Insperity Inc (NSP) 2010 Q2 法說會逐字稿

Good morning. My name is Thea and I will be your conference operator today. I would like to welcome everyone to the Administaff Second Quarter Conference call.

(Operator Instructions)

At this time, I would like to turn the call over to today's speakers Paul Sarvadi, Chairman of the Board and Chief Executive Officer, and Richard Rawson, President, and Douglas Sharp, Senior Vice President of Finance, Chief Financial Officer, and Treasurer. 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, or 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.

The risks and uncertainties may have caused the actual results to differ materially from those forward-looking statements.

Let me take a minute to outline our plan for this morning's call. First, I'm going to discuss the details of our second quarter 2010 financial results. Richard will discuss recent and expected trends in our direct costs including benefits, worker' compensation, and payroll taxes, and the impact of such trends on our pricing. Paul will then add his comments about the quarter and our plans for the remainder of the year. I will provide our financial guidance for the third quarter and an update to our full year guidance. Then, we will call in the call with a question-and-answer session.

Let me begin today's call by summarizing the financial highlights from the second quarter. Today, we reported Q2 earnings of $0.20 per share. These results were significantly above our expectations and reflect continued positive trends in our growth and profitability metrics. A worksite employees averaged 105,359, which was slightly above the high end of the forecasted rank of 105,250. Gross profit for worksite employee per month averaged $226 for the quarter. This was above the forecasted range of $206 to $212 as favorable results were achieved in all three of our direct cost areas.

Operating expenses totaled $62.8 million for the quarter. This was just above the high end of our forecasted range of $62.5 million, due to an accrual for incentive compensation tied to our better than expected financial results. Our cash flow remains strong through Q2 as we generated $15 million of EBITDA plus stock based compensation and ended with quarter with $144 million of working capital.

Now, let's review further details of the second quarter results. As I just mentioned, paid worksite employees averaged 105,359 during Q2 This was a 2.3% sequential increase over Q1 of this year as we experienced unit growth throughout the quarter. Client retention averaged 99%, for Q2, which is an all time high for us.

We are particularly pleased as these results were achieved during a quarter in which we increased benefits pricing due to the high COBRA participation levels in our plan. Now, a second component of worksite employee growth met hiring in our client base was also positive during the quarter. However, this was partially due to the typical hiring of part-time summer health and we continue to expect minimal net hiring over the course of 2010.

Worksite employees paid from sales have shown some improvement and challenge to be a challenge in this weak environment. Second quarter revenues increased by 2% compared to Q2 of 2009 as a result of a 5.1% increase in revenue per worksite employee per month, more on offsetting the 2.9% decline in average paid worksite employees.

The Q2 year-over-year increase in our top line is a positive sign when compared to decreases in each of the previous four quarters. Looking at second quarter revenue contribution and year-over-year change by region. The northeast region, which represents 24% of total revenue grew by 9%. The southeast region which represents 11% of total revenue was flat. Central region, which represents 15% of total revenue declined by 2%. The southwest region, which represents 31% of total revenue declined by 1%. And the west region, which represents 19% of total revenue increased by 2%.

Moving to gross profit it is a similar story to what we experienced in Q1 of this year. Pricing remains stable and surpluses from our direct cost programs exceeded our expectations. This resulted in an average gross profit for worksite employee per month $226, which was an increase of $5 over Q2 of 2009 and $17 above the mid-point of the Q2 2010 forecasted range.

Richard will discuss the details of our pricing and the direct cost programs in a few minutes. So, I'll just provide some brief comments. As for our benefits program, pricing allocations came in higher than expected while costs of $788 per covered employee per month were at forecasted levels.

As for our workers''s' compensation program, we continue to experience favorable claim trends. Workers compensation costs were 0.64% of non-bonus payroll for 2010.

And below both Q2, 2009 and this quarter's forecasted level of 0.68%. Actual loss estimates resulted in a $1.7 million reduction in previously reported loss reserves in the second quarter of 2010. This compares to a $1.6 million reduction in Q2 of the prior year.

Payroll taxes as a percentage of total payroll increased from 7.1% in Q2, 2009 to 7.3% in Q2 of this year.

This increase was primarily due to higher state unemployment tax rates, which we anticipated in the weak labor market. And have effectively priced to new and renewing business.

Now, moving on to operating expenses. We reported a 1% year-over-year decline to $62.8 million for the quarter. However, when excluding incentive compensation expense from both periods, operating expenses declined by 3.3%, which is consistent with the year-over-year worksite employee decline. As for some of the details, salaries and wages declined by 3% from Q2 of 2009. Stock-based community expense declined by approximately $500,000 due primarily to forfeitures associated with our first quarter reduction in force.

Commissions declined by 3% due to lower worksite employee levels lower sales production. Advertising increased by $1.3 million over Q2 of 2009. This was consistent with our forecast and plans to invest in marketing initiatives over 2010 to boost lead and sales activity. General and administrative costs increased by 3% over Q2 of 2009, however were managed below forecasted levels.

Depreciation and amortization expense decreased by 12% due to a lower level of capital expenditures throughout 2009 and the first half of this year. As for our balance sheet and cash flow. EBITDA plus stock based compensation totaled $15 million for the second quarter and cash outlays included capital expenditures of $1.6 million. Repurchases of approximately 22,000 shares at a total cost of $506,000. Cash dividends of $3.4 million. And $5.6 million related to the recent acquisition of ExpensAble. And working capital increased $14 million during the quarter to $144 million and included the receipt of a $15.6 million scheduled reimbursement from our workers' compensation program. At this time, I would like to turn the call over to Richard.

Thanks, Doug. Today, I would like to update you on the details of another great quarter of gross profit results, which came from positive contributions in all our direct call centers. Then I will update you on the status of renewal contract negotiations on both our health and workers' compensation programs, and finally, I will share with you our outlook for the balance of the year as it relates to gross profit.

Many of you know our gross profit. Many of you know our gross profit comes from the service fee component of our mark-up combined with a typical surplus that is generated when the direct cost pricing allocation components of our mark up exceed the corresponding direct cost. This quarter, the service fee component our mark-up was one $194 per worksite employee per month. And the surplus was $32 per worksite employee per month, which produced the $226 of gross profit per worksite employee per month that Doug just reported. The service fee component was in line with our expectations while the surplus component was $17 per worksite employee per month better than our forecast.

The service fee on business debt was renewed during the quarter, was slightly more than $1 per worksite employee per months better than our forecast. It doesn't sound like much until you remember that our renewal department was responsible for implementing the additional COBRA allocation for all customers beginning in April.

Additionally this quarter, we experienced the highest client retention rate that we have ever had. The bottom line on pricing is that we are very pleased with these results and the clients continue to see the value of our service.

Now, let me give you some of the details of the much better than expected surplus beginning with the benefits cost center.

Again, this quarter, our benefits cost center produced favorable results. The deficit in this cost center was $6 per worksite employee per month better than we expected and was driven by the increases in our allocations that I mentioned just a moment ago. As for the COBRA side of benefits, they came in as expected. If you remember, from our last quarter's call, we had assumed as COBRA participants subsidies ran out, they would lead the plan.

We had also assumed those participants healthcare claims would continue to be about twice as much as a regular participant's claims. COBRA participation remained flat, relatively flat, however. The claims were 1.8 times that of a regular participant's claims, which is not quite as good as the 1.7 times but still better than the assumption.

Lastly, we continue to see migration of plan participants selecting lower cost higher deductible plans. Moving to the payroll tax cost center, we experienced a better surplus of $5 per worksite employee per month.

This additional surplus was generated because we received the balance of our state unemployment tax rate and they were lower than we expected. Now, let's discuss the workers' compensation surplus results, which was also better than expected.

This additional cost in the cost center came from lower costs, which were driven by both lower incidents and severity rates. For this policy year-to-date, we have had a 8.64% reduction in the number of workers' compensation claims filed compared to the same period last year. Slower incidence rate is a due to a combination of a continuation of our effective safety service programs coupled with the lower number of worksite employees that filed those claims. The severity rate, which is the average cost of the claims, dropped 10.29% from the same period last year. These results produced a $3 per worksite employee per month better than expected surplus.

In summary, the stabilization and direct cost management produced a better than expected results. Now, you may recall that our workers' compensation policy renews each year on October 1. So, at that time of year, or, this time of year, we are working on our renewal. This year, our renewal talks with Ace Insurance Company are going very well. And we should be finalizing the new program very soon. Also, you may recall that our current three year contract with United Healthcare expires on December 31 of this year.

We began the renewal dialogue several weeks ago. And while we have not finalized a new multi-year agreement, I can say our negotiations have gone very well and that we will be able to finalize this contract in the next couple of weeks.

I think it is safe to say we should expect some level of cost reduction in both of these programs. Now, let's talk about the gross profit expectations for the third quarter and the balance of 2010. As for the pricing of our service fee, we are not seeing improvement in the economy to raise rates. So, I don't expect to see any increase in the service fee for new or renewing customers. Even though our renewal department continues to have great success, we will continue to forecast the $194 per worksite employee per month of service fee for the balance of the year. 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 center declined as the employees reached their specific wage limits. In addition, as we start to grow, the allocation that we get on new business has to be prorated. And the spreads are not as much as they are in the first quarter of each year. Since we are growing this year, our surplus in Q3 will be lower than Q1 and Q2. But, the full year surplus expectation for the cost center should be better than our original forecast due to the better than expected year-to-date results.

Moving to the workers' compensation cost center. Here is what we see. On the pricing side of this cost center, I had reported to you that last quarter, our allocation had been stabilized and they have continued to be stable throughout Q2. Because the workers' compensation insurance market place is still very soft, we will keep our allocations at the current level. On the expense side of this cost center, we just entered another good quarter 0.64% of non-bonus payroll because of continuation of very low incidents and severity rates.

We believe that we can continue to manage our expenses to a level of 0.64% of non-bonus payroll for the full year 2010, which is slightly better than our previous guidance. However, if claims develop out better than the actuarial estimates, the ultimate cost will be lower and the surplus is higher than our new forecast. Now, switching to the benefits cost center, let me tell you how we see the deficit changing beginning with the allocations.

At the beginning of 2010, we outlined some changes that we were going to make to our pricing policy. Those changes included a special allocation to cover the additional COBRA-related healthcare costs. As I mentioned earlier in my remarks, we successfully implemented this plan and you have seen the beginning of the results this quarter. This plan combined with ongoing renewals will continue to increase the benefits allocations throughout the balance of 2010.

On the cost side of the equation, we believe that our trend for 2010 should be 6% to 6.5% higher than 2009's expense for the following reasons. Even though the federal government subsidy period for newly eligible COBRA participants expired May 3, our participation has not declined that much so far. But, eventually, it will. Our 6% to 6.5% range assumes that the cost for COBRA participant remains at the 1.7 to 1.8 times the cost of a regular health care participant's cost.

Utilization by non-COBRA plan participants has improved but it has not returned to historical levels. As I mentioned earlier, while we have continued to see substantial migration of planned participants moving to the lower cost higher deductible plans, the COBRA effect is still adversely affecting our costs.

Even with the 6% to 6.5% year-over-year increase in cost, our deficit in the benefits cost center should improve in Q3 and Q4 as the pricing allocations continue to increase. In summary, when you combine our year-to-date results with all the factors we 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 $231 to $233 for the full year, which includes some contribution from our adjacent businesses, which Paul will now discuss.

Thank you, Richard. It is my pleasure today to provide a progress report on three major initiatives that are important to Administaff's stakeholders. First, I'll discuss our efforts to restart our growth engine, which resulted in a resumption of our unit growth in paid worksite employees in Q2.

Secondly, I will offer some color on the recent acquisitions and how they fit into the long term adjacent development plan and our new PEO growth strategy.

Lastly, I will comment on our outlook for the balance of the year in light of the persistently sluggish economic climate and lackluster employment picture.

We were successful in restarting the unit growth through a combination of excellent client retention. A small contribution from net new hires within the client base and recovering new sales. This quarter, we experienced a 2.3% sequential increase in paid worksite employees over Q1, which is our first sequential increase since the third quarter of 2008. This quarter was our best ever as a public company in client retention at 98.95% as an average of only 1.05% of our worksite employee exited with terminating clients each month. For the second quarter of the year, we would have expected about 1.5% attrition based on historical averages.

This level of success in client retention is a continuation of the improvement we have been experiencing over the last year. For the first half of 2010, we experienced a 20% reduction in worksite employees loss through client attrition and achieved the highest customer satisfaction numbers in our history.

We also experienced the slight net gain in new hires versus layoffs within the client base in two of the three months of the quarter. Part of this benefit is seasonal as clients added some summer, part-time, and temporary help. The balance of the net gain reflects a modest hiring in our small business client base. On the sales front, we made substantial progress over the quarter, resulting in and reaching 93% of our internal sales forecast.

The retooling we completed in Q1 has been effective, but we still have much to do to regain the momentum and consistency we expect from our sales organization. We are working with the feedback from the sales management staff regarding the second quarter results to continue to tweak and adjust our processes to accelerate sales. We also made tremendous progress during the quarter towards our long term PEO growth strategy, which is driven by adjacent business development plan.

Our plan is to develop profitable adjacent business units with recurring revenue streams and strong growth potential and substantial cross-selling opportunities to grow our core PEO business. We intend to leverage our 300 professional sales personnel, our substantial marketing expertise, and our 25,000 PEO prospects that we see face-to-face each year to grow these new businesses.

This strategy will also allow us to develop a much wider net of small and medium-sized business that is become customers as one or more services--of one or more services that may eventually qualify for a premium PEO offering.

Recently, we announced the acquisition of two excellent companies that fill gaps in our core PEO service and add new opportunity for revenue and profit growth in the fast growing softwares of service space.

In June, we acquired ExpensAble, which provides state-of-the-art expense-management solution. Allowing companies to automate expense reporting, establish and enforce corporate travel policies, and provide visibility in the company expenditures to control cost. This application even includes the ability to take a picture of the your expense receipt with your handheld device, instantly adding the purchase to your expense report, and immediately into the company expense database.

The efficiency improvement and cost control ExpensAble provides will be very attractive to our target clients. We expect many of our nearly 6,000 clients and 25,000 prospects to be excellent candidates for this service.

Conversely, many of the ExpensAbles 5,000 clients may be prospects for the PEO service or one of our other adjacent businesses. We also announced last week, the addition of Galaxy Technologies, which we believe has the best time and attendant solution in the market place. This acquisition also fills a need in our core service offering while providing strong growth opportunities helping companies track, allocate, analyze, and control personnel resources.

The timing for adding Galaxy could not be better. In the second quarter, Galaxy introduced their latest version of TimeStar, time and attendant software, with an incredible user interface that separates the product from the competition. We expect to add on marketing and sales efforts to help take this new product to the marketplace in a big way. Both ExpensAble and Galaxy have a service culture that the competitive advantage compared to the companies in their respective businesses.

They are both premium service that will fit nicely into the array of Administaff's services designed to help clients improve business performance. We have also completed our internal development of an additional software service offering. We are preparing for launch this quarter.

We will be introducing a performance management solution specifically designed for small and mid-market companies as a result of a redesign of our HR tools desktop products into an integrated application. These three product offerings each represent an opportunity for a company to experience a high quality business performance improvement tool. Over time, we expect to offer these products together and potentially as a software with a service offering experts to accomplish the goal of better company performance.

Prior to the addition of these new offerings, we have been providing other products and service that have contributed at the gross profit line. These include our market place alliance offerings, recruiting and background screening services, and earlier division of the tools product. In the first half the year they contributed $3 per worksite employee per month to gross profit. Over the last half of the year, we expect the contribution of gross profit to increase sharply to $9 with the addition of the two acquisitions and the launch of our new performance management tool.

This will produce a total gross profit contribution for the full year of $6 from our adjacent business development strategy.

During our upcoming fall campaign. We expect to reach up to customers of all our products and services to introduce them to all the other offerings available. This will be the first real test at lead generation and cross-selling of all the services. This beta test will provide the input to rev up our adjacent business and new PEO growth plan in 2011.

My last topic for the day is the in light of the weak economic environment. The numbers we monitor from our database reflect a slowing economy and our quarterly client survey reveals caution and concern among small business owners. Commissions we paid to the sales staff of our clients were flat in the second quarter over the same period last year. This is after increases of 4%, 6%, and 8% respectively in the prior three quarters. Overtime, as a percentage of regular pay, did move up in the quarter to 8.2%. But, it is still below the 10% that historically leads to more hiring. Survey respondents were fairly negative on their expectation of economic growth in the last half of the year with only 6% expecting an economic rebound. However, 48% of our clients expect their own sales to increase. 65% of respondents said they are on plan or better than expected year-to-date, and 30% expect to add employees while only 9% expect layoffs. So, we see our client base with the expectation of outperforming the market place at-large as they perceive it which is reflective of the client selection of the best small to medium-sized businesses in the country.

While the majority of our clients are expecting to do well. They are not without short term concerns. 78% sighted the economy as their biggest short-term concern, followed by healthcare reform at 53% and healthcare costs at 46%.

Their long term concerns reflect their uncertainty regarding taxes, government expansion, and the effect on business and the federal deficit in addition to the economy. Approximately 70% of these business owners stated their concern level at elevated or very concerned about the four issues for the long term. Now, let me explain how the outlook for Administaff considering this input from our client base. Like many of our clients, we also expect to outperform the market place over the balance of the year. The recession has lingered and a substantial recovery is not yet on the horizon. However, we have adapted well and have turned the corner on our ability to grow in this climate. Our improved client retention and recovering sales are expected to be sufficient to continue our sequential unit growth and achieve year-over-year growth over the last half of this year.

The issues most on the mind of small to medium-sized business owners include healthcare reform, government compliance, and the associated increasing liability.

These concerns are certainly drivers for using our core PEO service, and we plan to accentuate the comprehensive Administaff co-employment solution as the answer for business owners with these concerns. At this stage of an extended down economic cycle, the marketplace produces winners and losers as the strong and agile get stronger and benefit from their ability to react to change.

We certainly expect to be one of those winners. We have a proven business model with the core product offering producing record levels of client satisfaction retention. We have a seasoned professional sales and marketing team poised to take advantage of the enhanced benefit of our service in this climate.

We have a new adjacent business development plan that is gaining momentum and becoming an essential component of our long-term PEO growth strategy.

We are debt free and our historic high working capital position of $144 million puts us in a position to execute our plan and take advantage of the opportunities in the market place. So, in spite the near term lackluster economic outlook, we believe our careful planning and delivered execution will produce positive results. We expect Administaff to continue to perform well, increasing growth and profitability over the balance of the year.

At this point, I would like to pass the call on to Doug and provide the specific guidance.

Thanks, Paul. Now, before we open up the call for questions. I would like to provide the financial guidance for third quarter and an update to the our full year 2010 forecast. In general, we are raising our full year guidance based upon the following. We are forecasting continued sequential unit growth. We are also projecting an increase in gross profit for worksite employee for the second half of 2010 compared to our previous forecast. As for operating expenses, we plan to take advantage of the opportunity gained by our stronger than expected earnings in the first half of 2010 and our strong working capital position.

Our forecast assumes further investment in our unit growth recovery plan and our adjacent business services strategy.

Finally, our full year guidance includes the expected impact of the two acquisitions, ExpensAble Galaxy. So, as far as key metrics guidance. We are now forecasting average paid worksite employees in a range of 108,000 to 108,500 for Q3. And 106,750 to 107,250 for the full year.

This assumes net monthly unit growth in a range of 800 to 1,000 worksite employee over the remainder of the year.

As Richard just mentioned, we expect gross profit per worksite employee per month to be in the range of $231 to $233 for the full year 2010 up from our previous range of $222 to $226.

This includes the contribution of approximately $3 from the ExpensAble and Galaxy acquisitions. As for the third quarter, we expect gross profit for per worksite employee per month to be in the range of $226 to $230. As for operating expenses, we are now forecasting a revised range of $261 to $262 million for the full year. This is an increase of $6 million over our previous forecast, and includes an additional $4.3 million in expenses related to the operations of our two recent acquisitions.

The remainder of the increase assumes some additional corporate head count including those associated with our adjacent business services strategy.

Also, keep in mind, that the high end of our forecasted operating expense range includes an additional incentive compensation cost associated with the higher unit growth and gross profit projections. For the third quarter, operating expenses are in a range of $62 million to $63 million includes a portion of the additional investments mentioned above.

As for interest income, we are forecasting $900,000 to $1.1 million for the full year and $200,000 to $300,000 for the third quarter.

We continue to forecast an effective income tax rate of 42% and are now forecasting 25.6 million average outstanding shares for Q3 and the full year.

Now, in summary, the continued improvement in the key metrics guidance implies 2010 full year earnings and range of $0.81 to $0.88 per share, representing a 23% to 24% increase over 2009. At this time, I would like to open up the call for questions.

The first question will come from Toby Summer from SunTrust Robinson Humphrey.

Thank you. I had a question for you about the Fall selling campaign and wanted to get a sense from you. What are the key points that Administaff is going to be emphasizing to your prospects over the next couple of months?

Hey Toby, we are preparing for that fall selling and retention campaign. And we have done quite a bit of testing of the market place since health care reform has passed, and we felt quite encouraged about the ability to use that in our sales and marketing effort to increase our opportunities to offer our core PEO solutions. So, the fact of the matter is, what healthcare reform means to the small business community is additional cost, additional complexity, and additional risk.

We've already really sensed a lot of business people throwing up their hands and saying, "I really can't figure it out. I don't want to be in the business of trying to comply." That's a core strength of ours. That is one of the great reasons to become a client of Administaff. And we will leverage that. So, that's a big part of the plan.

We also have a very significant cross-selling program that we are going to implement this fall as a kind of a beta test to market our other products and services. And to inform our wider customers base that HR tools customers, our Galaxy customers, our Expensable customers. Inform them of the PEO offering and other offerings. And go out to the PEO customer base and get referrals for those new lines of business. So, we have a lot of exciting activities prepared for the Fall. And we are looking forward to really revving up our sales engine.

Thank you. One other question. Then, I'll get back in the queue.

I see Mark Allen has been busy. He had a couple of deals recently. I was wondering if I could get an updated cash balance? Kind of a current one since the quarter? It seems like you spent a little and received money back. And get a sense from you whether you are looking to continue to build the adjacent businesses, or to the exclusion of share repurchase, or you feel like you are in a balanced position to be able to execute on multiple fronts?

Tobey, this is Doug. Essentially, the way the cash flow works for the quarter. We generated enough cash to pay for those acquisitions and then reimbursement from workers' comp program, which was expected was over and above that. So, that took us from $130 million working capital at the ends of the second quarter to about and $144 million at the end of the third quarter.

We will continue to look for acquisitions. They compliment the business model and the adjacent businesses strategy as the use of cash. We will revisit the quarterly dividend.

In addition to that, stay active in the share repurchase program. It's a matter of balancing all three and where we see the priorities and how we utilize the cash. I think we're very comfortable with the working capital levels we have today. Again, Paul mentioned they are at an all time high and put us in a real good position to grow going forward.

Thanks, I'll get back in the queue

Next question is from Michael Baker with Raymond James.

Thanks a lot. I was wondering in light of the focus in on the adjacent businesses, what should we expect in advertising spend or whether that will change from historical patterns?

Well, we have mentioned, I think last quarter, that we would have some increase in the advertising area. Both to take advantage of the healthcare reform and also, to start to look at the kind of marketing jointly on the adjacent businesses that we've added. So, there is a little bit of an increase.

One of the great synergies here is that all of the products and services are business performance improvement tools and we will have a good way to, early on, get plenty of lead production simply from going out to our current client base. That won't require too much additional advertising.

But, we think we can bring all of these along and not really looking at a substantial increase as you can see built into our forecast for the fall.

So, in terms of third quarter, we typically see it come off a little bit the second quarter? Should we still anticipate that?

Yes, we should. You will still see the seasonality. And bump back up in the fourth quarter in conjunction with the Falls sales campaign.

Okay. Then I had a question for Richard. Just wanted to understand the kind of expectation with respect to health reform. More specifically ,whether you guys would be impacted by any of the grandfathering provisions and if so, any anticipation in terms of expected cost or reform that you plan to price through, so to speak, in the upcoming renewal?

Yes, Michael. Certainly on the grandfathering provision. I think that, obviously, we don't know for sure. I doubt there are going to be very many plans to get grandfathered. Because understand the things they are talking about, they're saying if you change the deductible, then you bailed out of the grandfathering position.

So, I don't think we will be grandfathered in at this point. What that will mean, for our customers, is that those that are with us obviously will be doing that kind of testing for them on that provision. And, of course, customers who aren't with Administaff and come into our plan. They're going to get the benefit of us doing that testing under section 105 H for them as well.

We've seen that in Massachusetts and in San Francisco proper, that when we, behind scenes, do some of this administrative work for our customers as it relates to their health plan and the things that have to be reported to the various government agencies. I mean, they just love it. 2009 we grew in the state of Massachusetts because of the reform that took place there. So, we don't see it as a significant cost increase. But, what you got to compare to is what the rest the small business market place is going to be experiencing in 2011. That has to do with, obviously, higher premium taxes. That has to do with provisions that relate to increasing the age for dependence up to age 26. There are some unlimited benefits that apply--that will apply on the medical plan side as mandatory, and of course, our plan has had already had an unlimited number. A lot of small business plans, they put a cap on it. So, we should benefit from that as well. So, what we're seeing right now, is a lot more good than bad.

We really haven't seen much bad as it starts to unfold. It is a lot different position than when we were looking at it on March 24, which was the day after the bill was signed.

Thanks for your thoughts.

The next question will come from Jim MacDonald with First Analysis.

Good morning, guys.

Good morning.

On the health benefit pricing, how do you see that given some of the large increases from some of the insurers in the market place, how do you see your position?

Jim, I see our position as really good. We are probably, I would think, or see at this point, that we are probably in one of the best positions we have been in a long time.

Even though, there will be about 10% of our healthcare costs next year goes up because of the HMOs out in the west coast, those are fixed dollar plans. You'll be seeing trend increases in the 10% to 15%, 16% for those small plans. That's already what we're being told. But,, yet, the rest of our plan, I mean, it shouldn't be anywhere near that kind of a cost increase. So, especially as COBRA participants who are in the plan now fall off.

So, we are looking forward to some good days.

While you mention the COBRA, can you talk a little bit how fast you expect them to fall off and I think the (inaudible) are double recently and when do you expect them to get back to normal, percentage wise?

Well, I think that as the number of participants falls or drops off. In other words, as these people's subsidy expires and they leave us, I think we'll lose participants in the COBRA plan. But then, probably what will happen next year is that the participants' cost will kind of go back up to the two-times of regular participants cost. You will have two things going on, which should pretty much off set each other.

Switching over to the new offerings, can you talk little bit about the average client size for the companies you bought and how that overlaps with your client size? I imagine it's higher. In general, so, how do you expect to balance that disparity maybe?

Actually, we will take them one at a time here. But on the Galaxy acquisitions, fewer clients but typically larger. Using a time and attendance tool, that should be a great opportunity for us relative to our mid market solutions that we offer.

And Expensable had a little bit broader customer base size-wise, because every business wants to control their cost and wants to do expense reporting and make that as simple and easy as possible and less complicated. But both of these companies, because of the growth and the software as a service world and the ability to kind of demo it over the telephone and really sell it over the phone. In many cases, it's gravitating to smaller and smaller companies.

It is a great fit, we believe, between customers that we have that we will be interested in those services and customers that they have that would be interested in our PEO service. So, we think there is good cross-selling opportunity there.

Thanks very much.

The next question will come from Mark Macon with Robert W. Baird.

Good morning, nice results.

Thank you.

Can you talk about the client retention? That was particularly impressive in terms of--what drove that higher than usual retention rate? What have you changed in terms the service offering? What would you attribute that to?

Well, over the last couple of years, really, our focus on client retention has moved away from just client satisfaction--our client satisfaction measurement-- we're looking for not just satisfied or mostly satisfied. But, we are looking for the new definition of a customer that is more of a fanatic. More of a real fan of the service.

We have been measuring customers after renewal and how excited they were about the renewal. Did they barely renew or were they a fanatic in terms of a believer in what we do for them and how it affects the business? So, it's kind of a combination of managing and measuring different things and coming up with ideas to move people along in that experience. So, there is a lot of customer interaction that is the foundation of it. A lot of blocking and tackling to make sure that we know what our customer's expectations are. And that we're really trying to go above and beyond.

So, a lot of good work by our service team, and it seems to really be making the difference.

That's great to hear. It sounds like there wasn't sort of any wholesale change. Just more interaction and a little bit better execution on the blocking and tackling?

Absolutely,

If there were a way to just measure how close our client relationships are. I would say that the big difference from two years ago up to today is across our business. Whether it is the small business or emerging growth companies or our mid-market customers especially, We have done a very nice job of managing the relationship to make sure we're proactively responding. Proactively gauging their engagement level with us. And that seems to be really helpful.

When you couple that with--we have been sensitive on the pricing side. Over the last year and we talked about that every quarter. And we have done a really good job in kind of hitting the mark as to where the customer sees the value. And at what level they are willing to continue to pay for that.

We stood in the gap with them on the COBRA cost, remember that cost our company $12 million that we're not going back to get.

Right.

I think that's pretty awesome demonstration of how we stand shoulder-to-shoulder with our customers. So, when we bent back to our renewal group and explained what had taken place and what the additional costs were and needed to pass the pricing on--people, they didn't like it any more than we liked having to do it. But, they understood it. And, obviously, it was done effectively.

Can you talk a little about your expectations in terms of sales efficiency? How are the programs changed? I know there has been some changes organizationally within the sales force.

What sort of improvement would you expect to see?

We've gone through a lot of changes over the last six months or so once we got through last year's Fall campaign. And, when you make pretty significant changes, it take a little while. You know, like I mentioned this quarter, we were at 93% of our internal forecast, which I thought was very good considering the amount of change. And we finally hit 100% in the last month of the quarter.

We're getting there. But we're still making mid-course corrections and some of the blocking tackling that goes on in the selling process. We are still working through not leaving any stone unturned. We're looking at our presentation materials, and how we're communicating the messaging that's going on. So, it's been a very deep dive, and everybody is working hard. And it has been hard to get the right number of opportunities in the market place. And we have got plan insist the fall to help with that as well. So, we are making a lot of progress.

Like I said in my prepared remarks, there is a lot of work to do to build the momentum and gain the level of consistency we expect.

So, the guidance assumes what level of efficiency for the sales force?

It is about. We were in the 60s. And last year, we were in the [0.65] or point, about that range. And we are closer to [0.75] or so for what we 're looking at over the balance of the year. The 4th quarter is different and in the fall campaign.

Even last year, I think we were in the [0.9] or so range. And we will do better than that this year.

Total quota carrying sales people are up to -- ?

We were at 290 for the quarter, which is down a little bit. We are now adding sales staff in terms of trying to get back up to about that 320 hired number, but it will take a little while for the trained rep count to come back in. It's about 90 days to ramp them up.

So, it sounds like -- And pricing, when you are going out and selling, is that still an area of cognitive dissonance? Or is it more smooth now?

It's a little choppy. And business is, they haven't experienced the service and it bounces around a few dollars each quarter. But it certainly is nothing that gets us alarmed or concerned.

Great. Then, the percentage of the worksite employees that actually were receiving the benefits package, what was that?

It is right around seven--little over 74%.

Would you expect it to stay around there.

Yes, we are assuming stays at that level.

Great. Can you talk about more with expense with Galaxy. And how big they were prior to being brought on, and what sort of revenue they were generating and what sort of margin profiles they had?

Both of them are fairly early stage in terms of the growth we are looking for in the software as a service business. But, both of them are at a very important leverage point that we were looking for, where the product development is way down the road. And it is all about--a lot of these companies, a lot of times, the dollars were spent to develop the product. Don't really have the muscle and the financial wherewithal to really market the products and get them out there.

And that's where, when you take a product like that that's well-developed and they have got the service side right. You put it in the hands of 300 sales people talking to business owners face-to-face every day. It's going to be good.

We're pleased with finding these two. We really believe they are gems out there in the market place and they fit beautifully into our game plan going forward.

Were they a couple of million dollars each in terms of revenue?

No, they were a little bit more than that. Mark. I don't have the specific numbers in front of me. Around $4 million.

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

Once again, we thank everybody for being with us today. That's all the time we have today for questions. I would like to turn the call back to Mr. Sarvadi. Thank you for being here.

Ladies and gentlemen, thank you for participating in today's conference call. You may now disconnect.