Insperity Inc (NSP) 2011 Q1 法說會逐字稿

Good morning. My name is Carly and I will be your conference operator today. I would like to welcome everyone to the Insperity first-quarter 2011 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 today 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'd like to turn the call over to Douglas Sharp. Mr. Sharp, please go ahead.

Thank you. We appreciate you joining us this morning. Before I begin, I would like to remind you that any statements made by Mr. Sarvadi, Mr. Rawson or myself that are not historical facts are considered to be forward-looking statements within the meaning of the federal securities laws.

Words such as expects, intends, projects, believes, likely, probably, goal, objective, outlook, guidance, appears, target, and similar expressions are used to identify such forward-looking statements, and involve a number of risks and uncertainties that have been described in detail in the Company's filings with the SEC. These risks and uncertainties may cause actual results to differ materially from those stated in such forward-looking statements.

Now let me take a minute to outline our plan for this morning's call. First, I'm going to discuss the details of our first-quarter 2011 financial results. Richard will discuss trends in our direct costs, including benefits, Workers' Compensation and payroll taxes, and the impact of such trends on our pricing. Paul will then add his comments about the quarter and our plans for the remainder of 2011. I will return to provide our financial guidance for the second quarter in an update to our full-year 2011 guidance. We will then end the call with a question-and-answer session.

Now let me begin today's call by discussing our first-quarter results. Today, we reported first-quarter earnings of $0.33 per share, which was significantly above both our expectations in Q1 2010 earnings of $0.09 per share. These results included a $0.10 per share impact of incremental rebranding costs.

As for our key metrics, paid work-site employees averaged 112,409 for the quarter, an increase of 9% over Q1 of 2010, and just slightly below the low end of our forecasted range. Gross profit per work-site employee per month averaged $270. This was significantly above both our Q1 forecasted range of $253 to $257 and the $235 reported in Q1 of 2010.

Operating expenses totaled $75.8 million, or approximately $2 million below the midpoint of our expected range. We generated $21 million of EBITDA plus stock-based compensation, and ended Q1 with $141 million of working capital and no debt.

Now, let's review the details of our first-quarter results. As I just mentioned, average paid work-site employees increased 9% to just over 112,400 for the first quarter. Client retention averaged 96.8%, which was an improvement over the 96% retention achieved in Q1 2010. Work-site employees paid from sales came in slightly below our forecast. However, sales momentum continues to build, which Paul will discuss in a few minutes.

First-quarter revenues increased 17% over Q1 of 2010 to $536 million. This was a result of the 9% increase in average paid work-site employees, combined with a 7% increase in revenue per work-site employee per month.

Looking at first-quarter revenue contribution in year-over-year change by region, the Southeast region, which represents 10% of total revenue, increased by 5%; the Northeast region, which represents 26% of total revenue, increased by 29%; the Central region, which represents 15% of total revenue, increased by 15%; the West region which represents 20% of total revenue, increased by 22%; and the Southwest region, which represents 29% of total revenue, increased by 9%.

As for our gross profit results, Richard will discuss the details in a few minutes, so I'll just provide some brief comments. Gross profit per work-site employee per month averaged $270, which was $15 above the midpoint of our forecasted range. Surpluses achieved in each of our direct cost programs succeeded expectations, while service fee pricing came in at forecasted levels. Approximately 74.5% of work-site employees were covered under our health plans in Q1 at an average cost of $803 per covered employee per month. This was a 2.7% increase over Q1 of 2010.

As expected in this weak labor market, state unemployment tax rates increased over 2010. However, final rates came in lower than our estimates. As a result, payroll taxes as a percentage of total payroll, increased less than expected from 9.4% in Q1 2010 to 9.6% in Q1 this year. As for our Workers' Compensation program, costs totaled 0.61% of non-bonus payroll, below our forecasted Q1 cost of 0.65%.

Actuarial loss estimates resulted in a $1.9 million reduction in previously reported loss reserves in the first quarter of 2011. This compares to a $2.1 million reduction in Q1 of the prior year. And lastly, our adjacent businesses contributed approximately $11 to gross profit per work-site employee per month during Q1 of this year, up from $3 in Q1 of 2010.

Now let's move on to operating expenses, which totaled $75.8 million for the quarter, or approximately $2 million below the midpoint of our forecasted range. These lower expenses included a shift in advertising of approximately $1 million from Q1 to Q2, and also $700,000 in savings in the G&A area of our rebranding efforts. Now while we reported a 10% increase in operating expenses over Q1 2010, when excluding the incremental rebranding costs, and operating expenses associated with our mid-2010 and January 2011 acquisitions, total operating expenses were relatively flat.

Interest and other income for the quarter totaled approximately $280,000, within our expected range; and our effective income tax rate increased from 42% in Q1 2010 to 43% in Q1 2011. As for our cash flow, EBITDA plus stock-based compensation increased from $9.5 million in Q1 2010 to $21.2 million in Q1 of this year. Cash outlays included cash used in the previously announced acquisition of OrgPlus assets of $10.8 million; cash dividends of $4 million; repurchases of just over 105,000 shares at a cost of $3.1 million; and capital expenditures of $3.3 million.

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

Thank you, Doug. I'll begin my remarks this morning by providing you with the details of our excellent first-quarter gross profit results. And then I will share with you our gross profit outlook for the balance of 2011.

As many of you know, our gross profit has historically come 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 cost. We have now added a third component to gross profit, which comes from the adjacent businesses that we have acquired, built or partnered with.

As Doug just reported, our gross profit per work-site employee per month this quarter was $270, which was $15 more per work-site employee per month than we had forecasted. The service fee component of our markup averaged $190 per work-site employee per month. The surplus component was $69 per work-site employee per month, and the adjacent businesses contributed $11 per work-site employee per month.

Now this additional $15 per work-site employee per month gross profit that came from better-than-expected results in each of our direct cost centers. Our average markup for the quarter was $190 per work-site employee per month, which was in line with our forecast, and the $11 per work-site employee contribution from our adjacent businesses was also in line with our forecast.

So let me give you the details of the $15 per work-site employee per month additional surplus that was produced this quarter, beginning with the benefits cost center. The deficit in this cost center was $8 per work-site employee per month lower than we expected, which was the result of higher pricing allocations combined with lower benefits cost.

On the cost side, we experienced a further reduction in the number of COBRA participants, dropping from 5.4% of the base in Q4 to 4.5% of the base in Q1. The claim costs per COBRA participant also declined slightly from Q4 of 2010. And we also experienced a lower than expected amount of large loss claims this quarter.

Now let me explain the additional $5 per work-site employee per month surplus in the payroll tax cost center. In the fall of each year, we make an estimate as to what our state unemployment rates will be for the next year. During the first quarter of each year, we receive the actual rates from the states, and they came in lower than our forecast, which led to our additional surplus.

Now let's discuss the Workers' Compensation cost center surplus results, which was $2 per work-site employee per month, better than expected. This additional surplus in this cost center came from lower costs as a result of lower administrative fees, and a slight increase in the discount rate that we used in our reserve calculations. In summary, our first-quarter results were very positive, and we have set the stage for what we expect to be our largest gross profit year in our history.

Now I'll explain our gross profit expectations for Q2 and the balance of 2011, beginning with pricing. We increased our markup $4 per work-site employee per month for customers that renewed in the first quarter. Additionally, our new business sold in the first quarter was $5 per work-site employee per month higher than new business sold in the first quarter of last year. If we continue to sell and renew clients at this rate, we should be able to achieve our original forecast of $191 per work-site employee per month average markup for Q2 and $192 per work-site employee per month average markup for the full year.

Looking at the surplus component of gross profit, here's what we see for Q2 and the full-year beginning with payroll tax cost center. You may recall that our payroll tax cost center surplus declines each quarter throughout the year as employees reach their specific wage limits. The surplus that we earned this quarter will continue into the second quarter, but certainly not to the same magnitude.

Moving to the Workers' Compensation cost center, here's what we see. On the pricing side of this cost center, our allocations are still the same as Q1. And our claims experience has been good, so we have no need at this time to raise our allocations. On the expense side of the cost center, our costs have declined for the reasons that I mentioned a few minutes ago. So we will lower our expense forecast from 0.65% of non-bonus payroll to 0.63%, and let the upside come as we effectively manage this direct cost.

Now switching to the benefits cost center, let me tell you how we see our deficit in this cost center changing for Q2 and the balance of 2011, beginning with the pricing allocations. We are continuing to see employees migrate to lower-cost, high-deductible medical plans, which automatically reduce the allocation amounts that we receive. This trend should continue for the balance of 2011.

As I mentioned last quarter, the trend in health insurance costs across the country are expected to increase 10% to 15% this year, partially due to the federal mandates included in the healthcare legislation that was passed last year. Now, 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, which gives 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 for the balance of 2011. As I mentioned a few minutes ago, the number of COBRA participants has continued to decline, and we should approach normal levels of participation by the end of this summer. 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 actually a good thing.

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

Third, the planned design changes that went into effect on January the 1st of this year, which added a deductible to our pharmacy benefit and contributed substantially to our lower cost, will become less of a factor in reducing our expenses as the year goes by.

And last, you may remember that we entered into a new three-year agreement with United Healthcare, which went into effect January the 1st of this year, and has built-in reductions to the administrative fees as our covered work-site employee base grows. Therefore, factoring in this information into our forecast, we should expect to see a year-over-year increase in benefits cost of 3.5% to 4.5% each quarter for the balance of the year, moving towards the higher end of the range later in the year as deductibles and co-pays of participants are met.

Now this is lower than our original forecast of 4% to 5% year-over-year cost increases that we mentioned last quarter. Therefore, the contribution to gross profit from the benefits cost center should improve slightly from our original forecast at the beginning of 2011. In total, our revised surplus should now be in a range of $39 to $41 per work-site employee per month for the second quarter, and $46 to $50 per work-site employee per month for the full year.

Finally, our adjacent businesses services, which added $11 per work-site employee per month of gross profit in Q1, should increase each quarter throughout the year, and average $13 to $15 per work-site employee per month.

At this point -- so when you combine this service fee, the surplus, and the adjacent business contribution, we should see our gross profit per work-site employee per month end up in a range of $241 to $245 per Q2, reflecting the seasonal quarterly payroll tax effect on this metric. For the full year, we expect to reach a record level of gross profit per worksite employee per month in a range of $251 to 254.

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

Thank you, Richard. This morning, my comments will include highlights of the first quarter, including an update on our transition to Insperity. I'll also discuss progress on building our sales momentum and our near-term growth drivers for the business that feed into our expectations for the balance of the year. I'll conclude my remarks with the critical success factors we're focused on for the balance of the year that set our course, as we look ahead to 2012 and beyond.

Thanks to the Herculean effort by a large team of Insperity employees led by our marketing group, we had a very successful launch of our new identity on March the 3rd. This major change was driven by our new growth strategy to align multiple synergistic businesses, alongside our workforce optimization solution, and leverage the substantial investment we make in our sales force. This was also driven by the desire to clear up confusion related to the Administaff name, which was a hindrance in gaining understanding and selling opportunities among prospects regarding our PEO offering.

The goal of the rebranding is to increase the number of opportunities to offer our multiple business performance solutions, and thereby achieve consistent, predictable, and faster growth and profitability. Although we are only two months into this new identity, we are very pleased with the early anecdotal feedback we've received regarding the new brand.

Over time, we will have more quantitative data to validate the change, but the ease of initiating a productive dialogue with prospects about what we do is all the confirmation we need right now to be excited about Insperity. It is clear that the stumbling block has been removed, and our ability to explain our workforce optimization and other business performance solutions without the need to explain we are not in the temporary help business.

Our launch also included a substantial level of national TV and radio advertising that's having the desired effect. Our new ads focus on the inspiring business performances of our clients and the role we play as a trusted advisor. Those ads are reaching our target market with a fresh new impression.

This transition, while off to a great start, will take some time to complete. The sales organization and others across the Company are becoming familiar and fluent in the new messaging, and learning about how to communicate this new strategy. They are learning about new synergistic business performance solutions and how they help businesses run better, grow faster, and make more money. They are taking on a new role as a business performance advisor and have new information to learn to support them in that role.

We expect this will take some time to become efficient, and we are working diligently to help the organization make these changes. All the while, we are focused on continuing to grow the core workforce optimization business and regain momentum in the sales effort, which made good progress this quarter.

Lead generation and corresponding sales activity, including first calls and census, were down early in the quarter due in part to the cessation of our advertising in December in preparation for the brand change. As a result, new sales were weak in January and February, but rebounded nicely once the new brand was announced.

For the full quarter, we had a 9% increase in work-site employees sold over the same period last year, with 11% fewer trained sales staff, which averaged 286 in Q1. Our closing rate was back over 20% of prospects quoted on the workforce optimization solution, due in part to the tenure of our sales organization, which includes 65% of our business performance advisors with more than 18 months experience.

With our new identity in place and closing rates back up to acceptable levels, it's now time to drive up the activity numbers to increase our unit growth. We expect leads, first calls and census in our core business to ramp up over the balance of the year, as our marketing, sales, and cross-selling efforts take hold.

Another highlight of the first quarter was our improvement in client retention, which was 96.8% for Q1 2011 versus 96% in Q1 2010. We have continued to see the benefit of our focus on client loyalty and first-year client experience to drive these results.

The other driver to our growth is a net gain in employment within the client base from new hires exceeding layoffs. This number was slightly disappointing in the quarter, as the year got off to a slow start in this metric. Layoffs actually exceeded new hires in January before recovering as the quarter progressed.

The key metrics we followed to forecast these numbers are stable, but not as strong as we see in a normal recovery. Commissions we pay on behalf of our clients to their sales staff were up 5.4% over the same period a year ago, but down considerably from 16% we reported last quarter, which was unusually high. We consider an 8% to 10% range for commissions to be more reflective of solid sales at our client companies.

Overtime, as a percentage of base pay, is at a reasonable level of 8% but down from 9% last quarter. Now, in spite of the moderation of these two metrics, our recent survey results and an increase in open requisitions for new hires in our recruiting business, indicate that new hires should exceed layoffs in the coming months by some level. This is not as strong a tailwind as we were hoping for, but we'll take it, compared to the last couple of years.

Our expectation for unit growth at a level of 1,200 to 1,400 work-site employees per month reflects a continuation of strong client retention, increasing activity in sales, and this very slight tailwind from new hires exceeding layoffs.

While we continue to do the blocking and tackling to reach our 2011 growth and profitability goals, we're also focused on several critical success factors that will drive our value creation as we look ahead to 2012 and beyond. These critical success factors include validating the adjacent business development plan, completing the business performance advisory transformation, and establishing our Insperity workforce optimization as the dominant comprehensive business performance solution in the marketplace.

In order to validate the adjacent business development plan, we need to continue to produce leads from each business unit and demonstrate our ability to convert this cross-selling effort into solid revenue growth across the businesses. We also need to continue to manage the growth and profitability targets for each business, as we scale these businesses to profitability.

We also have to continue our deliberate build, buy or partner strategy to add any synergistic business performance solutions that make sense. In order to complete the business performance advisor transformation, we need to initiate our bundle-plus selling system -- which we'll launch this fall campaign -- which will place our 300 advisors as the quarterback in advancing all of our business performance solutions on each of the 30,000 prospects we see face to face each year.

We also need to complete our curriculum development and begin the process for our advisors to become certified business performance advisors. And we have partnered with the University of Houston on this project, due to their leading entrepreneurship programs and business school status to accomplish this goal.

In order to establish Insperity workforce optimization as the dominant comprehensive business performance solution in the marketplace, we simply need to grow our client base significantly. This means we need to fully recover our core selling metrics and grow our sales organization, and increase the number of opportunities to help businesses succeed. This includes expanding our mid-market sales team and using our business alignment survey to help more mid-market firms set their people strategy to align with their business strategy as a roadmap to better business performance.

And as a final critical success factor, to build value in the years ahead, is to make the Insperity brand synonymous with business performance.

In each of these areas, we have the people, the plan, and the potential to bring this about. I firmly believe that the most dramatic period of value creation for Insperity is in the next three to five years ahead.

Thank you all for being a part of this exciting time for Insperity. And at this point, I'd like to pass the call back to Doug to provide specific guidance.

Thanks, Paul. Now, before we open up the call for questions, I'd like to provide our financial guidance for the second quarter and an update to our full year, 2011 forecast.

We are now forecasting average paid work-site employees in a range of 114,750 to 115,250 for Q2, and 117,000 to 118,000 for the full year. As Richard mentioned, we now expect gross profit per work-site employee per month to be in a range of $251 to $254 for the full year of 2011. As for the second quarter, we expect gross profit per work-site employee per month to be in the range of $241 to $245, which represents a $7 increase over our previous forecast. This incorporates the seasonality and payroll taxes that Richard referred to, and the continuing improvement in our benefit cost center.

We expect Q3 to be relatively flat compared to Q2, as a drag on payroll taxes from new business is offset by expected increases in both our service fees and contribution from adjacent businesses. And consistent with our initial budget, we expect the sequential increase of $10 per work-site employee per month from Q3 to Q4.

As for our operating expenses, we continue to budget in a range of $302 million to $306 million for the full year. For the second quarter, operating expenses are expected to be in a range of $75 million to $76 million, and includes $4.6 million, or $0.10 per share of incremental costs related to our rebranding effort. Operating expenses are expected to remain relatively flat from Q2 to Q3, with a step-up of approximately $2.6 million in Q4, which includes the typical advertising surrounding our fall sales campaign.

As for interest income, we continue to forecast $1 million to $1.5 million for the full year and $250,000 to $350,000 for the second quarter. We are now estimating an effective income tax rate of 42% and 26.4 million average outstanding shares.

In summary, the improvement in our key metrics guidance, coming off of Q1's positive results, implies a range of 2011 full-year earnings per share of $1.13 to $1.21, or a 31% to 40% increase over 2010. Excluding the expected incremental costs associated with our rebranding effort of $0.27 per share, our updated guidance implies a range of $1.40 to $1.48 per share or a 63% to 72% increase over 2010.

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

(Operator Instructions). Michael Kim, Imperial Capital.

Just first on the incremental brand spending, can you talk a little bit about your expectations for the production from $0.30 to $0.27, and some of the drivers behind that? If you're seeing a little bit more effectiveness in the brand transition.

Yes, as I mentioned in our first-quarter results, there's some areas, G&A areas of the rebranding, as it relates to travel associated with employees coming here for training, and also just in some of the legal and financial things that you have to do when you change a name. So that resulted in about $700,000 savings in Q1. So that brought down our initial estimate of $13 million down from [the low] $12 million. For the remaining three quarters, we intend on spending as initially forecasted.

And then is there any change in your guidance relative to the sales efficiency for the fiscal year?

No, there's not. We're expecting an increase in activity levels now that the branding has taken hold and the cross-selling effort. And we expect that's going to drive the sales efficiency numbers we expected from the beginning of the year.

And then just on the adjacent businesses, can you give us an early read on what you're seeing in terms of cross-selling, or leads or what the pipeline looks like?

Yes, I think, really on all those fronts, we're doing quite well in terms of having each business unit develop their own plan for moving customers or recommending to customers other products and services, and moving them back and forth. But the biggest move there will happen in the fall.

I mentioned in my script about our bundles-plus selling program, which will be implemented in our fall selling campaign. And we're doing all the preparation for that now. But as that happens, then our sales team, each business performance advisor will become the quarterback in terms of explaining the full spectrum of offerings that we provide on each of our sales calls. And then we'll be able to coordinate the vending of not just the workforce optimization bundle, but any additional services that they want to add to their bundle to further configure their set of offerings or set of business solutions.

So, when that happens, we expect to see a significant increase in the number of bidding or selling opportunities for across all the products that we offer. And they'll then coordinate the response to the client and bring together their combination of solutions and pricing, and should see all the boats lift from that effort.

And just maybe on an overall basis, do you have any initial expectations of what the contribution will be from adjacent businesses as maybe a percent of revenue, either this year, exiting this year, or into next year?

Well, for this year, the contribution we've been talking about, of course, is at the gross profit line. And at the bottom line, we're not expecting to see profitability. In fact, we'll have a -- I don't know -- a few cent loss, Doug, something like that?

Yes, a couple of pennies.

And -- but then on a cash flow basis, it will actually still be cash flow positive. So, this year, we're focused on making sure we get the systems in place, the processes and the habits in place that people will need to learn, so that this can be much more meaningful as we go forward.

Yes, we had talked about seeing an effect on gross profit per work-site employee per month was, of course, $11 contribution in Q1. And we expect that to go up to $13 to $15 as an average for the full year.

And then just one last question on capital allocation. Considering where you guys are at, are you looking more, from a priority standpoint, buybacks, or dividends? Or looking at more ABU acquisition opportunities? And just as a tangent to that, are you looking at anything -- or would you consider anything on a larger end of the scale?

Well, I think we'll take a balanced approach to that. Obviously, at each of our Board meetings, we kind of go through an analysis of that. But the first priority, of course, is to fully implement the game plan that we're on to grow the core business. But we also want to keep the powder dry and be able to acquire any other company that we think would really fit with this strategy. And so we're keeping our eyes open on that front. So pretty much a balanced approach to that.

Okay. Great. Thank you very much.

Jim MacDonald, First Analysis.

Good morning, guys, good quarter. It sounds like you're going to ramp up sales hiring. Maybe you can tell us where you were in the first quarter and what your plans are on sales hiring, and whether that's more than what you previously expected?

Pretty much on track. We're at 286, I believe, in trained reps for the quarter. And we plan on adding four or five a month as we now go throughout the year until we get to around September or so.

Probably the net gain in trained reps will lag that a little bit, obviously, because there's a 90-day time period for those to roll in. But we hope to have a pretty good group trained up and ready to rock 'n roll in the fall selling campaign. And we're also adding a few; but in the mid-market area, when you add, it's significant, since they, when they're successful, produce about as much as three or four trained reps in the core business.

So we're also going to grow that somewhat this year. But the main thing is to get that entire team really trained up on where we're trying to go this fall with our bundle-plus program.

Since you mentioned the mid-market, can you just give us an update on how that effort is progressing?

Yes, we've been having quite a bit of success. I think we mentioned last quarter, our growth in the mid-markets as a segment, clients with 150 to 2,000 employees was up about 26% year-over-year. So that segment's grown very nicely. And that's due to excellent client retention, coupled with now our selling effort is starting to take hold. And that's why we're ready to expand the sales team to some degree.

But I would say also our pipeline for new business is very strong -- strongest ever for sure. But it's very hard to predict when those will actually close and come on, because normally that depends on a lot of things going on at the client location. And obviously, you have a lot of them will look for a January 1 transition. So, those selling cycles are longer. It's a little harder to predict. But I tell you what, we have an excellent pipeline and we expect many of those to convert. When -- what their start dates are, that's a little harder to predict.

One quick last one. Any regional differences in terms of customer hiring? Are you seeing strength anywhere? Or just sort of limping along here?

It's really been interesting to watch, because as much as I think people want to see it getting better, it hasn't gotten much better. We're not seeing the kind of pervasive, across-the-board hiring. What we are seeing are pockets. We're seeing specific companies who have a game plan that's going well, and so they're moving ahead. But I would say it's more like when we look every month that what we call kind of a -- you have the number of clients that gained employment against a number of clients that declined. And then you also have the degree to which they added or declined.

So, the gainers, how much did they gain? And the decliners, how much did they decline? And we are seeing the numbers start to turn to positive on both of those fronts. But it's really driven by a smaller number of companies adding a lot as opposed to across-the-board, everybody add one or two boats. And so the numbers we look at to forecast a net gain in employment are stable, but not the kind of numbers that drive new adds.

For example, the overtime rate being at 8% is okay, it's a decent number, but you really need to be in that 10% range to drive employment growth, where businesses will say, gosh, we're spending too much money on overtime; if we just add people, we actually save money. So, not quite at that level. So we're kind of -- just watching to see what comes about.

Now the survey information was more positive than that. The survey information -- we had quite a few more folks that were expected to hire people as opposed to people expecting to lay off. But the smaller, mini-sized business community is pretty optimistic to begin with, so you can't just go by what they anticipate. You have to kind of look into the numbers of what they're doing and see if that matches.

Great, thanks.

Mark Marcon, Robert W. Baird.

Good morning, and let me add my congratulations. I was wondering, on the work-site employee growth, it looks like you're anticipating that it's going to pick up a little bit here relative to what we saw in the first quarter. What gives you the confidence on that front?

Well, remember, in the first quarter, you had the big transition period related to the fall campaign growth, offset by the large, percentage-wise, that terminate from clients that are lost at the same time of year.

As you get into the second quarter and beyond that retention number -- or actually that attrition number gets to be a very small number. And as sales momentum picks up and client attrition is such a small number, you automatically start to see better growth. And so we're expecting some, but not a lot -- I mean, we're expecting some momentum increase in the sales effort on pace. We're not forecasting some dramatic increase. But as the selling effort continues on the path that it's on, offset against a low client attrition number -- which we have some pretty good visibility into that, in terms of what number of work-site employees are expected to leave that are connected with clients that have left.

And then the only thing that would throw a fly in the ointment is what happens with net gain in employment of new hires versus layoffs. We're basically expecting to see what we've been seeing, which is pretty much this limp-along approach, just a little tiny tailwind, but -- and no headwind on that front.

And the sales efficiency -- what are you projecting that it goes from, to?

Well, I'm still expecting we get to 0.8 or so by year-end. But as you know, in the first quarter, that number is always low and then starts to build throughout the year. And no difference this year, although it was significantly better than last year. We had a 9% increase in sales with 11% fewer trained reps. So there was quite an efficiency gain.

But I'm not going to jump off the cliff on an efficiency gain when the numbers are that low. So either you just got to move it up and we'll see how the year works out. But, obviously, if each quarter throughout the year worked out the way the first quarter did, then we'd have a 20% increase on last year's 0.7, so that'd be a 0.85. But we think 0.8 is probably the right number to be looking at.

Great. And I have a couple of other questions, if I may. One is just with regards to the adjacent business units. Which one contributed the most over this last quarter? And where do you expect the strongest growth as that contribution continues to increase throughout the year?

That's a good question. As far as that, the gross profit line, we probably came out best in the retirement services area. But we're looking more to manage it as a portfolio, because each business has its own seasonal idiosyncrasies and so forth.

I would say the one that's showing the most consistent growth in new business, new clients, is really in the time and attendance business. But we also had a very good quarter in our newly acquired OrgPlus business. We're seeing that transition into our family of businesses very well. And we think that particular business has a nice multiplying effect for the others, because the OrgPlus organization planning and modeling and visualization tool actually becomes a front end to our other Software-as-a-Service products, because you can report the key performance indicators through this visualization tool, and display the data in the organization charts.

So there's a lot of pieces to this strategy coming together. But these are younger businesses, newer businesses, and there will be more in fits and starts. So I wouldn't want anybody jumping off and get too excited about any one and how it performs in any one quarter yet.

Okay, great. And then the last question. Add expense was less than I expected for this quarter. How should it pick up through the balance of the year? What should we look for, for that part?

Yes, and as I've mentioned, Mark, we shifted about $1 million of ad expense from Q1 to Q2, and some of that was just timing and getting the production of the TV ads in place. So you have to consider that. And that's probably -- that is the explanation as to why it came in probably a little bit lower than what you expected. I would say for the full year, we're still looking at the same ad spend, relative to our initial forecast and our initial budget.

So is that still going to be around $25 million, $26 million?

I think it's -- yes, it's near there. We didn't give specific guidance, I don't believe, on the particular line items, but it's in that range.

Okay. Thank you.

Jeff Martin, ROTH Capital Partners.

Yes, I echo the same -- strong results. (multiple speakers) Was just curious if you could go a little bit more into client retention? Is it at a level that you think you can sustain for an intermediate time period? Or is it going to be a challenge to keep it at this level?

Well, we were really pleased with the year-end transition. To come out -- I think I reported last quarter in January, at around a little over 6% attrition in January compared to typically 8% or more in the last few years. That's a -- that was a real validation of what our folks are doing over in the service organization to reduce that attrition number.

And the two key areas that they focused on were a client loyalty program. In other words, going to customers and getting a rating from them in our survey information at renewal of how strongly they felt about their renewal. Did we just barely squeak them in? Or are they a fan of the Company? Or where do they fit? Working with them to say how can we move you from this level to a higher level of advocacy, and then we find out and try to perform at that level.

But the other one had to do with an effort focused on new customers and their first-year experience with us. And I think we've made systemic changes and improvements there that are improving our retention of first-year to second-year customers. Some of that had to do with how we bring them in and how we price them into the second year. In previous years, there was a bigger step-up from the first year to the second year. And we kind of have been able to reduce that, because the initial price is not as low as it was maybe through the recession period. So at renewal time, you're able -- step-up is not as high.

So I think there are systemic things there that lead me to believe that we'll be able to produce around this level. And we're always working to improve it, but we're comfortable in this level right now.

Okay. And then in terms of the markup, on the service fee component, is that -- is there any change to your view on that? I know that in terms of the guidance, you maintained it, but are we at a point where you might have some more pricing power than you thought towards the back half of the year or heading into next year? What are your thoughts on that?

Yes. We -- when you look at this first quarter's results, it's the first time in, gosh, I'm going to say probably 18 months, maybe two years, that the customers that renewed -- we got average markup, and it was a lot of them. Had a $4 per employee per month average markup for the whole group that renewed in the first quarter. And when you (multiple speakers) --

That was the increase.

Yes, it was an increase, yes. And then when you look at new sales for the first quarter, that was a $5 per person average markup over the same period of last year.

So, we're trying to -- when you do the math, to try to -- as they roll in throughout the year, it kind of lags on the mathematical increase over the year. But we're feeling pretty good about it. I think we have pricing power. There's no doubt in my mind about it. From all the allocations that we're looking at and the different components of the direct cost, the customer satisfaction levels are, as we talked about, are high. We're not going to get wild and crazy, but I think there's a chance that maybe we could, at the end of the year, have a little bit better markup average for the full year than what we're forecasting.

Okay.

We really want to make sure we -- you always want to drive the volume first, because that's the really critical, and then pricing right behind it. So, we're focused on the volume, but we're starting to see improvements on the price side.

Sure. Okay. And then if I could dive into this, just getting a little granular, but on the Workers' Comp side, you had a $2 better than expected per month. Some from lower admin fees and some from a higher discount rate. Could you shed some insight on to the discount rate? What was the difference in the assumption? And what is the impact, if you assume 100 basis points higher discount rate on gross profit per work-site employee per month?

Yes, well, you're only discounting the current year that you're setting up. So, as we mentioned, in the first quarter, we got a $2 favorable impact; about half was from the lower administrative fees, half from the discount. It's not a big contributor. It was a big contributor in the first quarter. We don't expect to be a large contributor to gross profit for this year.

And then we'll just have to monitor interest rates going forward beyond this year. Because you remember, probably back when the rates were at 4% to 5%, obviously, you get a benefit from that. But we're not there. I don't think we'll be there in the near-term looking at rates. So, just a little bit of a contribution today -- or this year.

Well, going back to that time, it affected us in several areas. When the interest rates were at 4% to 5%, but to the tune of about $0.40 a year in earnings. So, if the interest rates get back up to that level or when they do at some point, well, we'll have extra.

Yes, (multiple speakers) [redesign] for sure.

Sure.

Okay. And then finally, just kind of echo one of the previous questions about a buyback. It seems like you've got things moving -- nearly everything moving in a positive trend. Do you -- I mean, do you think it's the appropriate time to get more aggressive on a buyback? And could you remind us what your current authorization includes?

Well, we will discuss that again at the next Board meeting coming up in a week or two. And we bought a few shares back in the quarter, I forget -- 150,000 or something. We'll be opportunistic for sure. I mean, we're not going to -- if we see a buying opportunity, we would move on it. And I think -- I don't know (multiple speakers) --

Yes, we still have about 1.1 million under authorization.

1.1 million shares?

Right.

Thanks, guys. Good luck.

Your final question comes from the line of Tobey Sommer, with SunTrust Robinson Humphrey.

Many of my questions have been asked already, but Paul, I wanted to ask kind of a broad question. How do you feel that your dashboard for managing the business has improved over the years? Are you getting everything you need, in terms of monitoring sales, first calls, all that kind of thing? Or are there improvements you're still looking to make to that dashboard? Thanks.

Yes, I think if you look at the workforce optimization core business, that thing runs beautifully. All the visibility we have is excellent. Obviously, the difficult areas there are in the areas that we have to make some estimates dealing with benefits and Workers' Comp. But as far as how all the data and information comes together for us to make business decisions with, it's really excellent. And I think we have very highly skilled individuals that are doing a great job on that front.

And then the selling side, we always -- selling, you run by the numbers and it's pretty straightforward. We certainly have the right information there. Where I think we're learning a lot, and of course, where we have some changes coming, is in broadening the arsenal, if you will, for the business performance advisors and expanding their role. And we're trying to be very deliberate and very careful because we do not want to disrupt the core workforce optimization sales.

In fact, we not only do not want to disrupt it, we're expecting to see momentum build and increase there. And we do really believe and are seeing the synergy of being able to talk about these other products and services, and call on customers from these various companies that we've aggregated. We now have over 100,000 businesses that are current customers of one or more of the 11 business units that we're running. So, all that works fine but we have new things we're learning about how to accelerate that, how to make that happen more consistently, and how to really see that leverage come into the financials.

Thanks. My last question, just curious as to how quickly the new sales in the quarter kind of re-emerged or re-accelerated as you hit the advertising pedal again? Thanks.

Yes. We had a nice boost in March. Like I said, January and February on the sales front was pretty rough. January, because we -- you know, you just have the exhausted effect from the fall selling campaign. You're getting all those customers enrolled and signed on. We had stopped a lot of the advertising effort because you don't want to do the advertising under the old brand. And so that carried on through February.

We had our sales convention the first week of March and launched the new brand. And we got what I would say is a nice bump in the selling effort, and probably largely driven by the new brand, but more the impact on our sales internally -- you know, sales staff being very excited about it, as we all were. And you get an initial bump from that.

But now, as far as the -- once the advertising starts, then you start to get the activity that comes in from that, lead production, et cetera. But that flows in over about a 90-day time period, so that should be right in front of us.

Thank you very much.

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

Well, thank you all very much for being with us today. We look forward to continuing to implement the strategy that we've laid out for you, and hopefully, have another great quarter. Thank you all very much.

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