Insperity Inc (NSP) 2010 Q4 法說會逐字稿

Good morning. My name is Regina, and I will be your conference operator today. I would like to welcome everyone to the Administaff fourth-quarter 2010 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).

At this time, I would like to introduce today's speakers. Joining us are Paul Sarvadi, Chairman of the Board and Chief Executive Officer; Richard Rawson, President; and Douglas Sharp, Senior Vice President of finance, Chief Financial Officer and Treasurer. At this time, I would like to turn the call over to Douglas Sharp. 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 meaning of the federal securities laws. Words such as expects, intends, projects, believes, likely, probably, goal, objective, outlook, guidance, appears, targets 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 am going to discuss the details of our fourth-quarter and full-year 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 recap the 2010 year and then discuss the major initiatives within our 2011 operating plan. I will provide our financial guidance for the first quarter and full year 2011. We will then end the call with a question-and-answer session.

Let me begin today's call by discussing our fourth-quarter results. Today, we reported fourth-quarter earnings of $0.30 per share, which was above our expectations and significantly better than the loss of $0.11 per share reported in Q4 the prior year.

As for our key metrics, paid worksite employees averaged 111,249 for the quarter, an increase of 4% over Q4 of 2009. This was also our third consecutive quarter with a sequential increase above 2%.

Even more important, we achieved a step-up in paid worksite employees in January, coming off of our heavy year-end sales and renewal season. Paul will discuss these results in further detail in a few minutes.

Gross profit per worksite employee per month averaged $242 for the quarter. This was above our forecasted range of $237 to $241, and significantly above the $191 reported in Q4 of 2009.

Operating expenses totaled $68.2 million, within our expected range and just a 4% increase over Q4 of 2009. During the quarter, we generated $18.5 million of EBITDA plus stock-based compensation and ended the year with $144 million of working capital and no debt.

Now let's review the details of our fourth-quarter results. Revenues increased 10% over Q4 of 2009 to $436 million. This was a result of a 4% increase in average paid worksite employees, combined with a 6% increase in revenue per worksite employee per month.

As for worksite employees, positive results were achieved in each of the three drivers. First of all, sales continued to show improvement off of the lows experienced during the recent recession. Secondly, client retention continued to hold up at historical highs, as we have now averaged 99% for three consecutive quarters. Thirdly, we experienced net hiring in our client base during the quarter, although still at minimal levels.

Looking at fourth-quarter revenue contribution and year-over-year change by regions, the Southeast region, which represents 11% of total revenue, increased by 4%. The Northeast region, which represents 24% of total revenue, increased by 17%. The Central region, which represents 15% of total revenue, increased by 8%. The West region, which represents 19% of total revenue, increased by 10%. And the Southwest region, which represents 30% of total revenue, increased by 6%.

Moving to gross profit, things have improved dramatically since the fourth quarter of 2009, when we experienced unusually high healthcare costs due to a spike in COBRA participants and a higher level of healthcare utilization by our worksite employees. Improvement in our benefit cost trends combined with appropriate benefit pricing adjustment and surpluses in our other direct cost program has resulted in a return to more normalized gross profit levels. Richard will discuss the details of our pricing and direct cost programs in a few minutes, so I will just provide some brief comments.

As for our benefits program, cost per covered employee came in at expected levels. Approximately 74% of worksite employees were covered under our health plans in Q4 at an average cost of $808 per covered employee per month. As for our workers' compensation program, we continue to experience favorable claims trends. Workers' compensation costs were 0.58% of non-bonus payroll for Q4 of 2010, which is consistent with Q3 of this year and below Q4 2009's cost of 0.67%.

Actuarial loss estimates resulted in a $2.3 million reduction in previously reported loss reserves in the fourth quarter of 2010. This is fairly consistent with the $2 million reduction in Q3 of 2010, and compares to a $1.1 million reduction in Q4 the prior year.

Payroll taxes as a percentage of total payroll remained flat from Q4 of 2009 at 5.6%.

Now let's move on to operating expenses, which totaled $68.2 million for the quarter, or $204 per worksite employee per month. When excluding $7.00 of incremental expenses associated with this year's acquisitions, operating expenses per worksite employee per month would have declined from $204 in Q4 of 2009 to $197 in Q4 of 2010.

As for some of the details, salaries and wages increased 9% over Q4 of 2009, due primarily to incremental headcount from the 2010 acquisitions and higher incentive compensation expense associated with our improved operating results. Stock-based compensation expense declined by approximately $200,000. Commissions increased by 20%, consistent with an increase in paid worksite employees over the course of 2010, higher production in our fall sales campaigns and sales commissions associated with our two recent acquisitions.

Advertising costs included the typical seasonal step-up associated with our fall sales campaign; however, were 12% lower than Q4 of 2009. This was a result of our decision to defer certain marketing efforts into 2011, which Paul will discuss in a few minutes.

General and administrative costs increased by just 2% over Q4 of 2009; however, were managed below the forecasted level. Depreciation and amortization expense decreased by 9% due to our lower level of capital expenditures over the past two years.

Interest and other income for the quarter totaled just over $200,000, at the low end of our expected range and relatively flat when compared to Q4 of 2009.

Now I would like to take a few minutes to review our full-year results. We reported full-year 2010 earnings of $0.86 per share, a 32% increase over 2009. Revenues increased by 4% to $1.7 billion.

And as for the full-year 2010 revenue contribution and the year-over-year change by region, the Southeast region, which represents 11% of total revenue increased by 1%. The Northeast region, which represents 24% of total revenue, increased by 12%. The Central region, which represents 15% of total revenue, increased by 1%. The West region, which represents 20% of total revenue, increased by 3%. And the Southwest region, which represents 31% of total revenue, increased by 1%.

Gross profit per worksite employee per month increased by 5% from $221 in 2009 to $232 in 2010. The year-over-year increase of $11 per worksite employee per month was the result of $8.00 of higher surplus in our direct cost areas and a $5.00 contribution from our adjacent Business Services, partially offset by a $2.00 decline in the markup of our HR services.

As for a recap of our direct costs, benefit costs per covered employee per month increased 6% for the year, from $751 to $796. Workers' compensation costs as a percentage of non-bonus payroll declined from 0.64% in 2009 to 0.60% in 2010. Actuarial loss estimates resulted in a $6.2 million reduction in previously reported loss estimates in 2010 compared to a $5.7 million reduction in 2009.

Payroll taxes as a percentage of total payroll increased from 6.96% in 2009 to 7.11% in 2010, due primarily to the expected increases in SUTA rate. Pricing allocations were adjusted by a similar amount to maintain our surplus in this area.

Now let's move on to operating expenses, which were flat compared to 2009 at $261 million; however, declined by approximately 2% when excluding incremental expenses associated with our 2010 acquisitions.

Reported salaries and wages increased by 2%. Stock-based compensation costs declined by 20%, primarily due to forfeitures associated with our reduction in force in Q1 of 2010. Advertising costs and G&A costs increased by less than 3%. Commissions remained relatively flat.

Depreciation and amortization costs decreased by 10% due to a reduction in capital expenditures in 2009 and 2010. Interest income declined by approximately $600,000 from 2009 due to the declining interest rate. And our effective income tax rate decreased slightly from 42% in 2009 to 41% in 2010.

As for our balance sheet and cash flow, EBITDA plus stock-based compensation increased from $55 million in 2009 to $60 million for the full year of 2010. Cash outlays included cash dividends of $14 million, repurchases of 359,000 shares at a cost of $8 million, capital expenditures of $7 million and cash used in acquisitions totaling $13 million.

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

Thank you, Doug. Today, I will give you the details of our fourth-quarter better-than-expected gross profit results, and then I will take the balance of my time to share with our gross profit outlook for 2011.

As many of you know, our gross profit comes primarily from the service fee component of our markup, combined with the surplus that is generated when the direct cost pricing allocation components of the markup exceed the corresponding direct costs. As Doug just reported, our gross profit per worksite employee per month this quarter was $242, which was $3.00 more per worksite employee per month than we had forecasted. The service fee component of our markup averaged $192 per worksite employee per month. The surplus component was $44 per worksite employee per month, and we had a $6.00 per worksite employee per month contribution from our adjacent businesses.

Now, the additional $3.00 per worksite employee per month gross profit came from a $5.00 per worksite employee increase in the surplus component of our direct cost centers, offset by a $1.00 per worksite employee per month lower service fee and a $1.00 per worksite employee per month lower gross profit in our adjacent businesses from our original forecast.

Even though the average markup for the quarter was $192 per worksite employee per month, we did increase our average markup $2.00 per worksite employee per month for renewing business.

Now let me give you the details of the $5.00 per worksite employee per month additional surplus that was produced in Q4, beginning with the benefits cost center. The deficit in this cost center was $1.00 per worksite employee per month higher than we expected, which was the result of slightly higher benefit costs. On the cost side, we did experience a reduction in the number of COBRA participants from 6.4% of the base in Q3 to 5.4% in Q4. However, the cost per COBRA participant increased from 1.85 times the cost of the regular participants' claims in Q3 to 1.92 times the regular participants' claim cost this quarter.

The payroll tax cost center generated a surplus of $3.00 per worksite employee per month better than forecast, and was the result of higher compensation to worksite employees in December than we had expected.

Now let's discuss the workers' compensation cost center surplus results, which was also $3.00 per worksite employee per month better than expected. The additional surplus in this cost center came from lower costs, which were driven by lower severity rates. The severity rate, which is the average cost of claims, dropped 22.1% from this time last year. The incidence rate was 8.75% higher than Q4 of last year, and was primarily driven by a larger number of worksite employees that are covered today versus last year.

In summary, we had an excellent year in 2010, considering that we only had $191 of gross profit per worksite employee per month in Q4 of last year, and now we just reported $242 of gross profit per worksite employee this quarter.

The growth in profit recovery plans we initiated a year ago to deal with, number one, the Federal COBRA stimulus issues, and number two, the pricing pressure on our markup, worked extremely well, and we are in a much better position to increase gross profits for 2011.

So let me explain what we see for 2011, beginning with the pricing. The success of our renewal department that they had in Q4 has continued in 2011. We are continuing to add to the average service fee, even though there has not been much improvement in the economy. We should begin to see some improvement in new business pricing in subsequent quarters, but for now, we will just stay with an average service fee forecast of $192 per worksite employee per month.

Looking at the surplus component of gross profit, here is what we see for 2011, 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 are projecting faster growth this year, I would expect to see our surplus in this cost center to decline $3.00 to $4.00 per worksite employee per month for the full year.

Moving to the workers' compensation cost center, here is what we see. On the pricing side of this cost center, our allocations are still flat with Q4, and the workers' compensation insurance marketplace is still very soft. Our experience has been good, and we have no need at this time to raise our allocations.

On the expense side of this cost center, our costs for 2010 ended up at 0.6% of non-bonus payroll due to the efforts of our people involved in both the safety and claims management groups. We believe that we can continue to manage our expenses to a similar level in 2011, though we always start the year with a conservative estimate, so we will forecast an expense of about 0.65% of non-bonus payroll and let the upside come as we manage this direct cost.

Therefore, the effect on the surplus component of this cost center would be about $5.00 per worksite employee per month reduction to gross profit for the year. However, if claims develop out better than the actuarial estimates, which has happened many times in our past, the ultimate cost will be lower and the surplus would be higher than this forecast.

Now, switching to the benefits cost center, let me tell you how we see our deficit improving in 2011, beginning with the pricing allocations. Last year, I mentioned in several conference calls that we had been seeing quite a shift in covered employees migrating to lower-cost, higher-deductible medical plans, and we saw that again in the fourth quarter of this year. This automatically reduces the allocation amounts that we receive, and I think we will continue to see that migration in 2011.

However, the trend in health insurance costs across the country are expected to increase 10% to 15% this year, partly due to the federal mandates included in the healthcare legislation that was passed last year. Most of that cost has been baked into our trend for several years, so we do not have to increase our allocations as much as the insurance companies do, which will give us a competitive edge.

On the cost side of the equation, we have several positive indicators which should help us have a lower cost trend in 2011. First, as you may remember, the federal government subsidy period for newly-eligible COBRA participants expired May 31 of 2010, and the number of enrollees in that program declined from a high of 7.2% of our total covered employees in Q4 of last year, down to 4.9% at the end of January 2011.

You may also remember that a COBRA participant's claims are about two times the cost of a regular participant's claims. So to have a declining base of more expensive participants is really good news. We expect this positive trend will continue until we get back to our historical level of about 3.7% later in 2011.

Second, as I mentioned earlier, we have continued to see substantial migration of plan participants moving to the lower-cost, higher-deductible plans, which should also reduce our costs.

Third, we made a few plan design changes that went into effect on January 1 of this year, which increased the deductibles on our pharmacy benefit and are thus helping to reduce our costs.

And fourth, you may remember that last quarter we announced the signing of a new three-year agreement with United Healthcare that also went into effect January 1 of this year, and has built-in reductions to administrative fees as our covered worksite employee base grows. Therefore, factoring in this information into our forecast, we should only see a 4% to 5% increase in benefit costs for the full year, with the first half of the year being on the low end of this range and the last half of the year moving towards the higher end of the range, as the deductible and co-pays of participants are met.

So looking at the contribution to gross profit from the benefits cost center, we should see a nice reduction to the deficit, which should more than offset a forecasted reduction in the surplus by the other two cost centers.

In total, our forecasted surplus this year should be in a range of $39 to $41 per worksite employee per month. Last, but not least, our adjacent business services, which added $6.00 per worksite employee per month of gross profit in Q4 is expected to increase to a range of $13 to $15 of gross profit per worksite employee per month in 2011. This is largely due to the contributions from the three acquisitions that we made since last summer.

Additionally, we are beginning to see some growth in several of those businesses. As we continue to help them grow with sales and marketing support, we should see an increase in gross profit each quarter from these businesses.

So when you combine the service fee, the surplus and the adjacent business contribution, we should see our annual gross profit per worksite employee per month end up in a range of $244 to $248, well above the $232 level that we had in 2010.

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

Thank you, Richard. My remarks today will begin by addressing our most significant accomplishments and our strong finish in 2010. Next, I will comment on our 2011 key initiatives, including accelerating our PEO growth, improving our adjacent business development plan and launching our new corporate identity. I will conclude my part of today's call with some thoughts on achieving our 25-year anniversary, which will occur next month.

2010 was quite a remarkable year for Administaff. When the year began, we were suffering the most severe effects of the prolonged recession and poor labor market. These factors resulted in a 15% unit growth decline from the 120,000 worksite employee peak and an operating loss in the prior quarter due to a spike in COBRA and other benefit costs.

So this time last year, we announced and implemented a plan to return to growth and profitability. We started the year with expectations to recover from a low of 103,000 worksite employees and reach 109,000 by year-end and generate $0.50 earnings per share. I am very pleased with the performance of the organization in rebounding more quickly and more effectively than expected by achieving a level of nearly 112,000 worksite employees and $0.86 per share.

The growth was accomplished primarily through record-level client satisfaction and retention levels and regaining our footing in the sales effort. The improved profitability was the result of realigning both our direct costs and operating expenses and the higher unit volume from our accelerated growth recovery.

Our client satisfaction and retention has truly been a highlight throughout 2010, and contributed substantially toward a step-up in our growth as we began 2011. Client satisfaction ratings were over 95% for both the fourth quarter and the full year. Our client retention averaged 99% each of the last three quarters, up from 98.5%. This systemic improvement showed up in a big way in January, which historically represents the month with the highest attrition rate. Retention for January of both 2010 and 2009 dipped to 91%, reflecting 9% attrition. In January of this year, attrition was less than 7%, which represented dramatic improvement and resulted in approximately 2000 fewer paid worksite employees that left with terminating accounts compared to the two prior years.

Our fall selling campaign was also successful and helped the Company to a strong finish for the year. Sales were at 94% of target for Q4 and 93% for the full year, and resulted in a 19% increase in paid worksite employees from new sales over 2009. Sales efficiency for Q4 exceeded one sale per salesperson, which was an 11% improvement over the same period last year. This was a solid step in the right direction, but still leaves quite a bit of room to reach historical norms.

Midmarket sales were up 54% over 2009, which continues to demonstrate our progress in refining our sales and service model to this attractive target market. Our business alignment survey, which is now provided as a step in the sales process, has proven to be a strong differentiator and a predictor for future sales.

As a result of higher sales and improvement in client retention, we were able to begin 2011 with over 112,000 worksite employees, a 9% increase over January of 2010. This occurred in spite of the persistent sluggish labor market, which has yet to contribute in any meaningful way to our recovery. The labor market has been weak in recent periods, but compensation data from our client base indicates hiring may be right around the corner. Average pay increases are back up above 3.5% and overtime as a percentage of base pay is at 9%.

Commissions we paid on behalf of clients to their sales staff showed a surprising increase of 16% over Q4 of last year, which is the most direct view into improving sales at our small to mid-sized business client base.

The basic blocking and tackling necessary in the core business to turn things around was impressive in 2010, but equally impressive was the progress we made applying what we've learned to transform the Company for the future. Over the course of 2010, we finalized plans and implemented a new strategy for faster long-term growth in the core PEO business. Our plan is to develop profitable adjacent business units with recurring revenue streams, strong growth potential and substantial cross-selling opportunities to grow our core PEO business.

This new strategy is nothing short of explosive in the potential to grow the core PEO and the overall revenue and earnings of the Company. The growth of the PEO contributes to the adjacent businesses through the nine out of 10 prospects that are not ready for the full-service offering, and each adjacent business becomes an incubator and feeder for the PEO.

Establishing this new strategy across the Company was the icing on the cake of a great 2010.

We used a build, buy and partner strategy to develop an array of HR and business service offerings to begin to capitalize on lost PEO prospects. This included successfully completing two acquisitions in the middle of the year and a third in the first week of this year. As part of our fall campaign, we rolled out our adjacent business development plan with eight offerings and tested our ability to refer customers across the businesses. Our sales team generated over 1600 leads for the adjacent businesses and provided an immediate lift for these businesses.

So from my point of view, 2010 was an excellent year, recovering our profitability, regaining our growth momentum and laying the groundwork for a powerful new PEO growth and adjacent business development plan.

We are beginning 2011 from a position of strength to attack our three most significant initiatives for the year. First, we intend to continue top- and bottom-line growth in our core PEO and midmarket business.

Secondly, we will continue to invest and grow our adjacent businesses to prove up our cross-selling and new growth model. And third, we will launch the rebranding of our Company to align with our long-term strategy.

Our plan to accelerate growth in the PEO operation is centered on continuing to improve sales metrics in our core market sales and beginning to scale up our midmarket sales. We are beginning the year with 287 trained sales staff, of which 60% have more than 18 months' experience. In order to increase sales this year, we intend to create more opportunities in front of qualified prospects. We expect this to be somewhat easier than last year on the backdrop of improved business owner sentiment compared to a year ago and considering the lead production from our adjacent business customer base.

We also expect to ramp back up the number of trained sales staff over the course of the year to a range of 310 to 320 trained sales staff. Normally, sales efficiency for new sales staff is far below tenured reps, so to be conservative, we have factored in only a 0.8 sales per salesperson per month into our growth forecast. This is higher than the 0.7 achieved last year, but still below our historical target of 1.0.

We are also ready for the first time to begin to add more midmarket sales professionals, because we are comfortable we have a proven sales process, key metrics and a level of success to replicate. This represents substantial upside for the long-term, as each midmarket sales professional adds as many worksite employees as four or five core market reps. Since the midmarket sales cycle is longer than the core market, we have not built any additional growth from new sales staff into this year's expectation.

At these sales levels and client retention consistent with last year, we anticipate a gain of 1200 to 1500 worksite employees per month average for the balance of the year.

The second major initiative for 2010 is proving up the basic elements of our adjacent business development plan. This means setting a specific goal for PEO worksite employees sold from our adjacent business customer base and hitting that target. It also means integrating the additional offerings into our ongoing PEO sale activity. We need to make it the standard operating procedure to add the sale of adjacent offerings to our PEO sales and generate sales from the standalone offering when our bundled PEO service is not a fit.

It also means broadening our marketing effort to produce leads for all 10 business units and refining the sales engine for each separate business to grow faster. The need for a go-to-market strategy to accelerate the growth and profitability of the Company is at the center of our decision to rebrand the business.

More than two years ago, we began a very deliberate process of evaluating our brand against our growth strategy for the future. Through a great deal of research and analysis, it became apparent a new identity and brand strategy could unleash the potential we have developed over the last 25 years at Administaff.

We discovered that we have a strong brand with those who know the Company, but some limitations with the Company name and identity with the much larger audience of prospective clients we would like to convert. We also found we have very strong brand attributes and characteristics that could be leveraged through an appropriate strategy to accelerate our growth.

One key statistic was that 44% of business owners surveyed felt so strongly they knew from the Administaff name that the company was in the temporary staffing business, they will unlikely to even accept an initial phone call from the Company. Of course, we have been aware of the confusion from the name over the years. However, the recession and the difficulty getting in front of prospects drove home the need to eliminate any and all barriers from getting in the door.

In addition, we found a strong connection between our corporate identity and the single PEO solution we have provided for the first 20-plus years of our history. This very strength was also a barrier to launching other businesses and taking advantage of new opportunities. In this case, the success of the brand in establishing the PEO business had a limiting effect on our new strategy to grow the PEO through new adjacent businesses.

For these and many other reasons and through a tremendous amount of careful deliberation, we have decided to rename and launch a new brand strategy for Administaff. We have been working diligently since the selection of the name last summer to execute this change on March 3, just 2.5 weeks from now. This brand and name change is far more than a simple global find-and-replace function, and will require significant but short-term investment for the Company.

This implementation will unfold over the course of the year, but the incremental expense will primarily be in Q1 and Q2 of this year. The new name aligns with our new strategy and results in a shiny new identity that I believe will take the Company to a whole new level.

Next month, we will reach a significant milestone when we reach our 25-year anniversary since my original partner and I founded the Company. We have accomplished a great deal over this time period, establishing and becoming the national dominant player in our industry. We developed the most successful business model and most comprehensive business service offered in the marketplace. If a small- to midsize company wants to improve their business performance as much and as fast as possible, there is no other service available to compete with the PEO service we have refined over the last 25 years.

However, one frustration we've had looking back is that we've not helped as many companies as we could have. We have balanced growth and profitability well and created substantial value, but our growth potential is much greater than we have demonstrated to this point. 25 years is long enough for the growth strategy we established early in our development. It's time for a new, dynamic growth plan to be implemented, and it will be on March 3.

I look forward to detailing the elements of the coming launch at our Shareholder and Analyst Day we have scheduled for March 30 and on our next conference call.

At this time, I would like to pass the call back to Doug to provide our specific guidance for 2011.

Thanks, Paul. Before we open up the call to questions, I would like to provide our 2011 financial guidance. As Paul just mentioned, we will be operating under three major initiatives in 2011. These include continued top- and bottom-line growth in our core PEO and midmarket service offerings, investment and growth in our adjacent businesses and a rebranding of our Company to align with our long-term strategy.

While each of these initiatives is closely linked, it makes sense to look at these separately to understand the expected impact from our 2011 earnings forecast. As for our core PEO and midmarket services, we expect to achieve double-digit unit growth, increase gross profit per worksite employee and leverage our existing PEO cost structure. We also expect a rebranding of our Company in cross-selling activities from our adjacent businesses to further accelerate our PEO growth.

As for our adjacent businesses, we will continue to focus on effective integration and positioning for long-term revenue growth. This will require some upfront investment in personnel and technology; however, we will be moderate in our approach to this. We have established a budget whereby a large portion of these investments will be made from the expected operating cash flow from these businesses.

Thirdly, as Paul just mentioned, we will be implementing a new branding strategy this year. Certain costs associated with the launch of our new brand will only impact 2011. So when providing guidance, I will provide sufficient details to understand the short-term impact on our operating expenses and bottom line.

I will begin by discussing our full-year 2011 guidance and the expected impact of certain initiatives on the implied EPS (technical difficulty).

As for average paid worksite employees, based upon Paul's earlier comments regarding our 2011 sales and client retention plan and the strong results of our recent year-end selling and renewal season, we are forecasting a range of 117,500 to 119,000 for the full year, a 10% to 11% increase over 2010.

As for gross profit per worksite employee per month, based upon Richard's earlier comments, we expect to be in a range of $244 to $248 for the full year.

As for our operating expenses, our 2011 forecast includes approximately $13 million of incremental expenses directly related to our rebranding efforts, most of which occurs in the first half of the year. We also expect to incur an incremental $8 million for our full year's operating expenses on our three recent acquisitions.

So the apples-to-apples comparison to 2010 would be approximately $199 in operating expense per worksite employee per month in 2011 compared to the $204 in 2010. And when including both of these items, we are forecasting total operating expenses in a range of $302 million to $306 million for the full year.

Similar to prior years, the high end of our full-year operating expense guidance is tied to additional incentive compensation which will only be accrued upon achieving higher operating results.

We are forecasting net interest income in a range of $1 million to $1.5 million for the full year, and estimating an effective income tax rate of 41% and 26 million average outstanding shares.

So our guidance, which includes a $0.30 per share impact of costs associated with the launch of our new brand implies an EPS range of $0.98 to $1.13 for 2011. Excluding these incremental costs, we would be expecting an EPS range of $1.28 to $1.43. Our more normalized earnings, once our rebranding costs are behind us, are reflected in the guidance for the second half of the year, where each quarter's earnings are expect to be in a $0.30 to $0.40 per share range.

Now let's discuss our first-quarter guidance and the expected seasonal pattern in some of our key metrics. As for paid worksite employees, we are forecasting a range of 112,500 to 113,000 for Q1. Thereafter, we expect sequential growth between 2.5% and 3.5% for the remaining quarters of 2011.

Based upon Richard's earlier comments, we are forecasting gross profit per worksite employee per month of $253 to $257 for the first quarter.

As for the quarterly pattern in our gross profit key metric, it is typically higher in Q1 because of the surplus we generate on a higher level of payroll taxes prior to worksite employees reaching certain wage limits. We expect a sequential decline in Q2 of about $20 per worksite employee per month as new business comes on and creates a drag on the payroll tax surplus. Thereafter, we expect sequential increases of approximately $5.00 in Q3 and $10.00 in Q4 as pricing increases roll in throughout the year.

First-quarter operating expenses are expected to be in a range of $77.5 million to $78.5 million, and include the usual expenses associated with the restart of payroll taxes on our corporate employees, our annual sales convention and sales incentive [script].

Additionally, Q1 expenses include the incremental rebranding costs of approximately $6 million. While we have historically experienced a step-down in operating expenses from Q1 and Q2, we expect expenses to remain sequentially flat this year as incremental branding costs of $4 million in Q2 will offset the typical sequential reduction in G&A costs. Thereafter, we expect a sequential decline in total operating expenses of approximately $5 million in Q3 as rebranding costs decline, and then a sequential increase of $2.5 million in Q4, which includes the typical advertising surrounding our fall sales campaign.

So to summarize the impact of our rebranding initiative, we expect the following effect on our quarterly EPS. $0.14 per share in Q1; $0.09 per share in Q2; $0.04 per share in Q3; and $0.03 per share in Q4, totaling the $0.30 per share for the full year.

As for our cash flow, our full-year guidance implies EBITDA plus stock-based compensation of approximately $70 million. We are budgeting 2011 capital expenditures of approximately $15 million, including amounts related to signage under our new brand.

In summary, we are excited about the momentum in our PEO and midmarket services, the growth potential in our new adjacent businesses and the alignment of our branding with our long-term strategy. We look forward to updating you on the results of these initiatives throughout the year. As Paul mentioned, we would like to invite you to our Investor Day scheduled for March 30 at our corporate headquarters. If you would like to attend, please contact our Investor Relations department for details.

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

(Operator Instructions) Tobey Sommer, SunTrust.

Thank you. I guess I will ask a question about the timing of the rebranding. Paul, is this something that you've had gestating for a while and were kind of waiting for the own momentum in sales in the business to reaccelerate?

Well, the timing is more related to the deliberate process of coming to a decision and then the effort that it takes to really do it well, do it right, and to minimize the expensive side but maximize the benefit. So we've been real careful about the staging of it, and now is the time. We are really excited to be launching here in a couple weeks.

I wanted to ask a question about the salesforce and growth there. Have you already initiated hiring efforts in direction sort of growth? In conjunction with that growth in the salesforce, do you have any office openings embedded in your 2011 plan?

Actually, no, we don't have any office openings scheduled in the plan, simply because we have room to backfill these sales staff. We want to ramp it up to about the 315 or 320 range or so, and we have room without opening new offices to do so.

Okay, and lastly, are there any incremental changes related to healthcare reform that are due to impact the benefits side this year, and would they be incrementally positive in terms of Administaff's kind of pricing versus the market?

Absolutely. As I spoke to briefly in my remarks, Tobey, the healthcare reform bill that was passed last year included several items that are now mandated that insurance carriers have to include in their coverage package for everybody. And most of those items had already been factors that were included in our plan.

As an example, now you have to cover an employee's children up to age 26 in the health plan, if they are in school or whatever. And our plan historically had age 25. So adding one more year really wasn't that big of a deal.

The second issue that was big -- at least is big for the rest of the insurance companies -- is the fact that there were no pre-existing conditions -- that limitation of pre-existing condition has now been removed. And for us, we've never had a pre-existing limitation in our plan as people came on. So that is a plus.

The third one is the unlimited lifetime benefit, which many, many plans, especially in the small group market, had caps $1 million, $5 million, something like that. And our plans never had a cap at all.

So when you start -- when the insurance company has to start factoring those things into their plan costs, it is going to increase the cost. And so we are in a very different position this year than we've been in in quite some time because of the fact that our COBRA participant numbers that hurt us so bad in 2009 are retracing back to normal levels.

Our forecasted trend increases 4% to 5% now because of administrative cost reductions in our new three-year agreement with United Healthcare. And the fact that the insurance companies are having to price in some of these major federal benefits that our plan doesn't have to have. So we are going to be able to increase our allocations above our trend and help to reduce the deficit in 2011, which should be a real plus year for us.

Jim MacDonald, First Analysis.

Can we talk a little bit about the acquisition and the related businesses? You are forecasting a pretty big jump there. It seems like those are about breaking even, maybe losing a little money now. And is that the -- what gives you confidence you are going to be able to almost double those businesses in size, and do you sort of expect them to keep breaking even or break into profitability?

Part of the answer there, Jim, is that for the couple acquisitions we did in 2010, you don't have full years of operating activity there. So you don't have the impact on both the gross profit or the operating expenses.

And then we just did a more recent one in January of this year, the OrgPlus product. I think when you add it all up and you look at what we expect as far as the bottom-line impact, while we are still invested in the businesses and the growth, we expect them to have approximately about a $0.08 drag or so on the 2011 earnings. However $0.07 of that is related to the (inaudible) price amortizations related to the acquisition. So EBITDA, more cash flow type impact, would be just a slight drag on the earnings in 2011.

And that ties right into my question on -- the D&A was low in the fourth quarter, even though you had already made a bunch of these acquisitions. Why was that -- why didn't we see more D&A from the previous acquisitions in the fourth quarter?

Again, we had just made the acquisitions. We were just allocating the purchase price among the different assets. And so you've got a partial piece of that, while you also had regular CapEx going down quite a bit over the past few years in the recession. And again, you don't even have anything related to the third acquisition that we did in January.

So I think a lot of it had to do with a much lower CapEx spend that we pulled back on and considering the recession that we were in; so you had that impact in the fourth quarter. We would expect an increase in that in the 2011 period for, again, the effect of full years of the acquisitions, along with some increase in our CapEx back to normal levels.

And the acquisition you did in January, is that one of the bigger ones or how does that compare with some of the other ones you did?

It was about in the same range. I think it was, you know, in that $10 million to $15 million range or so.

It is one of the larger ones in terms of the customer base acquired, and I think it is a really excellent opportunity there. Because if you have small and midsize companies that are using an organizational planning and design tool, those are really good prospects for our other HR and business services. And those are companies that are planning and trying to get somewhere and growing their companies, and we are excited about getting out there and putting a face with the name for those prospects.

Just one more and I'll let some other people come in here/ But what was the trained sales force level in the fourth quarter, just as a background?

It was about 300. This time of year, when you have the sales convention coming up, we do a little bit of cleanup there, kind of deciding who wants to stay on and is going to make it. So we are down to about 287, I think, is what we started the year with. But we were at about 300 for the quarter.

Okay. Thanks very much.

Jeff Martin, Roth Capital Partners.

Do I understand this correctly, that the incremental gross profit from your adjacent businesses is mainly due to the full year inclusion for 2011 and not so much on assuming a certain success rate in cross-selling to the client base?

That's correct. We are not factoring a lot of growth in those businesses yet, although each of those businesses have a plan to grow and grow faster this year over last year. But for budgeting purposes, those are relatively new operations, and so we didn't put a lot of that in there. What you're seeing in the increase is more the fact that we just added a third acquisition and you have a full year on the two that we acquired last year.

And then to make sure I understand this correctly, your sales force has recently been trained to sell adjacent services as well. It seems like you are fairly -- still fairly early in that stage. Would you say you are right at the beginning of a curve where you will start to see how successful that is, or where do you think you are?

Yes, that's exactly right. In fact, I wouldn't even say we've trained them to sell the other services yet. What we did in the fall campaign was test the ability for our face-to-face sales organization, the 300 or so sales staff that we had out in the marketplace, test the ability for them to refer someone -- one of our current customers or a prospect that decided not to come on to our full service. We were testing their ability to refer someone to any one of the other business operations. And that is where they generated 1600 leads for the other businesses. And that is substantial for them. Those businesses are small. When you get those kind of leads, we definitely saw it provide a lift. And that was just starting to scratch the scratch of the surface.

So we have the entire sales organization coming in for the convention at the end of this month -- or actually, the first week of March, when we will have our formal announcement about the rebranding. So we will be taking another step in the training process. We actually have district managers in this week to go through an additional step in kind of the training of where we are going from a sales organization. But it definitely, as you say, is early on in the process.

Okay. And then on the regional breakdown of the business, the two bigger pieces are going in different directions -- Southwest was down but the Northeast grew nicely. Could you give us some underlying factors that are going on in those markets and what your expectations are?

You know, it is mostly driven by kind of where the attrition occurs and any kind of high spots where we have some good success rates on the sales side. I would say the Northeast, the sales efforts have been consistent and stronger there than other areas. In the Southwest, where you have the bigger base of business compared to the size of the sales staff, it is always a bigger challenge to replace the terminating accounts. So it is really more driven by the number of sales of staff we have relative to the size of the base, and not worth trying to read too much into that.

Okay. And then could you quantify the impact of lower administrative fees on your policies to gross profit in 2011?

Yes. When we made the announcement last -- I guess it was in September of last year, the structure of the new plan, actually our administrative rate declines as we grow worksite employees. And based on where we were at that point in time, our forecast over the three years was that this would be about an $8 million savings in the gross profit area -- or in our cost reductions over that time. And of course, we've grown since then, so that number is probably going to be a little bit more than that.

Great. It sounds like things are really starting to improve for you guys. Good luck.

Mark Marcon, Robert W. Baird.

I was wondering if you could talk a little bit about the aligned tools that you have, like HR tools. Can you give us a little bit of a feel in terms of where you are seeing the greatest success? What are you seeing in terms of the adoption? How frequently are people adopting it? And what is leading to the -- which tools specifically are going to lead to the higher gross profit?

That's good. Let me kind of go through -- we have -- in our adjacent businesses, we have four that I would call our SaaS bundle, if you will, our Software as a Service bundle, that eventually I want to take to what I call Software with a Service, where we add a layer of professional support in terms of -- for example -- I'll use an example -- the performance management tool.

We just launched our Performance Now Software as a Service in November, and have had some pretty good adoption already. Now, over the course of 2011, we intend to bundle that into the PEO bundle on our current base, which does two things. Number one, it provides a very sticky technology component to our customer base, and also offers an opportunity, if anybody does leave the PEO relationship, to keep that technology when they depart, and for us to keep a revenue and keep a relationship.

So we will also, by adding that product to the 6000 or so -- or over 5000 clients, that gives us a real good base to continue to move that product along and establish ourselves in that area.

But we also see the ability for us to sell the bundle together. In other words, whether someone comes in from the time and attendance point of view, or comes in from the expense management or performance management or organizational planning, you can package them together, bundle them together and cross-sell those very, very readily.

So we intend to kind of focus on that. Those, I expect to be pretty fast-growing businesses and we will see a nice addition to gross profit. Now, as Doug was saying, we've opted to keep our level of investment in these businesses pretty much in line with the cash flow that they generate. And so even though there is about an $0.08 loss baked in here, $0.07 of that $0.08 is in the amortization of the acquisition cost. So we believe we can invest at that level.

And because of the leverage coming from our sales staff that is already out there selling PEO services, that is a very low cost of acquisition for these adjacent businesses. And then as they grow, as people use those products, they develop their relationship with us, and we believe that we are going to be able to harvest them into full-service customers over time. So that is how we see the strategy playing out.

Which ones are you having the greatest level of success with in terms of selling? Which one is resonating the most?

I would say our time and attendance business has probably grown the fastest since they came on, followed by expense reimbursement. And those are probably the top two.

Because there is an obvious ROI that is associated with those.

Correct.

Great. So when we take a look at that incremental gross profit that we are going to get out of those, how much of that is attributed to those two, and how penetrated are those relative to where they could be?

We have not hardly penetrated at all on those products. There is plenty of room for those to grow. And we didn't really break out the detail of those. We will probably go into some more detail at our Analysts Day and try to give you all a better picture of all that.

Okay. And then with regards to just the core PEO service fee, what are you seeing from a pricing perspective in terms of competition? Now that the environment is improving, do you think you can increase the core service fee? Or how should we think about that both near-term and longer-term?

Yes. Definitely, I think you will see that the market component of the service fee on new business sold improves in 2011 as the economy continues to stabilize/or maybe improve. So yes, we believe the worst part is behind us there.

From the competitive landscape, our service offering is so much different than those that compete against us. Our sales people are really good about explaining how our fees are different and why there is a higher value to our service fee than what is in the marketplace.

And so we just -- we see renewal pricing already, as I mentioned in my prepared remarks, has increased even through the month of January of this year. And so we are feeling real good about the value proposition, and it is just a matter of as the economy improves, we will get more of those dollars back.

Yes, I think this is normal for the cycle and the stage in the cycle we are in, where you get the volume to recover first on the sales side, which we are getting there. That was -- we had a good finish to the year. Volumes recovering, and you generally expect pricing to recover not long after that. We didn't factor that into our expectation for this year, but we certainly will be attempting to allow that to be some upside.

Okay. And then the $13 million in incremental spend for rebranding, what are the objectives? What are the metrics that you are hoping to accomplish through the rebranding? And I'm assuming you're not going to tell us the new name until beginning of March.

That is correct. March 3, we will be announcing that and getting that out there. And I think it will be evident at that time the type of potential and capability from the new brand strategy, which will include new mark, new byline, new approach to the advertising and to the sales effort.

And of course the purpose of it -- again, I mentioned in my script that we had a lot of difficulty during the down economic time of just getting in the door. And when 44% of the prospects think you are a temp agency just because of your name, when you don't even do temporaries, that -- 44% said they wouldn't even accept a phone call. You don't notice that that much when there is 600,000 perfect-fit businesses for the 300 sales of staff to call on. But when things get really tougher in an economy, hard to get in the door, you start to really notice that it's that tough.

And we're just going to remove that barrier. We hope that helps improve the number of opportunities. But we also think that, obviously, the main effort here is to increase our number of sales per salesperson per month and grow the business back. And we think that this will really allow that to come about.

Michael Kim, Imperial Capital.

You talked a little about the expansion in paid worksite employees through the balance of the year. Are you assuming a little greater strength in hiring activity among your existing PEO clients? Or how much of that do you think will be driven by new logos added through the course of the year?

We did not bake in a lot of upside from the labor market because it is just too unpredictable. But we also didn't assume that it was going to be a drag, which I don't think anybody is looking at that at this point.

So we've had a very slight benefit over the last couple quarters, and we kind of figure that's about where it would be for now. So most of the growth is driven by continuing the successful client retention rates and satisfaction, and then having the sales effort continue to recover some. Like I said in my script, we baked in about a 0.8 sales per salesperson per month compared to last year of 0.7.

Okay, great. And then on the new brand spending, some of the other companies I've seen, it is normally a multiyear process. Can you talk a little bit longer term what the elevated or incremental spend might look like in 2012, 2013, and what you anticipate the total level of spending to rebrand the Company?

We -- historically, we've been a pretty significant brand developer, been a pretty significant advertiser, because we were kind of a category of one in an industry we created. So during the down period of the recession, we cut back a little bit, just because it was obviously the right thing to do -- when business owners were in the foxhole anyway, the advertising wasn't going to get them to open the door.

So I don't see us having a huge new level of spending from now on. We have this incremental $13 million, most of it in Q1 and Q2. A little bit of a drag in the out quarters this year. But after that, I think to be at the kind of levels where we have been prior to the recession will be enough to continue to punctuate the branding effort that we need to keep the activity going.

Okay. and then one last question on CapEx. Beyond this year, the outlook for 2011, are you looking at CapEx starting to migrate back down to sort of historical levels?

Historically, prior to the recession, we've been in this $15 million or so range. Then we dropped to (technical difficulty) and 8, 7 or so, in that range, over the past two to three years. So I would say the normalized CapEx spend is about the $15 million level that we are going to plan on spending in 2011.

Okay, great. Thank you very much.

Michael Baker, Raymond James.

In terms of the January worksite employee count, can you give us a sense of what percent is from midmarket? And what that compares to, say, the same time last year?

Actually, we have a nice step-up in our midmarket business of over 20% from the year prior, and I believe the base business, if you looked at it, it was probably around 6 (inaudible) or so.

And that is -- some of that is not just the selling of those midmarket customers, but at year-end, we also reclass some customers that grew into that. We actually do that each quarter -- but when customers grow into the midmarket. So it is both -- it is a combination of a successful selling effort, nice retention on the midmarket business and having some transfer in.

Then when we think about kind of the margin profile of those, the PEO versus kind of midmarket, and particularly kind of the onboarding of midmarket, can you update us on your thoughts around that, how we should think about that?

Just from the standpoint of contribution, midmarket accounts have a lower gross profit per employee contribution, but a higher operating income per worksite employee contribution, because you're leveraging all that cost over a bigger base. So it actually works out fine in the model, depending on how fast you are growing in each of the two different businesses.

As far as onboarding, this is an area where we made progress on this a couple of years ago, where we have what we call a zero defect first payroll, and an incredible process for bringing these customers on, that we are getting extremely high marks from. And it is a very well-planned and executed effort and gets us off to a real good start.

Thanks. And then just one separate question. At one point, you indicated about a year ago, in the heat of the healthcare dynamic, that you might consider kind of a relook at risk you were taking. And I was just wondering if that's kind of more back burner now relative to what the branding push is, or just kind of updated thoughts on where that stands.

I'll let Richard address that directly, but I will just say that we have -- we are spending a little more time defining our segments, and we are going to pay close attention to what we call our entrepreneurial segment, that less than 10 employees. And I think there are some changes coming in that area, and that will have -- not for this year -- but I'm talking about in the out years, that is the growth where they're going to have more options on where to get coverage and to get credits and to calculate whether they should just let people get it on their own or whether they should get it through an exchange.

We think that is going to be positive for us because we are going to be in a position to help them figure that analysis out and help them figure out where they need to go. And actually those, as you know, in a benefit plan, those smallest of customers normally contribute a lot of losses.

You took the words right out of my mouth, so I don't have anything else to add.

Thanks for the update.

At this time, there are no further questions. I will now turn the call back over to Mr. Sarvadi for any closing remarks.

All right. Well, thank you very much for being a part of the call today. And I would like to once again invite you to our Analyst Day here at our Company on March 30, and also to be on the lookout for announcements in early March to launch our rebranding effort. Thank you again, and we will see you next time.

Ladies and gentlemen, this concludes today's conference. Thank you all for participating, and you may now disconnect.