as the Amendment In the Nature of the Substitute, the House Resolution Number 4872, as reported. This legislation totals 2,560 pages of complex legalize placing new regulatory burdens on many constituencies, including the nation's employers large and small. As we have continued the on-going process of making logical sense out of this massive legislation, we have grown increasingly enthused about the opportunity for Administaff's unique co-employment solution to gain standing and prominence in the years ahead.

For employers, the mandates provide exceptional coverage. If the coverage is not good enough, you pay penalties, while if this plan is too rich, you pay an excise tax. If you're a small business, you may be eligible for a tax credit or to obtain coverage through an exchange, but new plan design requirements are likely to increase premiums in the near term and you may have to provide vouchers to help employees provide coverage on their own. Businesses will have to collect data on employees beyond what they have available today and generate a multitude of reports using unique formulas for full time equivalent employees and average pay rates in order to determine eligibility and benefit mandates for coverage, tax credit, and subsidy. New W2 reporting is required; however, no reference to the use of the W 2 reported data is currently relevant to any other aspect of the legislation.

There are new caps on salary reductions for flexible spending accounts, an increase in penalties for withdrawals from health savings accounts and changes in reimbursements of over the counter medicines from account based plans. Costly benefit plan design changes must be implemented this year to conform to requirements and new non-discrimination testing requirements that were only applicable to self-funded plans will apply to all fully insured plans unless your plan qualifies as a grandfather plan. By now I am sure your eyes are probably glazed over or you have fallen asleep listening to just 30 seconds of the joy of health care reform for employers, and I have not even touched the tip of the iceberg. The bottom line for Administaff is health care reform is a nightmare for employers, and we have already seen signs of prospects throwing up their hands and raising the white flag. As information continues to meter out regarding what is contained in the legislation and related regulations are promulgated, this frustration is only likely to increase. Fortunately for us, we are in the business of government compliance and have experienced an employer mandated health care reform such as the Massachusetts reform several years ago. Our unique model of co-employment, which includes an off loading of government compliance and the sharing of employment risk, is a powerful solution to this environment today, and over the next eight years' schedule of implementation of this health reform legislation.

Our goal has always been to eliminate obstacles and to enable businesses to succeed by providing administrative relief and creating an environment where business owners can focus on managing their profit opportunities. I can safely say the emotion around this issue and the growing burden of government expansion is reaching a new high. This creates an opportunity for us to highlight our solution and drive home how we help improve the success equation for small and mid-market businesses. You may have seen our recent series of full page ads in the Wall Street journal depicting the exasperation among business owners and introducing the Administaff solution. These ads provide a glimpse into how we intend to dramatically increase the awareness of our co-employment solution in the face of increasing demand for this aspect of our service.

We are ahead of our profitability plan for the year so far, and we have an opportunity to capitalize on the emotion and frustration many business owners feel. We have, therefore, increased our advertising budget and are working on other ways to increase our sales opportunities over the balance of the year. Our long term PEO growth strategy is focused on increasing sales opportunities and making the buying decision for prospects easier. Our adjacent business development strategy includes cultivating PEO leads from the customer and prospect base of these new business units and making upgrading to the full service solution a natural evolution from utilizing one or more of these offerings. Our strategy also includes establishing a customer relationship with the thousands of PEO prospects our sales team meets with face to face each year that are not ready for the full service solution. In the first quarter, we made substantial progress flushing out this strategy and preparing for a formal launch of this plan later this year.

In summary, I see a powerful confluence of opportunity, capability and commitment coming together to take Administaff to the next level and realize the long term potential for this business model. The opportunity represented by health care reform and the growing burden of government regulation has increased the need for our core PEO offering. Our deep competencies that we have developed within the PEO have created opportunities to enter adjacent businesses on a stand alone basis which will add new revenue streams and make customers out of prospects until they are ready for our full service PEO solution. Our profitability and financial strength has created the opportunity to acquire adjacent businesses that improve the core PEO offering and have strong growth and profitability potential in their own right. We have the unique and powerful capability to take advantage of these opportunities presented. Our administrative and compliance expertise combined with our technology and development proficiency gives us the capability to turn health care reform into a profitable growth opportunity. Our sales and marketing expertise, combined with our knowledge and experience helping small and mid-size businesses succeed can provide a growth engine for a variety of new businesses whether we build, buy or partner to provide these offerings. Finally, the commitment to the small and mid-market business community we serve is the catalyst for solving problems and making life better for our clients' employees and their families. This commitment of the Administaff corporate employee is the reason for both the quick turn around we have experienced in the short term and the success we expect to achieve in the long term.

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

Thank, Paul.

Before we open the call for questions, I would like provide our financial guidance for the second quarter and an update to our full year 2010 forecast. In general, we are revising our full year guidance as follows. We are forecasting gradual improvement in our unit growth as we expect recently implemented sales and marketing initiatives to improve our sales efficiency in the face of a still challenging economic environment. We are increasing our forecast of gross profit for worksite employees based upon recently implemented price increases and more favorable direct cost trends coming off of first quarter's positive results. However, we also remain cautious in this area, due to the recent volatility in our health care costs arising from the current regulatory and economic environment. As for the operating expenses, we plan to take advantage of the opportunity gained by our stronger than expected Q1 earnings and our improved 2010 outlook by making investments to accelerate our unit growth recovery plan and our adjacent business service strategy.

So, as for our key metrics guidance we are now forecasting average paid worksite employees in the range of 104,750 to 105,250 for Q2 and 106,000 to 107,000 for the full year. This assumes net monthly unit growth of approximately 800 worksite employees in Q2, increasing to 900 worksite employees over the remainder of the year as our sales efficiency improves. As Richard mentioned, we now expect gross profit for worksite employee per month to be in a range of $222 to $226 for the full year of 2010, up from our initial range of $212 to $220. As for the second quarter, we expect gross profit per worksite employee per month to be in the range of $206 to $212, with sequentially increases in the range of $9 to $13 in each of the third and fourth quarters, as price increases roll in throughout the year.

As for operating expenses, we are now forecasting our revise range of $254 to $257 million. A $3 million increase from our initial forecast is primarily a result of additional investments in marketing and our adjacent business services, along with additional incentive compensation should we achieve higher than budgeted unit growth and operating results. The midpoint of this updated range is a 2% decline from 2009 operating expenses on a corresponding 2% projected decline in paid worksite employees. For the second quarter, operating expenses are expected to be in a range of $61.5 million to $62.5 million; that includes a portion of the additional investments mentioned above, partially offset by cost savings and other areas. As for our interest income, we are forecasting $800,000 to $1 million for the full year and $200,000 to $300,000 for the second quarter. We also continue to forecast an effective income tax rate of 42%. As for average outstanding shares, we are now forecasting 25.4 million for Q2 and for the full year. In summary, the improvement in our key metrics guidance coming off of the quick turn around experienced in the first quarter implies a range of 2010 full year earnings per share in which the high end from our initial forecast is now the low end of our updated forecast.

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

(Operator Instructions). We will pause for just a moment to compose the Q&A roster. (Operator Instructions).

Your first question is from the line of Jim Janesky with Stifel Nicolaus.

Good morning, everyone. A couple of questions, Richard, I -- or I'm sorry, Richard and Paul.

When I look at the small business report that came out today, compare it to the last couple of months of the NFIB survey, it looks directionally better on a lot of metrics, except for hiring. So, would I assume that the increase in worksite employees that you gave us for the year, that you raise that number, there's going to be more from better renewal trends and you really haven't worked any better hiring trends into your numbers?

You know, I think it is a little early in the recovery to bake in client growth or expected growth so, no, we have that build in neither net gain or loss from the client base, and our position would be to leave that as upside. I think the recovery is happening, and at least in our base, we can see it getting better. The 8% commission year-over-year number increase is a good sign.

You have basically 4%, 6%, now 8% increase in commission, so the sales pipeline for our client base is looking better. That will lead to a little bit of hiring, but not enough to where we are going to build that into our growth numbers.

Richard, looking at the COBRA issue, can you let us know what would happen for that positive trend, at least for your Company, to reverse? Would it be something as dramatic as a double dip in the economy, where folks start to worry about their jobs again and so they start to use health care more and then COBRA usage could go up above and beyond your expectations? Or do you think that the issues are largely behind you?

Save and except the double dip recession, I think that the worst is behind us. The part that we still don't know for sure is if the trend that we experienced in Q1 on utilization by the COBRA participants is actually over. I think that as we looked at that information, it appeared that obviously, you know, participants on COBRA were hitting their limits for the co-insurance, the deductibles, the copays and all of that. And so, it is possible that our cost in Q2 could go back up to the 25 or 30 basis point where they're now, again equal to two times regular participants claims.

If the economy continues to improve, there's going be less people on COBRA. Even if the Government extends the time period through December, so it is not near as murky and muddy as it was one quarter ago, but you can't see it quite clearly yet because we need to see how the second quarter in the economy works.

I think the other factor to add to that is on the pricing side, which is something that we have much more control over, we are successful in implementing our COBRA-related increase starting with the significant group of customers in April and rolling in as the second quarter progresses, so we are in good shape on that front.

Okay. Thank you.

Your next question is from the line of Tobey Sommer from SunTrust.

Hi. This is Frank in for Tobey.

I wanted to talk about the remarks regarding the IT platform. What are your thoughts on CapEx going forward?

For the year the CapEx we are going to have our budget of $9 million to $10 million and just a matter of prioritizing within the CapEx budget on the technology projects, but there is -- we have some flexibility to direct our development staff to address items of importance.

Okay. Great. What was cash flow from operations for the quarter?

We look at EBITDA plus dot based comp to net out the client payrolls, but that was about $9.5 million for the quarter positive. Significantly above what would have been produced from our initial guidance for the quarter.

Last quarter you talked about some changes you were making to the client services agreements; you said it was a little bit too early to tell. Can you give us any color on the client reaction so far, or what your success there has been?

Yes, the changes to the contract had to do with clients when they leave us, taking their COBRA participants with them. Haven't heard a lot of repercussions from that, of course we haven't lost many either, so I guess that's good news. But, we didn't think it was going be a big event.

Finally, if you can, remind us where we stand on the repurchase allotment and your thoughts going forward in terms of uses of cash?

Well we increased our authorization last quarter around this time, about 1 million shares to about 1.4 million in total. We actually had put a 10B51 Plan in place for the Company to buy shares back but the stock price didn't dip at that point. We only bought back about 100,000 shares, but we are obviously very bullish about where we are going from here and if we see any downward movement in stock price I'm sure we'll have another plan in place to take advantage of that.

Your next question is from Michael Baker with Raymond James.

Thanks a lot.

I was wondering if you could provide an update on some of the alternatives that you indicated you were going to look at? Is it related to health care risk or is it safe to say that that's a little more back burner in light of the recent developments?

Actually the risk reduction plan that we are working got a boost from health care reform because the whole health care industry turned to such a state of flux, it does open up some real opportunities for us, but we are reviewing several items. Now, however, you have to put in the context these changes that are going to happen over the next several years. So there may not be as many things we can do immediately, but the outlook for making some dramatic changes to our risk profile have increased with the possibility of having exchanges out there, and all fifty states have to put their own exchange in place.

You have subsidies for the smallest of small clients and if you will look at it in our base, obviously, the small customer segment, I'm talking about less than ten employees, have the highest deficit in terms of health plan management. There's going to be some opportunities there, and the opportunities to consult with both small and mid-size customers about finding their best options, I think it is going to be a tremendous opportunity for us and will also provide us an opportunity to manage risk with that client in terms of where, they can find their best advantage. So, it is -- it that has changed in the last quarter, but primarily because health reform has so many far reaching effects.

You talk about some of your competitors are pushing an alternative, that being an ASO plus agency, so if you looked at more from a continuum of offerings -- I know you emphasized co-employment, but at the same time you talk about adjacent businesses, so I didn't know whether you consider that adjacent or do you think that would be too challenging to manage in light of potential cannibalization?

What I expect to do with our adjacent business services offerings is create smaller steps toward becoming a PEO client and create opportunities as clients depart for whatever reason where they can retain certain solutions, parts of our offering, and we can continue to make nice income and have them come back potentially later.

So we intend to have a variety of offerings that people can buy other than the PEO solution, but the PEO solution we expect to be at the pinnacle of this continuum of a full service offering where a customer gets the most advantages.

so at this point, would it be safe to say that we shouldn't expect you to get the agency business per se because in essence your bet is that with the potential increased risk, ultimately people would prefer a co-employee model?

I think we would likely be prepared depending on how things go forward. If there are advantages to having an agency for a segment of our base, possibly the large customer segment or whatever, we already have an agency that's been in place for years that we have used different ways; we would be prepared if it is a benefit to our customer, so far we haven't seen that, but if that becomes apparent in the future, we will be right there.

Okay. One final one, you indicated last time that you saw some opportunity in more of the mid-market; I was wondering if you can update us on how that is shaping up?

Yes, we really -- it is very exciting for us to see how much activity we have in the mid-market area. The early indicator we have in that business is that we conduct a diagnostic. We use a diagnostic tool, a business alignment survey that becomes the foundation for proposals with our larger customers; and we've had a dramatic increase in the first quarter in how many of those were conducted.

That indicates a larger pipeline of business, but also a larger pipeline where we are engaged with the sea level (indiscernible) and the prospects at a much more substantive level, so you according to the small universe of customers, we have dealt with with that new sales model over the last year and a half or so, that should translate into a lot more mid market customers as we move along throughout the year, but that remains to be seen.

Are you still looking at a two year deal rather than a one year deal?

Yes, we -- I don't think we have signed anything less than a two year deal for the mid-market for a long time.

Okay. Thank you.

Thank you.

Your next question is from the line of Mark Marcon with R.W. Baird.

Good morning. Nice to hear the improved tone.

Thank you.

Can you talk a little bit about your expectations for pricing. Given the lower COBRA utilization, do you now anticipate that the price increase is a going to be a little bit less than what you passed on to clients in the back half of this quarter and going into the back half of this fiscal year?

What you will see as the second quarter rolls in is the special allocation that we built in for the COBRA will come in and you will see that happen. Since the COBRA experience, I am going to use that term, the whole COBRA experience is a 15 month time frame. We will keep that until our COBRA roll out, and whatever that is, we have -- at this point, we don't know. So I don't expect to see, I don't expect to see our customers getting a credit for that, or a reduction in the allocation until some time next year.

Okay. So basically, the pricing that you previously articulated on the last quarter, you would expect will continue for the balance of the year as you had previously indicated?

Absolutely.

The thing that's going to be very interesting though is our pricing allocation -- since we matched them so tightly to the cost on an ongoing basis, month to month, we are seeing a time coming now where the stability to our price levels is lower than the market, and especially with health care reform requirements, right now, by October, these plans in the small business community to add some of what was included in the health insurance reform components of the legislation, so adding unlimited coverage and adding age 26 to the -- for the children, allowing children to stay on your lan until later; there's a variety of components, or plan design components that are already in our plan because we are a big company plan for small to mid-size companies.

We don't have initial cost to build into our plans related to a bunch of mandates. So the comparison between our cost and what else is available is going be better over this next year just for that reason alone. Like I say, there were several reasons where the health care reform really has fallen into our lap favorably.

Great. How would you anticipate, what do you anticipate the variance is going to be once this is fully implemented, and I know there could be all sorts of changes, but as it is currently written, what is the difference between what a small business would pay for health insurance if they didn't work with you versus what they would pay working with you?

That's -- that's impossible to pin down, but historically bought --

For an average person in your client base?

Our historic situation is remember there's no commission in our contract --

Right.

We think commissions may go down in the new world, so that variance would offset, but we know that we have always had some additional costs in our plan, 5% or 6% that were not in the other plan.

So it is really hard to tell today, but I am very confident that we are going to continue to provide a very favorable environment for small and mid-size businesses to operate in. Plus, just the complexity of it it is enough to drive you insane, and we will do our normal solid effort of simplifying and bringing only the salient points and decisions that customers have to make. We'll help them be in compliance and stay focused on their business at the same time.

Right.

You mentioned Massachusetts previously. What was the experience that you saw there?

We were able to provide a very concise summary and flow -- a decision flowchart, if you will and -- help guide our clients plus provide the quarterly reporting that's required by the legislation, and we have used that as the test case, to where if this happened on a larger level, what type of service would we put together and how can you price it?

I really think you will see a cottage industry start and grow in just helping businesses navigate through their options for providing health care under health reform and we're very well-positioned to be a big part of that.

And in that particular market, we actually grew in 2009 as a result of starting to provide all this information and administration for that plan that was -- for that law that was passed in 2007.

You actually saw growth in term of the total number of worksite employees in Massachusetts?

Yes. Yes, we did.

Even if it is down economy, you notice our northeast is actually the only market we grew in in this down period.

Right. That's great.

And then, can you talk about sales efficiencies? What are you expecting for the balance of this year?

We are expecting some improvement over last year. But, again, we don't think that's the kind of thing to jump out ahead. We want to see it materialize. We are still at the 0.7% to 0.75% or so range that we have been planning to recover to, and that's where we are headed.

Great. Thank you.

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

Good morning, guys.

Following up on the last question, can you tell us what your average trained sales force is and how you expect that to move during the year?

We are at about 305 or so, the train rep count, which normally goes down the first quarter when we have our sales convention and we cut back on the sales staff at that point, but we are planning to add some as the year progresses, a small number, and maybe get back entomb that 320 range as you get toward the latter part of the year.

Okay.

And a couple of things on the health bill. Since you said since you're a big plan but you're a a bunch of small plans, how certain are you that you are not going to be counted as a big plan versus the separate small plans, and the second part is what about the 85%, and I know they're different percentages, but loss ratios that are required of the insurers, how might that effect you directly or indirectly?

That's interesting, on a couple of points. What was the first part of that?

The first part is about whether or not we will be deem aid large plan versus a small plan. I guess you know we have gotten some, we got some language in the congressional record that deals with this discussion about how a customer getting a payroll tax credit this year, how they get treated in this plan or in the new health care bill. And it actually says that if I understand it, that they will, the clients will be treated and get the credit as the individual client, as opposed to us getting the payroll tax credit. While that's in the congressional record, that's certainly a good leading indicator.

But, when you move forward into the issue about whether or not we are going to be deemed the large plan or the small plan, until some regs are written, we won't know for sure, but we are in the middle of -- at the Treasury department, you know our folks up in Washington are very close to those that are in, in the Treasury department and I will be writing the regs. They understand our industry, like our industry, and so we expect that we will be treated the way that we need to be, which doesn't necessarily give anybody an advantage by being in the PEO, but it certainly doesn't detract from a customer being in the PEO.

Yes, the term PEO is not used in the health reform ledge vision, but as Richard mentioned we did get a come inquiry read into the congressional record which shows the congressional intent and it was specific; in fact that's the, the first time anything happened this year, that the congressional record actually reflects the term PEO. So small victory, but it can be a big one because it does direct regulators as to how to treat clients in our relationship.

The second part about cost containments about the loss ratio?

Oh yes, that's a requirement on insurers who have a loss ratio, the premiums, and go directly toward providing health care service. In our particular case, you may recall, as an employer, we -- not only did we have an 85% requirement, ours is 100% requirement, always has been because we are not able to have a surplus in the health care side of our business, between what we allocate and collect versus what we pay in to a carrier.

So, remember our customers don't pay a premium. They pay us an allocation within our comprehensive service fee. We are a buyer of insurance; we pay premiums to the carrier. The mandate you are referring to is a mandate that our carrier will spend at least 85% of the cost of the premiums we pay in for health care costs, so we don't expect that to have an effect on us other than a favorable effect as we --

Thanks very much.

That's all the time we have today for questions. I would like to turn the call back over to Paul Sarvadi.

Once again, thank you for participating with us today. We look forward to putting another good quarter together and talking to you next time. Thank you very much.

Thank you. This does conclude today's conference call. You may now disconnect.