Insperity Inc (NSP) 2011 Q4 法說會逐字稿

Good morning. My name is Regina and I will be your conference operator today. I would like to welcome everyone to the Insperity fourth-quarter 2011 earnings conference call. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions).

At this time, I would like to introduce today's speakers. Joining us are Paul Sarvadi, Chairman of the Board and Chief Executive Officer; Richard Rawson, President; and Douglas Sharp, Senior Vice President of Finance, Chief Financial Officer, and Treasurer.

At this time, I'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 we begin, I would like to remind you that any statements made by Mr. Sarvadi, Mr. Rawson, or myself that are not historical facts are considered to be forward-looking statements within the meaning of the federal securities laws. Words such as expects, intends, projects, believes, likely, probably, goal, objective, outlook, guidance, appears, 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 fourth-quarter and full-year 2011 financial results. Richard will discuss expected trends in our direct costs, including benefits, Workers' Compensation and payroll taxes, and the impact of such trends on our pricing. Paul will recap the 2011 year and then discuss the major initiatives of our 2012 operating plan. I will provide our financial guidance for the first-quarter and full-year 2012. We will then end the call with a question-and-answer session.

Now let me begin today's call by discussing our fourth-quarter results. Today, we reported fourth-quarter earnings of $0.42 per share, a 40% increase over Q4 of the prior year. As for our Q4 key metric results, paid worksite employees averaged $122,065 for the quarter. This was above the high end of our forecasted range and an increase of 10% over Q4 of 2010.

Gross profit for worksite employee per month averaged $246 for the quarter, which was below our forecasted range of $249 to $252. Operating expenses totaled $73.3 million, below our expected range of $75.25 million to $76.25 million, and more than offsetting the gross profit shortfall. During the quarter, we generated $23 million of EBITDA plus stock-based compensation, and ended the year with $127 million of working capital and no debt.

Now for some of the details of our fourth-quarter results. Revenues increased 14% over Q4 of 2010 to $495 million. This was a result of a 10% increase in average paid worksite employees combined with the 4% increase in revenue per worksite employee per month. As for worksite employees, positive results were achieved in each of the three drivers. Client retention averaged over 99% for the quarter and worksite employees paid from sales were higher than forecast.

Also, as we've seen in recent quarters, Q4's results included some net hiring in our client base. In a few minutes, Paul will provide further details behind Q4's unit growth and our outlook for 2012.

Looking at fourth-quarter revenue contributions and year-over-year change by region, the Southeast region, which represents 10% of total revenue, increased by 6%. The Northeast region, which represents 26% of total revenue, increased by 22%. The Central region, which represents 14% of total revenue, increased by 10%. The West region, which represents 21% of total revenue, increased by 20%. And the Southwest region, which represents 28% of total revenue, increased by 6%.

Now moving to gross profit, our results were below expectations due to higher-than-expected healthcare costs, but partially offset by favorable outcomes in the payroll tax and Workers' Compensation areas. Richard will discuss the Q4 details in our 2012 outlook in a few minutes, so I'll just provide some brief comments.

As for our benefits program, approximately 73% of worksite employees were covered under our health plans in Q4 at an average cost of $858 per covered employee per month. Although the level of large claim activity came in higher than expected, benefit costs only increased 6% over Q4 of 2010.

As for our Workers' Compensation program, costs totaled 0.55% of non-bonus payroll for Q4 2011 and included a $3.6 million reduction in previously reported loss reserves. The reported cost was below both our forecast of 0.63% and Q4 2010's cost of 0.58%. Payroll tax costs, which included a $2.5 million reduction in costs related to a state tax matter in Pennsylvania, increased from 5.6% of total payroll in Q4 of 2010 to 5.7%.

Now shifting to operating expenses, we reported a 7.5% increase over Q4 of 2010 to $73.3 million. Approximately $2.1 million of this increase was associated with our rebranding initiative. Also, G&A costs increased in line with our forecast, and included costs associated with our adjacent business strategy, and upgrades to our new Insperity website and employee service center. Operating expense increases in these areas were partially offset by a decline in salaries and wages, and in particular, a lower incentive compensation accrual during the quarter.

Interest income for the quarter totaled approximately $230,000 and was partially upset by the fees on our new line of credit. As for our effective income tax rate, we estimated a full-year rate of 42% at the outset of 2011. Upon closing out the year, we finalized certain assumptions, including favorable adjustments related to R&D credits and depreciation. This resulted in an annual effective income tax rate of 40% and a corresponding Q4 effective rate of 36%.

Now I'd like to take a few minutes to review our full-year results. We reported full-year 2011 earnings of $1.16 per share. Excluding $0.17 per share of costs associated with two non-operational items incurred in Q3 of 2011, full-year EPS of $1.33 increased by 55% over 2010 earnings, and was considerably higher than the budget we set going into the year. As for some of the details of our full-year results, revenues increased by 15% over 2010 to $2 billion.

As for full-year revenue contribution and growth by region, the Southeast region, which represents 10% of total revenue, increased by 4%; the Northeast region, which represents 26% of total revenue, increased by 25%. The Central region, which represents 15% of total revenue, increased by 12%. The West region, which represents 20% of total revenue, increased by 20%. And the Southwest region, which represents 29% of total revenue, increased by 8%.

Now, gross profit per worksite employee per month increased by 8% from $232 in 2010 to $251 in 2011. The year-over-year increase of $19 per worksite employee per month was the result of $15 of higher surplus in our direct cost areas, and a $6 increase from our adjacent business services, partially offset by a $2 decline in the markup of our HR services.

As for a recap of our direct costs, benefit costs per covered employee per month increased by just 5% for the year from $796 in 2010 to $835 in 2011. Workers' Compensation costs as a percentage of non-bonus payroll declined from 0.60% in 2010 to 0.54% in 2011, including an $11.4 million reduction in previously reported loss reserves. Payroll taxes as a percentage of total payroll increased from 7.11% in 2010 to 7.15% in 2011, due primarily to the expected increase in state unemployment tax rates.

As for our operating expenses, we reported a 13% increase over 2010 to $294 million. 2011 operating expenses included $12 million of rebranding costs and a full year's impact of mid-2010 and early 2011 acquisitions. Operating expenses increased only 8% when excluding the 2011 rebranding costs. Interest income increased by 9% over 2010 to $1.1 million, and our effective full-year income tax rate decreased slightly from 41% in 2010 to 40% in 2011.

As for our balance sheet and cash flow, EBITDA plus stock-based compensation, adjusted for the two Q3 non-operational items, totaled $82 million for the full-year 2011. This is an increase of $21 million over 2010, even when including the cash outlay of $12 million associated with our rebranding. Cash outlays also included cash dividends of $16 million; repurchases of just over 1 million shares at a cost of $25 million; capital expenditures of $31 million; and acquisitions and other investments totaling $15 million. As a result, we ended the year with $127 million of working capital and no debt.

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 fourth-quarter and full-year 2011 gross profit results, and then I will spend most of my time discussing our gross profit outlook for 2012, and specifically, Q1.

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/buy or partner strategy.

As Doug just reported, our fourth-quarter gross profit per worksite employee per month was $246, which was below our expected range. The service fee of our component -- of our markup averaged $192 per worksite employee per month. The surplus component was $43 per worksite employee per month, and the adjacent businesses contributed $11 per worksite employee per month to the gross profit.

Now let me give you the details of each component. The $246 of gross profit per worksite employee per month was $5 below our forecast. Our markup was right on target, while the surplus was $4 per worksite employee per month lower than our forecast. The adjacent businesses' contribution was $1 per worksite employee per month below our forecast.

Looking at the details of the surplus, we find that the payroll tax cost center produced a $7 per worksite employee per month better than forecasted surplus. The Workers' Compensation cost center surplus was $6 per worksite employee per month better than expected, and the benefits cost center deficit was $19 per worksite employee per month worse than expected. Now, the $7 per worksite employee per month surplus in the payroll tax cost center is primarily related to the Pennsylvania tax matter that Doug referred to a few minutes ago.

Now let's discuss the Workers' Compensation cost center surplus results, which was $6 per worksite employee per month better than expected. Our incidence rate for the fourth quarter increased 3.64% over Q4 of 2010, which is well below the growth in the number of worksite employees that produced those claims. The severity rate per average claim is down 20.9% from the same period last year. These results, coupled with the success of our claims professionals' ability to settle previously filed claims for amounts less than our outside actuaries' original estimates, produced the extra surplus.

As for the benefits cost center, the $19 per worksite employee per month larger-than-expected deficit was primarily the result of us having the largest number of large loss claims that we have ever had. Now many of the claims are not recurring, so we should see some better results in subsequent quarters.

Additionally, we experienced a further reduction in the number of COBRA participants, declining from 3.4% of the base last quarter down to 3.2% this quarter. Some of the policy changes that we made in early 2011 have helped to drive down participation, which should help to reduce healthcare costs for 2012.

Now looking back at the full year, our gross profit per worksite employee per month increased $19 from $232 in 2010 to $251 this year, which punctuated a very good year. On this $19 increase in gross profit, we see that our payroll tax cost center produced $3 additional gross profit per worksite employee per month over 2010.

Our Workers' Compensation cost center also produced $3 per worksite employee per month of additional surplus over 2010. Our benefits costs per covered employee increased 4.8% over 2010, and contributed to a $7 per worksite employee per month reduction in the benefits cost center's deficit. And our newest contributor to gross profit, which is the adjacent businesses unit, added $6 per worksite employee per month. Our effective pricing and direct cost management strategies, that our people work on each day, continue to produce positive results and provide a great platform to launch our 2012 operating plan.

So let's begin that discussion with pricing. During the fourth quarter, we increased our average markup $3 per worksite employee per month on customers that renewed. Additionally, the new business sold in Q4 was $16 per worksite employee per month higher than new business sold in Q4 of 2010. When you factor in this new starting point, along with nominal increases on both new and renewing business throughout the year, we should see our average markup each quarter increase slightly from our current level. This pricing strength, we believe, indicates that both customers and prospects see the value of our premium services.

Now, looking at the surplus component of gross profit, here is what we see for 2012, 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. The timing of when new employees are added throughout the year also affects the surplus. Last but not least, the unemployment rates are continuing to increase in each state, causing some pressure on price. Therefore, we will conservatively forecast a slight decline in the surplus for 2012.

Moving to the Workers' Compensation cost center, here is what we see. On the pricing side of the Workers' Compensation cost center, our pricing allocations for new and renewing business have remained consistent. Our claims experience has been good, so the only reason to raise our allocations would be to keep pace with inflation. At this time, we do not plan to increase our allocation until we see such changes occur.

On the cost side, we will start the year with a conservative estimate of our expense ranging from 0.6% to 0.62% of non-bonus payroll. This produces a slight decline in the surplus for 2012 over 2011. However, if we have continued success in managing safety and claim settlement, then additional surplus would be generated.

Now, switching to the benefits cost center, let me tell you how we see our deficit shrinking beginning with the pricing allocations. Over the last 12 months, we have seen a 29% increase in the number of employees covered by one of our health plans that moved to our $1,500 or $3,000 high deductible health plan. This means that the pricing allocations we receive from this group of covered employees will be considerably less than previous allocations for the richer plans. We believe this migration will continue throughout 2012, as individuals continue to look for ways to reduce their healthcare costs.

In the marketplace, medical plan inflation for small business is expected to increase 8% to 10% this year, while prescription drugs are expected to increase 10% to 15%. We expect our pricing allocations will compare favorably throughout the year as we match them to our lower-cost trends. These cost trends do have several factors which should positively impact our results for 2012. As I mentioned a few minutes ago, the number of COBRA participants has dropped again to a new historically low level of participation, which should also help to reduce our expenses in the future.

Additionally, the continued migration of plan participants to the higher deductible plans lowers total cost for the full year, but does introduce some new seasonality. These participants will have more out-of-pocket expenses earlier in the year until they satisfy the various plan deductibles. Therefore, our costs will be lower early in the year and then increase as those planned deductibles are met.

Next, we made some plan design changes that went into effect January the 1st of 2012, which should also help reduce our healthcare cost trends. And last, we negotiated a slightly lower rate for our life and disability insurance coverage beginning in 2012. Therefore, based on these factors, we should expect total benefits costs per covered worksite employee to increase 2% in Q1 to reflect migration into the higher deductible plans. Then for the full year, we would expect the cost to increase 3% to 4% over 2011.

So combining the pricing allocations and cost estimates for 2012, we should see an improvement in the deficit of the benefits cost center for the full year, with the smallest deficit being in the first quarter. When you combine all of the forecasted direct cost surpluses and the benefit cost center's deficit, we should generate a net surplus of $43 to $47 per worksite employee per month for 2012, starting with a $74 to $77 per worksite employee per month surplus for Q1, and declining throughout the year based on all the reasons that I mentioned.

Finally, our adjacent business services, which added $11 per worksite employee per month of gross profit in 2011, are projected to grow revenues about 30% in 2012. This should translate to an additional $2 of gross profit per worksite employee per month in 2012 over 2011's results.

In summation, 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 $253 for 2012, which is consistent with our 2011 solid results.

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

Thank you, Richard. This morning, I will comment on our excellent financial results in 2011 and the tremendous progress we made throughout the year, setting a new course for future value creation for Insperity. I will also discuss the fall campaign and year-end transition factors that have positioned the Company for a solid start to the new year. The balance of my remarks will address our key initiatives and our outlook for 2012.

We are very pleased with our reported EPS for 2011 of $1.16, which represents $1.33 per share on an adjusted basis, as Doug mentioned earlier. This 55% increase over the prior-year was achieved in the midst of a major business transformation we have been implementing.

2011 began with a considerable level of execution risk around transforming our business, from 25 years managing one business delivering one comprehensive solution, to our new strategy to align multiple synergistic businesses alongside our industry-leading Workforce Optimization solution. This strategy is focused on leveraging the strength of our organization to accelerate our growth. This will be accomplished by offering a strategic selection of business performance solutions to close more new accounts, cross and upsell current customers, and grow our core Workforce Optimization business faster.

The three major elements of this new strategy that were implemented last year are the new Insperity brand, bundle plus selling through our business performance advisors, and development of adjacent business offerings. In 2011, we made great strides in each of these areas.

Insperity was launched on March the 4th, and has taken a leading position among business services brands in a matter of months. Our first survey results measuring the brand awareness and positioning were received in the fourth quarter, and the findings are very promising. Our standard of comparison was the awareness among our target small to medium-sized business owners of our previous brand and the receptivity to a contact from our sales team. After 25 years under the former brand, and constant reinforcement to support and overcome misconceptions, aided and unaided awareness was 10%. In just eight months, Insperity achieved a level of 5%, which is quite an impressive start.

In addition, due to the staffing confusion of the prior brand, 47% of our target prospects would not even take a phone call, thinking they don't need temporary employees, a service we have never actually provided. The results from the Insperity brand and the business performance solution positioning through radio and TV advertising, has completely turned the tables, with 50% that say they are likely or extremely likely to contact us, and less than 10% unlikely or not likely at all to contact us.

These results confirm we have eliminated a significant barrier and greatly increased the receptivity of our targeted prospects to set an appointment with our business performance advisors. In addition, we were able to confirm that the first impression made by our new brand positioning is exactly what we want, with 91% of respondents getting the impression Insperity offers solutions and strategic insights to improve your business.

Perhaps the aspect of the survey that shows the most potential was the competitive analysis of key company traits, including trustworthiness, innovation, industry leadership, value for the money, and best reputation. In this analysis, we were able to measure the impression of non-clients for Insperity against ADP, paychecks, and other business services companies on these factors. We were also able to measure the perception among clients in how well Insperity delivers on these promises and expectations.

The bottom-line is the new branding accomplishes the goal of positioning Insperity with prospects as a trustworthy, industry-leading innovator offering excellent value for the cost against perceived competitors. Then, among the actual clients, the perception of how well we deliver on these promises shows a clear advantage for Insperity against the competition.

In 2011, we also implemented a second key initiative in our strategic plan, establishing a business performance advisor role and our new selling system called bundle plus selling. These changes place our sales team in a position to convert more prospects into customers, and sell more products and services in the same amount of time and effort. Ultimately, when fully implemented, we expect an efficiency gain and a step-up in effectiveness in selling our flagship workforce Optimization solution, leading to faster growth and profitability for the Company.

We made great strides in 2011 in this area, establishing our business performance advisor training internally and our certification program through the University of Houston. We also introduced the entire framework to our nearly 300 business performance advisors and began the retraining process in our recent fall campaign.

We conducted the first phase of bundle plus selling, which allows business performance advisors to launch multiple parallel selling processes out of the same prospect meeting. We also formed our inside sales team to focus on the adjacent business offerings and help the advisor work toward converting more prospects to Workforce Optimization.

The third developmental highlight for 2011 was the progress we made with our adjacent business offerings, aligning multiple synergistic businesses alongside our Workforce Optimization service. The infrastructure to manage and develop these businesses is in place, and this support system is having the desired effect. The adjacent business develop team is identifying ways the core business strengths can help each of these smaller adjacent business units.

They are also accessing and delivering the support identified with a minimal effect on the core business. The progress made on all three of these new strategic initiatives was impressive, especially against the overriding risk management imperative to keep the core Workforce Optimization business growing profitably through the transition.

Now, the second major topic to discuss with you today is the fall campaign selling and retention results in the core business, including the starting point for Q1 2012 in paid worksite employee. We continue to improve sales efficiency, as sales for the quarter were up 9% over last year, with 14% fewer trained business performance advisors. We achieved 97% of our internal budgeted new sales and increased sales efficiency by 29% to 1.3 sales per salesperson per month. For the full year, this sales efficiency measure improved 17% to 0.77 sales per salesperson per month, up from 0.66 in 2010.

We had another excellent year in client retention throughout 2011, including the fourth quarter, as Doug mentioned earlier. For January of 2012, retention was 92.8%, which is not quite as good as last January at 93.2%, but still considerably better than 2010, which was 91.2%.

The third factor to consider in worksite employee growth is the net change in employment within the current client base from layoffs and new hires. Throughout 2011, we had a modest tailwind from new hires slightly exceeding layoffs from month to month, consistent with the slight improvement we've seen in the overall labor market. When you put the entire picture together, our worksite employee growth was slightly above expectations for Q4 and slightly down from December to January. Overall, this represents a good start for the year compared to Q1 of last year, and a solid foundation for growth in 2012, which I will discuss in a few minutes.

My last topic to cover today is our major initiatives for 2012 and how they factor in to our outlook for the new year.

As we continue our transformation into a business performance solutions provider with an ability to cross-sell a wide array of offerings, we have two critical areas to continue to develop. First, we have to continue to develop our business performance advisors, and increase their competency in bundle plus selling to match the expectations set by the new Insperity brand. This sales transition has been planned as a three-phase process, with the first phase behind us in 2011 and the next two to be accomplished in 2012.

Our sales convention scheduled for next week will usher in the second phase, which will zero in on improving prospecting and first call proficiency throughout the spring and summer. Specific training will be provided to improve the skills of our business performance advisors in analyzing the business performance needs of prospects, and providing appropriate recommendations.

This phase will also include a focus on our inside sales and adjacent business sales teams to ensure the prospect experience in the cross-selling effort builds trust, and enhances the likelihood of converting prospects into Workforce Optimization clients, as well as selling the adjacent business offerings.

The second phase, this fall, will focus on presenting a bundle plus sales proposal in using the multiple offerings and pricing to close more accounts. The second major initiative for 2012 is to continue the development and refinement of our portfolio of adjacent businesses. We have a substantial amount of work ahead of us within our established adjacent businesses in order to meet our objective of consistent, predictable revenue growth in these businesses. We expect each of these businesses to be successful in their own right on a standalone basis, and to benefit substantially by the channel represented by our Workforce Optimization customer base and sales team.

We also have new adjacent business opportunities we are developing to round out our array of offerings with further options to improve business performance for our clients. These new offerings will be piloted in the first half of the year. If they prove ready, they'll be formally launched this fall.

So our outlook for 2012 is quite encouraging. As for unit growth, we expect sales and retention to continue on a solid track. We are budgeting a continued improvement in sales efficiency from 0.77 sales per salesperson per month in 2011, to a range of 0.85 to 0.90 this year, simply trending off recent gains. We are also allowing for the next two phases of sales training to kick in, and prove out further efficiency gains before we start to forecast any benefit from bundle plus selling.

Our visibility into client retention in the next several months looks very good. Over the past couple of years, it appears we have seen a slight shift in the client attrition pattern to year-end and less attrition throughout the year. This is likely due to the growth in our midmarket segment, which has increased from 13% to 16% over the last couple of years, and some movement of our core clients to align their renewal date with the year-end for benefit purposes.

We will add some caution to our outlook surrounding the labor market and assume only the slight level of tailwind we had last year. The reason for this is mixed signals we have seen in some of our metrics in our client base. Overtime pay as a percentage of base pay is up to 9.5%, which is the highest we've seen in a while. However, commissions we paid to the sales staff of our clients was down in Q4 by over 5%. This could signal some pause in economic activity and hiring with an election looming ahead.

As a result, we expect the average number of paid worksite employees in Q1 to be on par with Q4, which represents a 9% increase over Q1 2011. For the balance of the year, we expect a net gain of 1300 to 1500 worksite employees per month, which will produce a 9% to 10% increase over 2011 for the full year. Our expectations surrounding operating expenses for 2012 include some continued investment in our adjacent business development. We expect our level of spending to increase around 6% to 7% over the 2011 levels within the range mentioned last quarter.

Our adjacent businesses are expected to have a slightly higher contribution at the gross profit line in 2012, but are expected to have a slightly greater drag on operating income and EPS as we invest ahead of growth in these areas. As we look at the business during this transition from the view of investing in our future growth, it helps to look at the mature Workforce Optimization business and the adjacent business portfolio separately.

We do not allocate all shared service costs internally to the adjacent businesses, nor do we allocate revenues or contributions from the sale of Workforce Optimization clients that benefited from our adjacent businesses. But on a representative basis, our 2011 adjusted EPS of $1.33 was comprised of $1.48 from our core Workforce Optimization business, and a drag of $0.15 from our adjacent businesses, which includes $0.06 of depreciation and amortization from the purchase price of acquisitions.

Now, for 2012, when you put our whole picture together, we expect a range for EPS of about $1.60 to $1.73 in total. On the same basis as this 2011 comparison, the Workforce Optimization business represents $1.77 to $1.90 per share, and the $0.17 loss from the adjacent businesses, including $0.09 of depreciation and amortization.

Now we are confident these investments have the potential to pay off in the years ahead in faster growth in revenues and profits. We are also very pleased that we can make these investments while continuing to increase EPS at an aggressive pace, provide an attractive yield through our dividend program, and buy back shares at opportunistic times. The employees of Insperity deserve high praise for the outstanding results in 2011 and the excellent execution demonstrated in a period of dramatic change.

At this point, I'd like to pass the call back to Doug to provide specific guidance for the year.

Thanks, Paul. Now before we open up the call for questions, I'd like to provide our 2012 financial guidance beginning with the full year. As Paul just discussed, our forecasted unit growth takes into account an expected improvement in sales efficiency, and client retention and net hiring, our client base had levels consistent with 2011.

Although worksite employees were down slightly through the year-end sales and renewal cycle, we expect average worksite employees in Q1 to be at the same level as Q4 2011. Thereafter, we expect sequential growth between 3% and 3.5% for the remaining quarters of 2012. This results in average paid worksite employees in a range of $127,500 to $128,500 for the full year or a 9% to 10% increase over 2011.

As for gross profit per worksite employee per month based upon Richard's earlier comments, we expect to be in a range of $249 to $253 for the full year. This is generally consistent with the $251 achieved in 2011. An increase in our service fees and higher contribution from adjacent businesses is expected to offset a lower payroll tax surplus than last year. In addition, we expect improvements in our benefit costs. This is offset by beginning the year with what we feel is a conservative Workers' Compensation estimate similar to how we have budgeted this item in previous years.

As for our operating expenses, we are forecasting total operating expenses in a range of $312 million to $316 million or a 6% to 7% increase over 2011. As for some of the details, we expect salaries and wages to increase about 10.5%, largely driven off of costs associated with 2011's acquisitions and investments in our adjacent businesses, and incentive compensation back up to targeted levels that were not achieved last year.

As for stock-based compensation, we expect that 2012 restricted share grant to be at a similar level as that grant in 2011. However, with a three-year vesting period, we have a smaller 2009 grant, which occurred during the economic downturn, being replaced by grants at more normalized levels. This is expected to result in a 16% increase in 2012 expense over 2011.

Commissions are expected to increase about 10%, generally consistent with our projected worksite employee growth. Advertising is expected to decline by approximately 17%, as the rebranding costs are now behind us.

G&A costs are expected to remain relatively flat. Depreciation and amortization is expected to be up by approximately $4 million over 2011, and includes purchase price amortization on recent acquisitions, and amortization of recently-implemented adjacent business back office systems, and the enhancements to our website and employee service center. Similar to prior years, the high end of our full-year operating expense guidance is tied to additional incentive compensation, which will be accrued only upon achieving higher operating results.

We are forecasting net interest income in a range of $1 million to $1.5 million for the full year, assuming no increase in interest rates. We are estimating an effective income tax rate of 41% and 25.8 million average outstanding shares.

Our guidance implies an EPS range of $1.60 to $1.73 for 2012, which is a 38% to 49% increase over 2011 recorded earnings of $1.16 per share. However, a better comparison to our 2011 earnings adjusted for non-operational items of $1.33 per share would result in an increase of approximately 20% to 30%.

Now let's discuss our first-quarter guidance and the expected quarterly pattern in some of our key metrics. Based on my earlier discussion, we are forecasting average paid worksite employees in a range of $121,750 to $122,250 for Q1. Based upon Richard's earlier comments, we are forecasting gross profit per worksite employee per month of $277 to $280 for the first quarter.

As for the quarterly pattern in our gross profit key metric, it has been historically higher in Q1 because of the surplus we generate on a higher level of payroll taxes prior to worksite employees reaching certain wage limits, then declines in Q2 before increasing in Q3 and Q4. As for benefits, with the recent growth in high deductible plans and the 2012 plan design changes, costs are lower in Q1 and step -up in Q2 through Q4 as deductibles are met. So, considering the seasonal impact of these factors and price increases rolling in throughout the year, we expect a sequential decline in Q2 of just over $40 per worksite employee per month, and sequential increases of approximately $10 in Q3 and $5 in Q4.

First-quarter operating expenses are expected to be in a range of $79.5 million to $80.5 million, and include the usual expenses associated with the restart of payroll taxes on our corporate employees, our annual sales convention, and sales incentive trips. We expect a step-down in operating expenses of approximately $1 million from Q1 to Q2. Third-quarter operating expenses are expected to be flat compared to Q2, with a sequential decline of $2.5 million from Q3 to Q4.

Historically, we have held our sponsored Champions Tour event during the fourth quarter of each year. However, beginning in 2012, we have shifted this event to the second quarter. This factor has been considered in 2012's expected sequential trend and will also affect year-over-year operating expense comparisons.

So considering all of these factors, our guidance implies a Q1 EPS range of $0.48 to $0.54 per share, with a sequential decline of about $0.28 per share from Q1 to Q2, and sequential increases of $0.15 to $0.16 per share in the third and the fourth quarters. As for our cash flow, our full-year guidance implies EBITDA plus stock-based compensation of approximately $102 million. We are budgeting 2012 capital expenditures between $15 million and $20 million.

In summary, we are pleased with our 2011 results and are excited about our 2012 plan. We look forward to updating you on the results of these initiatives throughout the year.

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

(Operator Instructions). Jim Macdonald, First Analysis.

Can we talk a little bit about what your plans are for your sales force and whether you plan to increase that, now that the efficiency is improving?

Sure. Let me address that. As I mentioned in my script, we're kind of in the middle of a three-phase retraining for our sales staff to introduce bundle plus selling. We are seeing efficiency gain, I believe, related to the brand change from last year. And I expect that to continue and we're budgeting some additional improvement. But as you know, getting to 0.85% to 0.9% sales per sales per month efficiency is still not back up to our normal pre-recession levels of 1.0%.

So, we do not intend to grow the sales force dramatically over 2012, but rather, keep the total number of business performance advisors around the 300 level, and have our trained rep count move up from about the 245 or 247 or so we have now, move that up closer to 270, 280 range. So, as we get toward the latter part of the year, we're doing well on the retraining. If things are really going well, we might start adding a few more then. But for this year, that's what we anticipate on sales headcount growth.

And regarding the adjacent business units, sounds like you're projecting a 30% increase. That, I presume, means you had some success with your new strategy or maybe you could talk to that. But on the other hand, in the quarter, the adjacent businesses were below our expectations. So how does that square up?

Sure. As you know, I mean, the adjacent businesses are small and newer businesses. They'll be driven primarily by a channel strategy alongside their own specific growth plans outside the Workforce Optimization channel. But we are making great progress there. We are growing in those business units, and expect as we, again, further train our bundle plus selling, that we'll see that increase even more so.

But as I said, these are new businesses. So there's a little more bouncing this around and your expectations on them. So -- but in total, I think we're looking at about 30% growth on the revenue side, which is great, even though that percentage on smaller numbers is not that hard to achieve.

But we expect around that 30% and not much additional drag this year, only a couple of cents. So I like the way that's progressing. As we round out -- the key here is to have the right offering and have the experience that prospects are going through in these adjacent businesses, to have that line up well with the Insperity brand and be a contributor toward building trust and confidence, so that we ultimately not only sell the adjacent business offering that the customer is interested in, but also move toward selling other adjacent business offerings and especially more Workforce Optimization customers.

If I could just sneak in a clarification, I didn't catch the share count and the repose you did in the quarter and your thoughts on share repurchases?

Yes, we did a little over 1 million shares for the full-year. We are forecasting 25.8 million average same shares for 2012. For the quarter, I don't know that I have that number. (multiple speakers) Yes, we did a smaller amount during the fourth quarter; but again, a little over 1 million for the full-year.

As far as going forward, we expect to be opportunistic on that front. And as is our history, we've always pretty much bought back shares to offset any shares granted and to manage dilution on behalf of our shareholders.

Thanks very much.

Tobey Sommer, SunTrust.

I wanted to ask a question about the markup assumption for 2012. Given the gross profit guidance, what sort of increase are you assuming for the markup portion?

Yes, Tobey, this is Richard. We ended -- the fourth quarter was right at $191. And we see that increasing about $1 each quarter for the whole book, on average for the book, each quarter throughout the year; probably ending up at $193, maybe $194 for the full year or by the end of the year.

Thank you. Richard, can I assume that the bulk of that overall increase will be driven by a larger increase in new customer signings?

Yes, I think so. That's the way we're seeing it at this point.

And just to continue on the pricing theme, when you have experienced some pricing increases in the past, has that cycle been durable and lasted for a period of time? Or has it ebbed and flowed in shorter intervals?

No, it's been fairly consistent. As we -- over the years, as we -- especially for renewing business, it's a more consistent, predictable number. And on new business sold, the current economic environment and what's going on at different periods does affect that group starting price a little bit more.

I think it's important to note, I mean, that was a very significant increase in the markup component on new sales in the fourth quarter -- $16 over the year prior. So we feel pretty good about that going into the new year. And that should continue (multiple speakers) -- at high-level.

A broader question for you, you undertook some investments headed out of the recession, including the name change and rebranding. Where do you -- and you talked about some more investments in training in the business performance advisors, et cetera. Where do you feel like we are in the overall stepped-up level of investment and transition? Are we kind of like more than halfway through? How do you feel about that?

Yes, I know exactly where we are. We are in -- coming to the end of the fourth phase of a six-phase transition.

And would that correspond with the level of investment, two-thirds of the way through?

I think so. I think we have some more investment coming this year, you can see a drag of about, I guess, $0.17 or so. A lot of that has to do with these purchase price amortization that you have on some of these acquisitions. But we expect this year, again, that this investment relates to getting those businesses growing at the right rate; getting them connected properly in the overall strategy.

And then as you look into '13, '14, '15, those businesses not only will grow but then we'll start to see lower losses on each business, and in turn, turn into profit in those businesses. So we are on the right track on that front and we've got two phases left to go. We're hopeful to accomplish both of those in 2012 and that should position us in great shape for 2013.

Okay. What is the timeframe for the amortization on that drag to moderate? I presume they're on a relatively compressed schedule?

Yes, it's about five -- five or seven years' amortization on those -- purchase prices.

Does it fall off a little bit next year? Or does it take five years and then just falls off like a cliff?

Well, it came in over a period of time. We did a couple in the middle of 2010. We did another one at the beginning of 2011. So there will be some -- it won't be a cliff, but there will be some fall-off relative to the 2010 acquisitions.

Okay. Thank you.

Jeff Martin, ROTH Capital Partners.

Paul, you made a comment about commissions paid to the sales force being down 5% and that being a mixed-signal relative to overtime. I was just wondering if you could expand on what you think is going on there? And if you've seen any change in that experience in the first five, six weeks of the year?

Yes, we are monitoring closely what's going on, on that front. And it is like I mentioned, it's kind of a mixed bag out there. I think people want things to be better, they're trying to be encouraged. The overtime, of course, indicates being at 9.5% means we're almost at that 10% number where companies are operating at a pretty full capacity. It makes more sense when you get in that range to hire new people if your outlook for new business is strong.

So what we have right now is they're operating at capacity, but the commissions we pay to the sales staff of our customers, which is our visibility into their pipeline for new business, is not very strong. And so that's why we're saying, hey, look, let's go steady as we go on what our expectations are from net new hiring in the client base. I also, though, mentioned in the script and I have some caution simply around the fact that it's an election year. That introduces another set of considerations and business owners factor that in as well.

So hiring is based so directly upon business owner and business leaders's sentiment that you have to weigh some of those factors in to the outlook. And it's a tough one, because you're dealing with trying to gauge how people might be thinking about some of the major things that are going on. But I think a measure of caution about that is a safe bet is the way that we should be planning.

And you know what? I think we'd all be happy if the economy started growing faster and people are feeling good, start hiring more of that -- we'll all be able to handle the upside of that.

And then in terms of your guidance, refresh my memory, what do you make in terms of assumptions for adjustments to prior-year Workers' Compensation claims? You had $11 million that helped out in 2011. Do you model that? Or do you model it to a certain level?

Well, we're just -- I mean, we look at it more overall. And obviously, we start very low on any expectation of adjustments to loss reserves. So it's not a big component of what we look at as the overall forecast for Workers' Comp going into a year. So you can see, for the full year, I think we're in the 0.60, 0.62 range for our forecast for 2012. Relative to where we ended up in 2011, more like [0.5 -- 0.54, 0.55] range. So I mean that's typically how we go about forecasting it. Richy?

Yes. I was going to say, you can't predetermine how claims are going to settle out compared to the outside actuaries loss estimate. So, I mean, historically, we have been conservative in our forecast and we haven't changed that view at all. We hope that there is more upside as the year goes by, but that really relates to how we manage safety in the workplace every day on existing clients, and how we're able to settle claims on previously determined losses or previously determined costs by our outside actuaries.

So are you accruing at that 0.6 to 0.63% rate?

Well, that's our forecasted rate. Each quarter, we're looking at how the claims roll in. We have an outside actuaries that looks at claims and development of those claims, so -- and even the older claims and how those have been settled out. So all that goes into the equation as to how much we're accruing at each quarter.

Okay. Thanks, guys. Appreciate it.

Mark Marcon, Robert W. Baird.

Thanks for taking my question. I was wondering, as it relates to the adjacencies, what is the actual amortization amount that's being factored into the guidance? In other words, you mentioned $0.17 in terms of the drag for this coming year. How much -- what's the drag on a pure economic cash flow basis?

As Paul mentioned in his script, about $0.09 of the $0.17 is amortization-related costs in those adjacent businesses for 2012.

Okay. And when would you expect that to go cash flow breakeven?

Well, I'm hoping 2013. But again, let's remember -- I still think this $0.08 is incidental to a faster growth rate, and that's what we're targeting out of this strategy in terms of the faster growth rate in the Workforce Optimization business. So I definitely want to get to breakeven as soon as I can, but the priority is to make sure that we execute this strategy in a way that it helps us grow our core business faster.

Great. And with regards to that, when you're talking about the improvement in the sales efficiency, which is quite encouraging, how are you factoring in the adjacencies into those quotas? How should we think about that?

It's still incidental to that, so I'm not -- again, what I said in my script and I think is the right approach to take, we're not factoring in into the improvement in sales efficiency from 0.77 to between 0.85 and 0.90, we aren't factoring in some dramatic change in effectiveness on bundle plus selling.

We believe this year we have two more phases of training to go through before we see that level efficiency gain coming out of the strategy as we go into next year. So the efficiency gain we're looking at this year from 0.77 to a range of 0.85 to 0.90 -- it simply reflects moving forward on the gains we had in the last half of last year, and the percentage of our core business performance advisors that have more than 18 months experience. That's tracking all well and properly, and should equate to some recovery, further recovery in 2012.

Well, and when you consider the fact that you removed that 46% of the prospect base wouldn't even take a call from us before the name change, and it's completely done a 100% -- or a 360-degree reversal, where people are wanting to call us, that's a pretty significant contributor to how efficiencies will be generated or improved in 2012.

And so when we think about the gross profit for the guidance for the first quarter, how much of that is from the adjacencies versus the surplus versus the markup?

Say that again? I'm sorry, I missed that.

When I just try to break down the gross profit guidance, how much of that is coming from the adjacencies relative to the surplus?

That's about -- yes, we're forecasting that to be about -- it was $11 for 2011 and we think that will be up about $2 in 2012, so about $13.

For the adjacencies?

Yes, for the full year 2012. But beginning of the year, more at the $11 level.

Okay. And then continuing to ramp up.

Yes.

And surplus that's being anticipated?

Forty -- let's see, $43 to $47, I believe, is what we were talking about in the -- yes, $43 to $47 (multiple speakers) --

Of surplus?

And that starts out high early in the year because of payroll taxes and the effect of so many people in the high deductible health plans.

Great. And then, obviously, there's potential upside there just in terms of the Workers' Comp?

Yes. Sure, right.

Okay. Great. And what's the -- the last question and I'll jump off the call. Any tweaks that you're doing to the marketing campaign? What's the learning spin from the campaign? What's being fine-tuned and what sort of results are you seeing from the fine-tuning?

Well, the actual survey results from the rebranding, from the advertising, were absolutely off the charts. We nailed it when it comes to the impression we're making on the prospect and the way the door has opened. We're starting at a different point now with the prospect.

And frankly, I think in this -- I'm really excited about next week's sales convention, because I don't think our business performance advisors realize how dramatic that change is. I think we're going to be able to demonstrate that to them with the results of the survey at our convention next week. And that should be very encouraging for them to know that there's a much more open door -- prospects that have seen and heard our advertising, they want to contact us.

Now, a lot of them won't because they're busy. But that means their mindset when we call them is completely different than it used to be -- like Richard was mentioning, with 46% or 47% that wouldn't even take a call. There are 50% of our prospects that, the ones that have heard our advertising, would like to call us. And if we call them, believe me, they're going to take your call. And they're going to set up a meeting.

So we think there's tremendous upside yet. We're not going to change a lot in the actual advertising message, because the takeaway from prospects was that we provide business performance solutions and strategic insight that can help their business.

That's exactly the impression we want to make, and now we want our whole selling process and the business performance advisors to be able to deliver on that promise. We're making the right promise. We know that when we provide our service to the customer -- this also came out in the survey -- that the degree to which we deliver on that very significant promise of being a trustworthy innovator, industry leader, that's a big promise. And fortunately, from the results, we see a great confirmation among the client base that we, in fact, deliver on that.

That's what sets a company up for dramatic competitive success, when you make a substantial promise that you're able to exceed the expectation in delivery. So we're very excited about where we are. We think we've got the right message and we've going to carry that out as we go forward this year.

Michael Baker, Raymond James.

I was wondering if there were any plans at this point to add to the portfolio of adjacent businesses?

Yes. I mentioned we have a couple of things that we're going to pilot early this year. And where we've made -- it's all included in the investment dollars we've been talking about here. And as those pilots play out with the right level of effectiveness, then we'll make the decision to launch them more formally this fall. So we do have some tricks up our sleeves and excited about how those will contribute.

So is it safe to assume at this point it will largely be internal build versus M&A?

Yes.

Okay. (multiple speakers) And then with the fall campaign, obviously, being behind you now, can you give us a sense of which of your adjacent businesses resonated the most with folks?

Well, certainly, I think our time and attendance solution has -- we've had the fastest growth there. Even to the point where we've had to work diligently on implementations and how to handle that kind of influx.

We have -- we've been making good progress on the expense management side. So a lot of our -- and the whole SaaS offering and cloud strategy, we're very excited about that. A lot of receptivity. We've got a going-forward plan for that that should take advantage of that. A clear trend of small and mid-sized companies wanting to have their technology in the cloud as opposed to managing all their assets internally.

So we're making good progress on those fronts. We think we have a couple of other things to kind of plug-in later this year, that help to round out the cloud offerings from an HR standpoint. And then we think that's going to be very helpful.

And then you indicated when you made this push to the adjacent business offering that one of the potential benefits would be if you had a customer that no longer wanted the PEO type relationship or outgrew it, that you would still potentially have a hook. And I was just wondering, given the attrition that you saw, whether or not you're seeing some evidence of that happening?

Just a little. And the reason is because most of the customers that went away are customers that didn't come on through a bundle plus selling approach. So they weren't -- they were introduced still as a one product solutions company when they first came on. And there's education to do there. There's upside there. But we also -- we have -- we do have customers now in each of these business units, some of which are former customers from the Workforce Optimization business, so that's a good sign. And that will be -- that is a part of the strategy and we expect that to be substantial one day.

Thanks for the update.

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

Well, once again, thank all of you for participating today and we look forward to a strong 2012. Thank you very much.

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