Insperity Inc (NSP) 2011 Q3 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 Insperity third 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). Thank you.

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'd 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 federal securities law. Words such as expects, intends, projects, believe, 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 as have been described in detail in the Company's filings with the SEC. These risks and uncertainties may cause actual results to different 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 third quarter financial results. Richard will discuss trends in our direct costs including benefits, workers' compensation, payroll taxes, and the impact of such trends on our pricing. Paul will then add his comments about the quarter and briefly comment on 2012. I will return to provide the financial guidance for the fourth quarter. We will then end the call with a question-and-answer session. Now, let me begin today's call by discussing our third quarter results.

Today, we reported third quarter earnings of $0.16 per share, which were net of $0.17 per share of cost related to two previously-disclosed nonoperational items. Excluding such items, these three earnings per share were $0.33 above both the implied EPS from the midpoint of our forecasted range of $0.29 in Q3 2010 earnings of $0.28 per share. Q3 2011 results also include $0.04 per share of incremental rebranding cost and, therefore, further demonstrate bottom line improvement over the prior year.

As for our key metrics, paid worksite employees averaged $118,226 for the quarter, which was above the high end of our suspected range $117,250 to $117,750. This was an increase of 9% over Q3 of 2010, and a sequential increase of 3% over Q2 of 2011. Gross profit for worksite employee per month averaged $245, which was within our forecasted range of $244 to $248 dollars, and significantly above the $227 reporting Q3 of 2010.

Operating expenses totaled $72.9 million, below our expected range of $73.5 to $74.5 million. We generated $21 -- $20 million of EBITDA, plus stock based compensation, when excluding the two non-operational items and ended Q3 $129 million of working capital.

Now, let's review the details of our third quarter results. As I just mentioned, average paid worksite employees increased 9% to $118,226 for the third quarter. Client retention continued at historical highs, averaging 99% for Q3. We experienced some net hiring by our client base, however, still at historically low levels.

As for sales, Paul will provide an update on our fall sales campaign activities in a few minutes. Third quarter revenues increased by 14% over Q3 of 2010 to $472 million, on the 9% increase in average paid worksite employees, combined with a 5% increase in revenue per worksite employee per month.

Looking at third quarter revenue contribution and growth by region, the Southeast region, which represents 10% of revenues, increased by 3%. The Northeast region, which represents 26% of revenues, increased by 22%. The Central region, which represents 14% of revenues, increased by 11%. The West region, which represents 21% of revenues, increased by 19%. And the Southwest region, which represents 29% of revenues, increased by 8%.

As far as gross profit results, Richard will discuss the details in a few minutes, so I'll just provide some brief comments.

Gross profit for worksite employee per month averaged $245 for Q3. This was within our expected range, as favorable results in our payroll tax and workers' compensation cost centers offset higher than expected health care costs. Approximately 73% of worksite employees were covered under our health plans in Q3 at an average cost of $849 per covered employee per month. Although higher than anticipated, this was only a 5% increase over Q3 of 2010.

Similar to the first half of this year, we experienced a higher than expected surplus in our payroll tax area. Payroll taxes, as a percentage of total payroll, declined slightly from 6.5% Q3 2010 to 6.4% of Q3 of this year on higher client payroll and bonuses.

As for our workers' compensation program, costs totaled just 0.43% of non-bonus payroll. This was below our forecasted Q3 cost of 0.62%. Now, while we perform an actuarial review of claims each quarter, a review of claim losses at the end of our policy period indicated a reduction in loss reserves $4.9 million to be recorded in Q3.

Finally, our adjacent businesses contributed approximately $12 to gross profit per worksite employee per month from Q3 up from $7 in Q3 of 2010.

Now let's move on to operating expenses, which totaled $72.9 million. This was approximately $1.1 million below our forecast, with expense savings primarily in the areas of advertising and G&A. On a year-over-year basis, operating expenses increased by 18% over Q3 2010, and included approximately $1.8 million in costs associated with our rebranding effort.

Other increases over the pri -- prior year were primarily in the areas of salaries and G&A, and included costs associated with the recent acquisitions. Interest income for the quarter totaled approximately $264,000, just below the low end of our expected range of $300,000 to $400,000. Other expense of approximately $7.5 million included the two non-operational items mentioned in my opening remarks. The first item is a non cash loss of approximately $4.4 million on exchange of our corporate aircraft. The second item, in the amount $ 3.1 million, relates to a dispute with the State of California over a state unemployment tax issue.

As disclosed in the previous SEC filings, this issue dates back to 2001 corporate restructuring, whereby the state initially approved a lower [suitor] rate, and then retroactively reversed this decision. While we still feel the restructuring and initial [suitor] rates were appropriate and no further tax was due, we agreed to pay $3.1 million to fully and finally resolve the dispute.

Now, let's look at our year-to-date cash flow. Year-to-date EBITDA, plus stock-based compensation adjusted for the previously mentioned non-operational items, totaled $59 million. Additionally, we received a $10 million reimbursement from the workers' compensation program in Q2. Cash outlays for the nine months included capital expenditures of $23 million, repurchases of 896,000 shares at a total cost of $23 million, cash dividends of $12 million, and cash payments related to acquisitions totaling $13 million.

We ended Q3 with $120 mi -- $129 million of working capital. In addition to this strong working capital position, we recently closed on the $100 million credit facility, which I discussed during last quarter's conference call. This will provide us with further flexibility to continue to capitalize on growth opportunities, pursuits, strategic acquisitions, invest in our infrastructure and continue our dividend and share repurchase programs.

In summary, we're pleased with our results through the third quarter, particularly given the economic and general uncertainty in the macro environment. Unit growth in the high-single digits, combined with stable pricing and improvement in our direct cost program, has contributed to a 100% increase in year-to-date earnings per share over 2010, when excluding the previously-mentioned non-operational items and incremental rebranding costs.

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

Thank you, Doug. I will begin my remarks this morning by providing you with the details of our third quarter gross profit results. And then, I will share with you our gross profit outlook for the fourth quarter, and some insight into 2012.

Our gross profit historically came from the service [fee] component of our markup, along with the surplus that is generated when the direct cost pricing allocation components of our markup exceed the corresponding direct costs. Now we've added a third component to gross profit which comes from our adjacent businesses, that was developed through a build by our partner strategy.

As Doug just reported, our gross profit per worksite employee per month this quarter $245, which was within our expected range. The Service [fee] component of our markup averaged $191 per worksite employee per month. The surplus component was $42 per worksite employee per month, and the adjacent businesses contributed $12 per worksite employee per month to the gross profit.

Now let me give you the details of each component. The markup component was $1.00 per worksite employee short of our forecast, while the surplus was $1.00 per worksite employee per month better, and our contribution from the adjacent businesses was right on target. Looking at the details of the surplus, the payroll tax cost center produced a $3 per worksite employee per month better than forecasted surplus. The workers' compensation cost center surplus was $12 per worksite employee per month better, and the benefits costs centers deficit was $14 per worksite employee per month lower than expected. Now, the extra $3.00 per worksite employee per month surplus in the payroll tax cost center is similar to what we experienced in the last quarter.

Now, let's discuss the workers' compensation cost center surplus results, which were $12 per worksite employee per month better than expected. This additional surplus came as a result of our claims professionals continued success in settling previously-filed claims at amounts lower than our outside actuaries original estimates. As for the benefit cost center, the $14 per worksite employee per month larger than expected deficit was primarily the result of us having a larger number of large loss claims than what we had estimated for the quarter.

The good news is, that we experienced a further reduction in the number of COBRA participants, dropping from 3.9% of the base last quarter, down to 3.4% this quarter. This is lower than the historical averages, and could prove to produce some lower-than-expected health care costs in our future.

In summary, our third quarter gross profit results were good considering the number and amount of large loss health care claims that we experienced during the period.

Now, let me tell you what gross profit expectations are for Q4 and what we are doing to improve the gross profit outlook for 2012 beginning with our pricing. During this quarter, we increased our average markup on customers that renewed by $5 per worksite employee per month. Additionally, our new business sold this quarter was $4 per worksite employee per month higher than the new business sold in Q3 of last year. This data supports the assumptions that our average markup should increase slightly in 2012, but should remain at $191 per worksite employee level for Q4 of this year.

Now, looking at the surplus component of gross profit, here's what we see for the fourth quarter and beyond, beginning with the 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. Our fourth quarter surplus typically increases above the Q3 surplus, as part of the normal seasonality of how the payroll tax expense affects our business.

Moving to the workers' compensation cost center, here is what we see. On the expense side of this cost center, our incident -- incidents rate for the policy year that ended on September 30, increased 10.15%, which is certainly in line with the growth of our worksite employee base that produces those claims. The severity rate per claim up 8.3% from last year, which is certainly in line with medical inflation. Even though we have been successful in settling claims for less than our actuarial estimates suggest, we will keep our expense forecast at 0.63% of non-bonus payroll for the foreseeable future, and let the upside come as we continue to effectively manage this direct cost.

On the pricing side of the workers' compensation cost center, our allocations for new and renewing business have stayed level, because our claims experience has been good. Therefore, we do not plan to increase our allocation until the economy improves.

Now, switching to the benefits cost center, let me tell you how we see our deficit changing, beginning with the cost side of this equation. We do have a few factors which should positively affect our trend for 2012.

As I mentioned a few minutes ago, the number of COBRA participants has dropped to historically lower levels of participation than we have previously experienced. Which should help keep our expenses lower. Second, we have continued to see migration of plan participants moving to the lower-cost, higher-deductible plans, which should also help our costs trend. Third, we are making some plan design changes that will go into effect on January 1 of 2012, which have historically reduced our health care costs trends. And, fourth, we entered into a new three-year agreement with UnitedHealthcare at the beginning of 2011, which has built in reductions to the administrative fee as our covered worksite employee base grows.

Since we have been growing that base all year, we should be getting another fee reduction by the second quarter of 2012. As for Q4 of this year, based on the current trend, we should expect benefits cost per covered employee to increase 4.5% to 5.25% over Q4 of last year, as deductibles and co-pays of participants have been satisfied. This translates to a year-over-year health care cost increase of about 4.5%, which in this environment is exceptional.

On the pricing side of the benefits cost center, we still see employees migrating to lower-cost, higher-deductible medical plans, which as you know, automatically reduced the allocation amounts that we will receive. We believe this trend will continue throughout 2012. Even though the trend in health insurance cost across the country are still expected to increase about 12% year-over-year, we should not have to increase our allocations as much as the marketplace because, as I mentioned, our experience is much better than that.

Adding up the forecasted surpluses and benefits cost center deficit, our net surplus should be in the range $46 to $50 per worksite employee per month for Q4, and $49 to $51 for the full year, which is in line with our forecast that we gave last quarter.

Finally, our adjacent business services, which added $11 per worksite employee per month of gross profit at the beginning of the year, and grew to $12 in Q3, should also contribute $12 of gross profit per worksite employee per month in Q4. So, when you combine the service fee, the surplus, and the adjacent business contribution, we should see our gross profit per worksite employee per month end up in a range of $249 to $252 for Q4, which would punctuate a very good year.

As for 2012, I think that we are doing the right things to see some slight improvement to our gross profit for next year. Favorable pricing and nominal direct cost trend increases should be manageable, and we should see some growth in the contribution from our adjacent business strategy.

So, barring any unusual factor that would affect these areas, we should expect gross profit per worksite employee per month to stay at current levels or increase slightly over 2011. In addition, the ongoing effective management of our direct costs creates a competitive advantage for our clients, and should also be attractive to new prospects. We believe this should help us to grow our worksite employee base in 2012.

Now, at this time, I'd like to turn the call over to Paul.

Thank you, Richard. This morning, I'll comment on our excellent third quarter results and the growth momentum we're beginning to see from rebranding, and our new Workforce Optimization growth plan. I'll also discuss the successful fall campaign kickoff, which occurred in September, and our progress implementing bundle plus selling, which is the centerpiece of our long-term cross-selling strategy. The balance of my remarks will address our can outlook for 2012, which is shaping up to be our best year ever.

The third quarter growth and profitability results are very encouraging as an indicator of the acceptance of the new Insperity brand, and the successful implementation of our new growth strategy. The Insperity brand is the vehicle to launch our new strategy to align multiple synergistic businesses, alongside our highly successful workforce optimization PEO solution, in order to accelerate our growth and profitability. These efforts are beginning to take hold, and we're seeing an increase in the sales efficiency in our Workforce Optimization sales force.

Q3 sales were 11% higher than last year, with 7% fewer business performance advisors. This resulted in a 20% improvement in our most critical sales per sales person per month efficiency measure, which improved from 0.71% to 0.85% over last year. First calls and [census per advisor] up 7% and 26% respectively, and pricing was up $4 per employee on new business sold over the same period one year ago. These are all encouraging indicators we are on track, and our new brand is beginning to gain acceptance.

Our MidMarket division is also continuing to build momentum. We had two sales in the quarter, which will be rolling into the employee count soon, and the pipeline for sales is very strong. This remains our faster-growing segment, as our 9% unit growth for the quarter was comprised of 22% growth in MidMarket, and 7% in the larger core business.

Adjacent business development cross-selling efforts are ramping up as we implemented our bundle plus selling system as part of fall selling campaign. During the third quarter, we continued the preparation for our adjacent businesses to increase capacity to sell in onboard new customers in anticipation of turning our 275 business performance advisors lose in earnest, promoting these offerings.

This year's fall campaign kickoff in Houston was extended to add three days of training time to introduce the new selling steps, processes, tools and commission structure to implement bundle plus selling. We are on a deliberate path to engage our sales organization in a new way to capitalize on the 25 to 30 thousand business owner prospects we call on each year. In our bundle plus selling system, our business performance advisors, that have historically focused exclusively on our Workforce Optimization solution, will also offer our customizable solutions from adjacent offerings to small and mid-size business client. Beginning this fall, every prospect visited by our business performance advisors will be introduced to the full array of HR and business performance solutions available from Insperity.

Our emphasis will still be on the Workforce Optimization offering, which is the most comprehensive business services bundle in the marketplace. However, we will proactively add solutions to the bundle from our new adjacent business offerings to further tailor our solution to meet the unique needs of each client, and to increase the likelihood of the Workforce Optimization sale. Each of the adjacent business offerings have been selected to help overcome historical objections from Workforce Optimization prospects. As our business performance advisors become pro efficient in recommending a set of complementary solutions that overcome these objections, we expect sales efficiency to increase. The adjacent business offerings were also selected for certain Wow factor that can be demonstrated and convert to a sale more quickly. In addition, these shorter, high-value prospect interactions serve to build the relationship and the trust necessary for the ultimate Workforce Optimization sale.

We are also offering our adjacent business solutions on a stand-alone basis, when our prospect is not ready for the full Workforce Optimization solution. This will place our 275 business performance advisor team in a much more active role growing our adjacent businesses. Each of the adjacent businesses will still have their own sales operation, and our business performance advisors will hand-off to prospect to the respective channel to go through the sales process. The advisor will continue to be responsible for Workforce Optimization sales, but will also facilitate the adjacent business offering sales process. We believe the implementation of the bundle plus selling system this fall will be a pivotal step to establish our long-term plan to accelerate growth and profitability of Insperity.

Now, before I pass the call back to Doug, I'd like to address our outlook for 2012. We do not intend to provide specific guidance for next year at this time, primarily due to the wide range of possibilities tied to the starting point of January paid worksite employees in our Workforce Optimization business. This number depends on the level of year-end client attrition, and the offsetting new sales from the fall campaign.

Each year, our annual budget plan is developed off of a starting point in paid worksite employees and the associated pricing, which can be precisely determined in the first week of February. Until then, we work with the wide range of possibilities for the year-end transition. But this year, I believe even the low-end of our current expectation for the starting point leads to an exciting outlook for next year.

First, we are well-positioned to continue our unit growth acceleration due to our excellent client retention we've demonstrated over the last 18 months. Fewer client terminations has been critical to the growth acceleration, and if it continues through year-end, we could have a nice step-up in paid worksite employee in January. Certainly, this would also depend on the success of our fall selling campaign, which is off to a very good start.

The pipeline for new business looks very good, but the number of accounts we close at year-end historically relates the confidence of our prospect client-owners. We have definitely improved in our ability to sell in this environment, but we are all well aware of the fragile state of business confidence, which seems to fluctuate daily. Sales and client retention for the balance of the year, and into January, looks solid, so our growth rate into next year looks like we should be at the current rate, or slightly better as the new year begins.

This quarter, we will exceed our record for paid worksite employees which was set in October of 2008. If we have a step-up into the new year of 1,000 to 2,000 worksite employees we'll be in good shape for double-digit unit growth in 10% to 12% range starting from a record-high number of worksite employees. Obviously, this level of growth would be better or worse factoring in resurgence of hiring, or a new onset of layoffs, based upon economic conditions.

Now, when you add Richard's outlook for gross profit at our slightly better than 2011 to this accelerating unit growth, you would expect a nice step-up in gross profit, also to historically high levels.

The remaining issue would be operating expens -- expenses, which we expect to increase, but certainly at a more modest pace than unit or gross profit growth. Without a recurrence of the rebranding expenses, which were a big part of 2011 operating expense story, we should see some operating leverage and see an increase around the 5% to 7% level over 2011 reported spending. Even though we're not ready to pin down specific guidance, all the factors we see going into next year point to exceeding our historical high EPS level of $1.76, and achieving record-setting profitability for Insperity. This is a very exciting time for our Company, our clients, and our shareholders.

We have repositioned Insperity to help more and more businesses improve their performance, and benefit from the high quality solutions we provide. Our new brand, adjacent business offerings and bundle plus selling is greatly increased our ability to get in front of more prospects with one or more solutions with a high likelihood of success. We expect this will translate into new level of growth and profitability, and tremendous enterprise value for the company.

At this time, I'd like to pass the call back to Doug to provide guidance for the balance of the year.

Thanks, Paul. Now, before we open up the call for questions, I'd like to provide the financial guidance for fourth quarter 2011.

We are forecasting average paid worksite employees in a range of $121,500 to $122,000 for Q4, or about a 3% sequential growth over Q3. We expect solid Q4 growth in spite of the fact worksite employees sold in the fourth quarter, which is historically our high selling season, or typically paid in the first quarter of the following year. As Richard mentioned, we're forecasting gross profit per worksite employee per month to be in a range $249 to $252.

As for Q4 operating expenses, we are forecasting a slight decrease from our previous forecast, to a range of $75.25 million to $76.25 million. These expenses include approximately $2.8 million, or $0.06 per share of incremental cost related to our rebranding effort.

As for interest income, we are forecasting $200,000 to $300,000 for the fourth quarter. We are estimating an effective income tax rate of 42% for both Q4 and the full-year, and [25.9 million] average outstanding shares for Q4, and [26.3 million] for the full year.

In summary, this key metrics guidance implies a range of 2011 full-year earnings of $1.07 to $1.13 per share. Excluding two non-operational items inter -- incurred in Q3 of $0.17 per share, and expected incremental cost associated with the rebranding effort of $0.27 per share, our updated guidance implies a range of $1.51 to $1.57 per share, or 76% to 83% increase over 2010.

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

(Operator instructions). Your first question comes from the line of Tobey Sommer with SunTrust.

Thanks. I had a question about your preliminary look at 2012. I know there are a wide range of outcomes, but it seems like you're on -- have decent prospects to see the same rate of worksite employee growth, or maybe a little bit better. At the same time, the OPEX growth (Inaudible) slower. Paul, how do you think about where margins can go in the business? If you keep adding worksite employees, is there -- is there sort of a natural place where operating margin would go, or is it purely a function of volume growth? Thanks.

Well, I think for now there is some operating leverage, as I mentioned, predominantly because we won't have the rebranding cost continuing into 2012 like we did in 2011. But, I think it's safe to take the unit growth, look at gross profit kind of in the range, or slightly better than we are today. Kind of like at the 5% to 7% increase over 2011 operating -- total operating expenses. And you know we just, as we're looking at it today, even at the low end of our ranges, we -- we think we're going to do our -- have our best year ever next year. That's kind of our best look at it from today. Can it be better than that? Sure can. And we're going to be working hard to do that on all fronts. We're in the midst of our fall campaign, and things are going well. You just have to keep the pedal to the metal all the way through the year-end, and see how we end up.

Do you have any particular initiatives for growth inside planned in operating expenses either new services or office openings? Sales force growth? Anything like that?

Certainly, we will grow our sales organization, our business performance advisors next year to some level. But we have not put that entire plan together yet for next year. So we'll be detailing that out over the next month or so, and pinning those numbers down, based on where we see ourselves ending up. I think next year's also a year of continued investment into the adjacent businesses to get the growth levels we want going in those businesses, and make sure that the service levels and the product offerings are an enhancement to the growth of our Workforce Optimization engine. So we don't expect that to be a drag (Inaudible) operating lines of any significance, but we would expect an increase in contribution of gross profit level, and not much of an impact at the operating income level, yet, in 2012.

Okay. I was wondering if you could comment on the rebranding? Initially, when you told us about it, beginning of the year, the expenses were going to be front-end loaded, now they're extended throughout the year. Do you think the fourth quarter will be the end of the incremental expenses, or do you see that kind of inching into 2012? And then I'd love to get any color you could give us on efforts in the MidMarket. Thanks.

Sure. The rebranding has just gone extremely well, from my perspective. In terms of the impression that we've made, and the image that's been created, the perception that people have about the new brand, and the offerings and the Company, we -- we -- our people did a fabulous job of taking our 25-year history of success and translating it into new image that is kind of just jumped on the scene and taken its place. And I believe that -- it is hard to believe, actually, that it's only about six months or seven months since we launched the new brand. I think we're well ahead in where we were thinking we might be, because normally, you'd have a significant dropoff and it would be a quite a time period before you could get lead production back up, and some other measures that are important.

But we're actually already seeing a nice pick-up, and we still have some other key elements that will be finalized and put into place as we go into the new year, none the least of which is the new -- the website, the Insperity 2.0 website -- corporate website, which will have some different dynamics to it. So, to your question about whether rebranding costs will increase in the next year, we don't believe they will. However, as I mentioned in previous calls, we do expect for our advertising and marketing to be at levels that were more consistent back in the 2007-2008 period, as opposed to the '09 and '10 period, when the economic client was so severe. So, we're going to put all of those pieces together in terms of the operating plan for next year, and we're confident 2012 looks really good for us at this point.

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

Yes, good quarter, guys.

Thank you, Jim.

Maybe you could talk a little bit about how you are managing the reps with the new adjacent business unit strategy, to how your incentivizing them to make sure they focus on both areas, and not over focused on one area or the other, and how you expect that to come out?

That's a good question, Jim. There are substantial, or significant paradigm shifts going on within our business performance advisor base. The fall campaign kickoff meeting and associated training programs were really important to start to help our business performance advisors understand the new role and the way that they would sell these multiple offerings in tandem with one another. The follow-up meetings that we've had that include manager training, and weekly performance advisor training. Also, we have radio -- our own internal radio program where we are continuing to explain on a regular basis, and give examples of how we expect things to turn out. They've gone very, very well and we're making progress. But it is a transition, they are learning new tricks, if you will, and so we're being patient with this, but the upside just looks very obvious to us at this point. We think we're really on track that -- the ability to use some of our adjacent business offerings to help make the Workforce Optimization sale is why I'm not so worried about your question, might get diverted from one thing to another.

It's easy to think that, say, a time and attendance sale might, or -- could be a distraction to the Workforce Optimization sale, but as an example, if a customer had the historic op -- objection to coming on the Workforce Optimization solution, let's say they objected due to cost, the amount of money they were going to have to invest, we offer the time and attendance solution for ones not in place, because that's a direct, immediate cost reduction for that client, that can be used to fund the sale of the Workforce Optimization solution. That's the part that we believe is going to help, and every one of our adjacent business offerings are there because they help solve an objection with the customer or enhance the ability to sell Workforce Optimization.

And switching gears to sort of the professional service fee level, I think at Analyst Day you talked about, over time, getting that back to the 200 level. Where do you think we are in that progression? Will we see significant improvement there in 2012?

Yes. Jim, I think that the economy is going to play a little into this, but you know we have, obviously, stabilized at the 191 level. We're continuing to see new business sold at a mark-up above where they were sold a year ago. And so, do I see us getting back to 200 in 2012? No. But I think we can ratchet it up to $2 to $3 per employee per month in an average for the full year, assuming that the economy kind of stays where it is now, or maybe even improves just slightly.

And from a -- congratulations on the repurchase, by the way. What are your feelings about more repurchases and the guidance for Q4 share count seems sort of high in face of the repurchases that you've already done. Maybe you could comment on all of that?

Yes. I mean, the think the Q4 guidance, relative to the shares, is just taking the average and the timing of when we did with the repurchases. But it doesn't consider any further repurchases, as we normally do when we provide guidance. So, you know, we'll continue to look at our repurchase program, and dividend programs, and as you've seen over the past couple of quarters, we've taken the opportunity to repurchase at what we feel are attractive prices, attractive valuation and we'll continue -- I would expect us to continue to do that.

Your next question from the line of Jeff Martin with ROTH Capital Partners.

Thanks, guys, good morning.

Good morning. (Multiple Speakers)

I was curious if you could share with us what your current repurchase allocation remaining is?

Yes. I think it's in the 700,000 range or so -- 700,000 shares or so.

Okay. And then, you typically have a small business survey that is released in conjunction with earnings, have you got anything to share? Are you conducting an update there, and if so, what are you hearing?

Yes. We do release that this morning, and the -- the headline was that small business is still waiting for an economic rebound, and they're pretty much extending their conservative business operation, and that was kind of the assessment that we came out of there with. Even though on -- 65% of our clients that respond to survey are meeting or exceeding their 2011 plans, many of the measures went down from the previous quarter. In terms of what their expectations are in the near term. They kind of all pushed out the expectation for an economic rebound into mid- to later 2012, and so was pretty much of a tempered response in terms of the business sentiment out there.

Now, on the data that we also look at from the quarter that tells us to compare what businesses are really doing compared to what they're seeing for the future was pretty interesting. Overtime was up a little bit to 9% of base pay, which is up over 8.5% from the previous quarter. What I was worried about last quarter, was that commissions on a year-over-year basis were down 3% and this quarter, it came back to where now they were up 3%, which is still weak, but, certainly, better than where we were a quarter ago. And also, 53% of the customers surveyed still expect a sales increase over the next six months. So it wasn't all bad news, but it was pretty, you know, conservative view of the future. So we've kind of weighed that into our expectation.

And Jeff, on the shares under authorization, when I add in the recent reauthorization of the million shares, we're currently at a million-three or so. Okay? A million --

Another question if I might. Paul, could you compare and contrast this year versus last year? In terms of your January WSE base expectation -- not expectation, but outlook, because you were up about 1200 or so, just shy of 1200 on an average base for Q1 of last year. Maybe, if you could give us a little contrast this year versus last year and kind of essentially the same way of handicapping what you think the probability is for getting a couple thousand WSE increase in Q1?

Sure.

Of 2012?

I'll tell you what I'm thinking about, with a reminder that is -- there is a lot of moving parts that get us to that January (Inaudible), if it works out employee count, so it is really hard to predict. But, compared to last year, we certainly had more activity this year, you know, more opportunities. You know, our census count, for example, was up 26%, just in the third quarter. We came into this fall campaign with more energy and momentum. Last year, if you recall, we were kind of phasing down some of the advertising because of the brand change that was coming. It just wasn't prudent to spend that kind of dollar. This is very different, you have kind of momentum building around the new brand; momentum building around the activity levels.

We are down in number of advisors out there, but they're -- they're selling more, more efficient at this point, that's a positive thing as well. MidMarket, the pipeline looks good, but those are hard to predict. We should be seeing our answers on that front, both from new and renewing accounts here within the next couple of weeks. But things look good on that front. I just don't know how good that is going to be. But, I have a good confidence level at that 1,000 to 2,000 range, and I'm hopeful we can even do better than that. Way too early to build something like that in.

Okay. Actually, if I could sneak one more in. On the MidMarket accounts, could you give us how many MidMarket WSEs were in Q3, and how that compares to the past couple of quarters?

We have been running, for the year, about 30% or so higher than last year, on what we're actually adding in from MidMarket. The growth rate (Inaudible) quarter was 22% year-over-year growth in the MidMarket, which is pretty good, and now that core business has been growing at about 7%, you know, I think we have things growing the way we want to on that front.

Our next question comes from the line of Michael Baker with Raymond James.

Yes, I was wondering if you could give us an update on what you're seeing out there in terms of acquisition activity? If there's any interest there, or is it just a function of you're comfortable with what you have now and regardless of what's going on, you're ready to kind of move forward?

Yes. That's -- let me just say that we're -- the game plan, of course, is to add business performance solutions that not only help a company improve their own corporate performance, but also in some way, shape, or form, facilitate the Workforce Optimization solution or enhance that and increase the opportunity or the possibility of them coming on as a Workforce Optimization customer. So we will continue to be on the prowl for things that fit that picture. I continue to be fairly encouraged by the quality and number of both companies and products that are out there and available to add to our suite. But I think we're going to take a -- an approach to where it would be clear , any time we add something, and how that fits into the whole

How about in terms of PEO assets themselves? Is that less of importance?

Yes. That is an area that we've never had that much interest because our particular Workforce Optimization solution is quite unique in the marketplace, and the service levels are extremely high, and the pricing matches that premium service offering. So the customer base that we find in our PEOs have typically not been sold the same offering and not in the same way. So we find that that's not the best avenue to grow the worksite employee base.

And then in terms of adjacent businesses, you indicated kind of a Wow factor and pointed to time and attendance. Are there other ones you find are drawing prospects in?

Sure. Our expense reimbursement product, our performance management, all of our SaaS products have a really -- you're able to demonstrate that product. We also have some that really fit kind of a try and buy environment. We have our employment screening, which is a low-cost, not a big commitment to get an opportunity to experience who we are and how we serve customers. That has become a very nice lead-in.

In addition to that, our recruiting service has just been incredibly well-received. We have some unique aspects to both how we find a cultural fit for an employee, which we believe is equally important as the skills responsibilities being a fit. We have a way to charge for and price that service, that we're finding that our prospects are interested and excited about. And it is also a service that you can engage immediately, and many times we already found that, once customer's used the recruiting service, there's a likelihood to go to the next step to the Workforce Optimization solution.

Given you're upbeat about 2012, how should we think about the headcount as it relates to business performance advisors? You know, looking towards 2012?

Well, that is something we have not pinned down exactly yet. And that's because I want to see how much progress we've made on sales efficiency over this fall campaign. And you know, if the progress is really, really good, I'll probably add some more than I would otherwise. You want to make sure you've got the model right, efficiency working as you grow the staff. But, you know, we'll keep that in balance with where we want to end up for next year.

Our next question comes from the line of Mark Marcon with Robert W. Baird.

Good morning. I was wondering, you've been doing a really good job in terms of monitoring some of the mid-sized accounts. I was wondering if you could give us a little bit of feedback in terms of what you're hearing from them? What your expectations are in terms of retention there?

On the MidMarket customers?

Yes.

Yes. I think we've -- we really have a great product offering in our MidMarket group, and we are doing a real nice job servicing customers, and staying in touch, and demonstrating our value to them. So our retention has been much improved last year, improved over the year before that, which was much improved over the year before that. So I'm hopeful -- hopeful that we're going to have another round of improvements, but we're just not quite at the point yet where we can call that a clear victory. It is going to take a few more weeks before we can do that. But we're on a good track.

You know, some of the early dialogue, there's always some that are either shopping or looking. We do have a couple that have already been purchased by larger firms and they're going to be kind of folded into a larger company. There's nothing you can do about those. But all in all, we're just really in pretty good shape on that front and hopefully we'll have nice improvement over last year.

Great. And in order to have the sort of sequential increase that we ended up seeing on the worksite employees from Q4 to Q1 this last year, um, what sort of retention rate should we hope to have in that December-January-February time period?

I think last year was kind of like around the 6% level or something for the quarter, of attrition. 6.5% or so. So anywhere in that level, you know, 6% to 7% is much better than the 7% to 8% or 8% to 9% we were experiencing a couple years before that.

And anything that should change in terms of the small client base? In terms of how you think about the attrition there?

Well, we've actually made tremendous progress there over the course of the year, also.

Yes.

Through what's called our start strong program. You know, setting the expectation with the smaller customers, then meeting that expectation has really been improved through a program where there's more interaction and interface between the sales and service team in the enrollment and orientation process. And that has really helped to reduce our first year losses on the first year attrition numbers. I think the other factor that's helping that, also, is that in our pricing model on new business, historically, we used to have a pretty big step-up from year one to year two that related to the benefits and some of the other direct cost components, so it was quite a step-up from year one to year two. The way we've done things over the last year and a few months or so, with a pricing system that Richard and Jay worked out together, there's not -- the pricing on new business was a little bit higher, but the step-up in year two is lower. So, hopefully, that means better retention of first-year to second-year customer.

Great. And then, can you talk a little bit about the adjacent businesses in terms of the potential contribution. You know, at the Analyst Day, you talked about some longer term goals there. How do you think that that's -- it's tracking thus far, relative to those expectations, and how much of an increase could we conceptually see in terms of the gross profit for worksite employee per month from those over this year and this coming year and -- and then the one after that?

Well, there are a lot of factors that meter into that. We are, I think, as bullish or more bullish than we were at our Analyst Day on the long-term strategy in the contribution and gross profit that can come from the adjacent businesses. The timing, and when we turn that into operating margin, those are decisions you make on how to grow the businesses and our biggest priority there is, of course, to have this whole strategy facilitate the growth and paid worksite employees and the Workforce Optimization business. But each of these businesses, in their own right, have a bright future and we're expecting each of those to grow in the 30% range year-over-year, is what we're trying to put in place. You know, support system to grow at those levels because they're small -- pretty small businesses. Should be able to grow at that rate or faster. And each of those ought to get to profitability in a fairly reasonable time over the next couple of years or so.

Our final question comes from the line of Michael Kim with Imperial Capital.

Hi, good morning, guys. Just a couple of brief questions. Just to expand on adjacent businesses, are you seeing your strongest activity from existing (Inaudible) clients or with the rebrand, is that opening new prospects outside of the existing base?

We are making some good progress on both fronts, both, obviously, our bundle plus selling approach is directed at mobilizing our business performance advisors, and capitalizing on the 25 to 30 thousand, you know, calls that they make each year. But in addition to that we do have marketing plans that we are implementing and still testing a lot of things, frankly, with each of the different areas. But you'll notice that our major branding message this year and our advertising has included the entire array of business performance solutions, and that is certainly providing a lift already for each of the adjacent businesses.

And then just lastly, you talked a little bit about net hiring during the quarter. Are you assuming continued net hiring into the fourth quarter, and maybe for the fiscal '12 period, just given some of the survey feedback you're hearing?

We decided to maintain a very conservative view of net hiring. That it would be around break even to slightly positive, but definitely not trying to build in anything on the upside there. So I think that's the right thing to do, based on what we're hearing from the customers.

Okay. Great. Thank you very much.

That is all the time we have today for questions. I would like to turn the call back over to Mr. Sarvadi for any closing remarks.

Thank you all very much for participating, and we look forward to finishing out the year strong and reporting back to you on our starting point for next year. Thank you very much.

This concludes today's conference call. Thank you all for participating, and you may now disconnect.