Insperity Inc (NSP) 2012 Q1 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 first-quarter 2012 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 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 I begin, I would like to remind you that any statements made by Mr. Sarvadi, Mr. Rawson, or myself that are not historical facts are considered to be forward-looking statements within the meaning of the federal securities laws. Words such as expects, intends, projects, believes, likely, probably, goal, objective, outlook, guidance, appears, target, and similar expressions are used to identify such forward-looking statements, and involve a number of risks and uncertainties that have been described in detail in the Company's filings with the SEC. These risks and uncertainties may cause actual results to differ materially from those stated in such forward-looking statements.

Now, let me take a minute to outline our plan for this morning's call. First, I'm going to discuss the details of our first-quarter 2012 financial results. Richard will discuss trends in our direct costs, including benefits, workers' compensation, and payroll taxes, and the impact of such trends on our pricing. Paul will then add his comments about the quarter and the progress we are making implementing our long-term growth strategy. I will return to provide our financial guidance for the second quarter and an update to our full-year 2012 guidance. We will then end the call with a question-and-answer session.

Now, let me begin today's call by discussing our first-quarter results. Today, we reported first-quarter earnings of $0.54 per share, which was at the high end of our forecasted range, and our highest quarterly EPS ever reported. Earnings increased 64% over the $0.33 per share reported in Q1 of 2011. As for our key metrics, paid worksite employees averaged 121,938 for the quarter, an increase of 8.5% over Q1 2011, and in the middle of our forecasted range. Gross profit per worksite employee per month averaged $282. This was above our Q1 forecasted range of $277 to $280, and above the $270 recorded in Q1 of 2011. Operating expenses totaled $80 million, in line with our budget, and a 5.4% increase over 2011. We generated $30 million of EBITDA plus stock-based compensation, and ended the quarter with $136 million of working capital and no debt.

Now let's review the details of our first-quarter results. Revenues increased 11% over Q1 of 2011 to $595 million, primarily as a result of the 8.5% increase in average paid worksite employee. As to the drivers to our worksite employee growth, client retention averaged 96.7%, which is relatively consistent with the high level achieved in Q1 of 2011. Also, net hiring in our client base offset a slight shortfall in worksite employees paid for new sales.

As you probably are aware, our key pricing metric is gross profit per worksite employee per month, and our Q1 results exceeded our expectations. The average gross profit per worksite employee per month of $282 was $3 above the midpoint of our forecasted range and a record high for our first quarter.

Richard will provide the details behind our favorable results in a few minutes, so I will just provide some brief comments on our direct costs. Benefit costs per covered employee increased by just 3.6% over Q1 2011, to $832. Approximately 73% of worksite employees were covered under our health plans during the quarter. Workers' compensation costs totaled 0.56% of non-bonus payroll, below our forecasted Q1 cost of 0.62%, and included a $3.5 million reduction of previously reported loss reserves. Payroll taxes as a percentage of total payroll remained relatively flat, at 9.6%, as an increase in SUTA rates was offset by higher worksite employee payroll and bonuses.

Now let's move on to Q1 operating expenses, which were in line with our budget of $80 million and increased 5.4% over Q1 2011. This year-over-year comparison includes the impact of rebranding costs incurred in Q1 of 2011. This is reflected in the decrease in advertising costs and G&A costs being relatively flat over the two periods. An increase in salaries and wages made up most of the operating expense increase over the two periods, and was primarily related to headcount associated with our adjacent businesses.

Net interest and other income for the quarter totaled $288,000, within our expected range. And our effective income tax rate declined from 43% in Q1 2011 to the expected 41% rate in Q1 of 2012. As for our cash flow, EBITDA plus stock-based compensation increased from $21 million in Q1 2011 to $30 million in Q1 of this year. Cash outlays included cash dividends of $3.9 million, repurchases of just under 106,000 shares at a cost of $3.3 million, and capital expenditures of $3.4 million.

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

Thank you, Doug.

This morning, I will first update you on the details of our record-setting first-quarter gross profit results, and then I will focus most of my time on our gross profit outlook for the balance of 2012, and specifically Q2. As Doug just reported, our first-quarter gross profit per worksite employee per month was $282, which was above the top end of our range and $3 above the midpoint of our range. The gross profit was made up of $190 of average markup, $82 of surplus, and $10 from the adjacent businesses.

Now, let me give you the details of each component. The $190 average markup was $1 per worksite employee per month lower than our forecast; the $82 surplus was $5 per worksite employee per month above our forecast; and the adjacent business contribution was $1 per worksite employee per month below our forecast. Now, the dollar per worksite employee per month decline in our markup was driven primarily by a faster growth in our mid-market segment, compared to the growth of our Core business. Looking at the details of the $5 per worksite employee per month better than expected surplus, we find that most of that surplus came from the workers' compensation cost center, while the payroll tax cost center and the benefits cost center were right on target.

So, let's discuss the workers' compensation cost center surplus results. Our incidence rate for the quarter increased 4.5% for 6 over Q1 of 2011, which is well below the growth in the number of worksite employees that produce those claims. The severity rate per average claim is down 14.6% from the same period last year. These results, coupled with the success of our claims professional settling previously filed claims for amounts less than our outside actuaries' original estimates, continued to produce the better-than-expected surpluses. In summary, our effective pricing and direct cost management strategies that our people work on each day produced record-setting first-quarter results. And these results give us a solid foundation to forecast the balance of 2012.

So, let's begin that discussion starting with our markup. During the first quarter, we increased our average markup $2 per worksite employee per month on customers that renewed. Additionally, the new business sold in Q1 was $3 per worksite employee per month higher than the new business sold in Q1 of 2011, which I would characterize as not great, but certainly not bad in this economy. Therefore, we expect price increases over the balance of the year to offset the mix change that we experienced in Q1.

Now, let's look at the surplus component of gross profit for the balance of the year, 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. Typically, the second-quarter surplus drops considerably from Q1, so don't be surprised when it happens again this quarter. For the full year, this cost center surplus should be slightly better than our original forecast.

Now, 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. We have heard from Workers' Compensation insurance carriers that they are in, quote, a transition market, close quote, and that we should expect to see carriers increase their prices as the year goes by. Therefore, as we see these changes, we will increase our allocations accordingly, but we are not changing our forecasts at this time.

On the cost side of the workers' compensation cost center, we have experienced positive results so far this policy year, as I mentioned a few minutes ago. Therefore, we are comfortable lowering our expected expense range a couple of basis points to 0.58% to 0.60% of non-bonus payroll for the balance of the year. Combining this cost assumption with our current allocation assumptions, we should see a slightly higher surplus for the balance of 2012 over our previous forecast.

Now, switching to the benefits cost center, let me tell you how we see our deficit changing, beginning with the pricing allocations. We have continued to see a significant increase in the number of employees covered by one of our health plans moving 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 lower than their previous allocations when they were in the richer plans. However, since United Healthcare has recently announced an increase to their contracted rates with many of their network doctors and hospitals, we will be increasing our allocations on both new and renewing business to offset this increase to our cost.

Since our healthcare cost trends continue to be substantially lower than the small business marketplace for comparable plans, we expect our pricing allocations will compare favorably throughout the year to our clients and prospects. On the cost side of the benefits cost center, when we consider continued migration into the lower-cost plans, plan design changes in January of 2012, participant deductibles being satisfied beginning in Q2, and the trend, we would expect to see total benefits cost per covered worksite employee to increase about 4% in Q2 from Q1, and about 4% to 5% for the full year over 2011. When you combine the pricing allocation increases and the cost estimates for benefits, we expect the deficit in this cost center for the full year to be in line with our prior forecast.

Then, when you combine all of the forecasted direct surpluses -- or, excuse me, direct cost surpluses and the benefits cost center's deficit, we should generate a net surplus or $32 to $34 per worksite employee per month in Q2, and $47 to $51 per worksite employee per month for the full year. Then, our last contributor to gross profit, which is our adjacent Business Services, should continue to add about $11 to $12 per worksite employee per month to gross profit for the balance of 2012. 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 $250 to $254 for 2012, which is slightly better than our original forecast.

Now, before I turn the call over to Paul, I would like to update everyone about a future positive impact to gross profit that we have not factored into any of our forecast. As you may recall from last quarter's conference call, we experienced a $2.5 million reduction in the payroll tax cost, related to a Pennsylvania tax matter. This amount represented the reversal of an accrual for taxes, which we believe were no longer owed to the State, and as confirmed by the State Supreme Court in February of this year. In addition to this accrual, we had previously paid approximately $2.9 million to the State on the same tax matter. We have now filed a refund claim for this amount, and are currently working with the State to receive reimbursement of these funds.

We have not considered this in our forecast, as the timing and ultimate amount is uncertain. However, upon receipt of any funds from Pennsylvania, we would experience a further reduction in our payroll tax cost during that quarter, thus increasing our surplus and our gross profit per worksite employee per month. Hopefully, we will get the funds this year.

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

Thank you, Richard.

Today, I will briefly comment on our record-setting financial results in the first quarter and some key highlights. I will spend most of my time this morning discussing the tremendous progress we are making implementing our long-term strategy for growth acceleration, beginning in 2013. The balance of my remarks will address our take on the economy and labor market, from our small to midsized business client base and our outlook for the balance of the year. We had an excellent first quarter this year, setting a record in EPS against a backdrop of a weakening labor market. Our [great] results in sales and marketing and client services were particularly impressive, since we are in the midst of implementing significant changes in our business model.

Sales results in our flagship Workforce Optimization business were on budget for the quarter, achieving a 17% increase over Q1 of 2011. This was accomplished by 9% fewer trained business performance advisors, compared to last year, and represents a 30% improvement in sales efficiency in our key sales per salesperson per-month metric. The number of leads, first calls, census per rep, and average size account were all up over last year. We believe these results are the first hard metrics confirming the success of our rebranding initiative last year, and validating the survey results I reported on last quarter. Leads were up 7% over last year, and first calls up 6%.

Our marketing and advertising continues to support our new brand, and it appears the Insperity brand is gaining some real momentum in the marketplace. Our client satisfaction and retention results continued near historic highs at a level of 96.7% for the full quarter, compared to 96.8% in Q1 2011. These levels continue to confirm the value of our Workforce Optimization solution and the excellent service delivery from our client services organization. It's certainly rewarding to see solid execution in this environment, but it's even more exciting when one understands the revolutionary new growth engine that is being established at the very same time.

Two years ago, we began to implement a vision to make a bold transformation of our business model, in order to grow our Business faster. As we approached our 25th anniversary and evaluated our remarkable history, we concluded we had but one frustration, we had not helped enough businesses succeed through our game-changing Workforce Optimization service. We have demonstrated a highly successful business model that has produced consistent, predictable growth over 26 years, through a variety of economic cycles.

It would have been far easier to stay the course and enjoy the level of success achieved than to take on a major change. However, our desire to grow our Business faster and help more companies succeed, combined with the struggles of our national economy and the small business community, led us to a new strategy for long-term growth acceleration. Due to the complex nature and the breadth of the changes required to implement this new strategy and the desire to maintain historical growth rates during the transition, we phased in the changes over a period of years.

We identified six phases we would have to take the Company through to lay a foundation for faster consistent predictable growth. The first four phases put in place the building blocks and included the following, Phase I, strategy development communication; Phase II, adjacent business development; Phase III, new brand implementation; and Phase IV, bundle plus selling.

We are currently in Phase V, which is proficiency and refinement, so I will focus in on the critical activities that are going on today. The goal in this phase is first to make any refinements in the four building blocks that are evident. I am pleased to report that we have validated each element of the strategy, and we are more confident than ever in the potential for growth, as we first become proficient and then efficient in executing this new plan.

Our current focus on proficiency and refinement involves confirming new processes are in place and working, and new habits are being learned across the organization. The most critical areas revolve around our Business performance advisors in their new role providing multi-product recommendations as an integral part of the sales process on each call.

This is critical to converting our organization from our historical focus on one offering, Workforce Optimization, into a cross-selling machine. The adjacent business offerings we have added have specific elements, which complement our service or offset costs related to our Workforce optimization Offering. We expect offering this array of service options will lead to more Workforce Optimization sales coming in from the same activity, as well as more sales of our new adjacent business offering. The ramp-up of our inside sales support organization and the ability to take in a large volume of lead activity and conduct online demos is also a key refinement.

The ability to demonstrate our solutions as part of the sales and trust-building process has been proven effective, but will have to grow to handle the expected volume. Another area of substantial effort going on in this phase is in our Sales Performance Improvement group. Bundle plus sales training and business performance advisors certification are in full swing and will continue through the rest of the year. The support system for business performance advisors, inside sales, and adjacent business sales personnel to gain proficiency are being developed and honed in real time. Training and automation for managers to coach and facilitate bundle plus selling success are also critical.

The refinement phase also includes important activity in our adjacent Business Development organization. In current adjacent business units, we are working diligently on execution skills. These teams are refining sales and operating plans and learning to accurately forecast and achieve results. We are also preparing to launch strategically selected new adjacent businesses this fall that complete an array of services to facilitate the sales efficiency we are aiming to achieve. We also have new products in development for many of our adjacent business units that are expected to drive future growth.

In the marketing area, we are very pleased to see the refinement surrounding our new Insperity brand can be characterized as tweaking messaging and leveraging validated strength. Advertising, collateral materials, websites, videos, and other marketing materials are working well, and version two of each of these will be even better. In this phase, we are literally turning on the new growth engine and running it, but ever so carefully to ensure it gets broken-in properly and fine-tuned. We are getting close to the final Phase VI, which is efficiency and growth acceleration, which will occur this fall when we attempt to rev the engine for the first time.

If we are successful as we expect, this new growth strategy will take hold in 2013 and drive significantly higher growth for Insperity. We believe this deliberate approach will provide a framework for consistent, predictable, faster growth in the years ahead. In the meantime, we are dealing with the realities of the economic climate and an on-again, off-again labor market. The indicators we monitor in our client base continue to be mixed, and in our view, decrease the likelihood of any substantial hiring in the near term.

Overtime as a percentage of base pay is down to 8.5%, and commissions paid to the sales staff of our clients are flat on a year-over-year basis. This data, coupled with a cautious outlook from business owners and decision makers, make the odds favor a labor market with a low level of activity in both layoffs and new hires. Our survey clearly shows the optimism and desire to grow that is inherent in the small business community, but there is also some demonstrated concern over fuel prices, the coming election, impending tax increases, and the effect these issues have on the economy. The good news is 75% of clients surveyed said their businesses were performing either on or ahead of plan for this year, to date.

Most expect to maintain current pay and staffing levels, but 38% say they expect to hire more employees this year, while only 6% expect layoffs. Their optimism is also reflected in their expectation for sales improvement, with 56% expecting an increase in sales over the balance of the year. However, when asked about their expectations for an economic rebound, the highest percentage are unsure when it might happen, at 40% against 25% that believe a recovery is happening now. In our experience, there have been times when the data and the sentiment don't line up, and more often than not, the data wins out in the end. So, our best analysis of this information gives rise to some level of caution surrounding hiring for the near term.

Generally, our outlook for the balance of the year for earnings per share is in the same ballpark as we started the year with. However, we now expect slightly lower worksite employee growth, offset by slight increase in gross profit per worksite employee. Also, as we have done in the past, we will make some minor operating adjustments to lower expenses to match the growth rate. We originally budgeted the year with a slight tailwind from net employment growth in the client base, and we feel it's prudent to take this out, based on what we are seeing in the labor market.

This reduces our expectations per unit growth slightly, from a monthly increase of 1,300 to 1,500 worksite employees, down to 1,200 to 1,400 worksite employees per month. From where we are today, this net gain each month produces 8% to 9% unit growth for 2012 over last year. All in all, we are off to an excellent start and on track for a great year in 2012. We are excited with the progress we are making as we near completion of our Business transformation, and the prospects for growth acceleration as we look ahead to 2013.

At this time, I will pass the call back to Doug for final comments on our guidance.

Thanks, Paul.

Now, before we open up the call for questions, I would like to provide our financial guidance for the second quarter and an update to our full-year 2012 forecast. In general, we continue to expect our full-year financial results to be within the range of our initial guidance. We have made slight adjustments to our operating plan for the latter half of 2012, to accommodate for the lack of improvement in the labor market and overall weak economy. Additionally, with the benefit of the actual first-quarter results, we are able to refine the seasonal pattern in gross profit over the balance of the year. This resulted in some tweaking of gross profit between the quarters.

So, as for our key metrics guidance, based upon Paul's earlier comments, we are forecasting average paid worksite employees in a range of 124,250 to 124,750 for Q2, and have updated our full-year guidance to a range of 126,500 to 127,000, or an 8% to 9% increase over 2011, slightly lower than our initial forecast. As Richard mentioned, we expect gross profit for worksite employee per month to be in a range of $250 to $254 for the full year 2012, which is slightly higher than our initial guidance.

As for the second quarter, we expect gross profit for worksite employee per month to be in a range of $234 to $236. The expected stepdown from first-quarter results reflects the seasonality associated with payroll taxes, 2012 benefit plan design changes, and the increased participation in high-deductible plans. We now expect a sequential increase of $3 per worksite employee per month from Q2 to Q3, and an increase of $15 from Q3 to Q4.

As for operating expenses, we are now budgeting in a range of $311 million to $313 million for the full year, which is down by approximately $2 million from our initial budget and reflects the slight changes in our operating plan to coincide with lower worksite employee forecast. For the second quarter, operating expenses are expected to be in a range of $78.75 million to $79.75 million, which is consistent with our initial budget.

As a reminder, our sponsored Champion store golf event will occur in Q2 of this year. Historically, this event was held during the fourth quarter of each year. So, taking this and some other timing changes into account, operating expenses are expected to decline by approximately $2.5 million from Q2 to Q3, and decline approximately $1 million from Q3 to Q4.

As for interest income, we continue to forecast $1 million to $1.5 million for the full year and $200,000 to $300,000 for the second quarter. We are estimating an effective income tax rate of 41% and 26 million average outstanding shares. In summary, our key metrics guidance implies a range of 2012 full-year earnings per share of $1.58 to $1.72, or a 36% to 48% increase over 2011, similar to the EPS range implied by our initial guidance.

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

(Operator Instructions)

Tobey Sommer, SunTrust.

Given the context of your prepared remarks and the cautious data you are getting out of your customer base as it regards the economy, what are the internal improvements? And as you optimize this -- the new business model and the approach with the salesforce, how are you going about trying to tweak your sales volume growth higher? Is it akin to the historical method of increasing the salesforce itself? Or are there other levers you are trying to pull?

No, we are really focused on the improving sales efficiency. And as we forecasted for the year, we felt like it would be going up naturally, based on the branding and some of the things we were doing. But the new habits and new first-call training were basically retraining the entire group of business performance advisors to a new approach. And those elements of the sales process, from the prospecting to the first call to what we call a validation step in the sales process to closing -- all those elements you have to go through training, developing new habits, et cetera. And we are migrating through that very well.

We are validating that new habits are being learned and put into practice, and it's really exciting to see that even with all that level of change going on, we are continuing to see some improvement over last year. There is a delay, though, between when you get all those elements in place, before you start to really see that efficiency ramp up on an individual level, and then, of course, across the whole Company. And that is what we are expecting to see in the last phase, which is our efficiency and growth acceleration phase, which is what our fall campaign will be about this year. And we hope that will lead to a nice step-up at year-end and a whole different level of growth, going forward.

Paul, can I ask you a question about the adjacent businesses? Where are you seeing the best traction? And conversely, maybe where you're a little bit more challenged? And then, do you have an outlook to continue to add to those externally through M&A, or more internal development? Thanks.

Thank you for that question. We certainly -- within the terms of which ABUs are doing better than others, we have a lot of great things happening in each one of them. They are separate businesses, have to be worked -- their own issues within each one. But the commonality, in terms of strategy, is getting to this point where on every first call that our business performance advisors are on, that they are making a multi-product recommendation at the end that could involve whatever set of services meets that particular client's immediate need.

And so, we are seeing that begin to happen now, and it's really exciting -- when each of our sales business performance advisors come out of a call and they are recommending -- as an example, they may recommend, say, Time and Attendance and Expense Management, because those are cost-containment or cost-reduction solutions; and that cost savings there would help make the Workforce Optimization solution more viable for that client

So, they might recommend a three-product solution. And then, once they make that recommendation, the new steps in the sales process where demos are done on the Time and Attendance and Expense Management solution, so that by the time they come back in with the Workforce Optimization proposal, you have a proposal for a combined solution that puts together the total picture of the cost savings from the ABU recommendations against the investment made on Workforce Optimization. So, there is some new skills around that, that are being put to work, and we are seeing that really come together. But like any new habit, you have to do it and then do it enough to gain proficiency, then it becomes second nature and you become more efficient at it.

So, we are getting traction on each of the ABUs to some degree. The ones that are moving on the best, I think, would be more on the cost-savings side, to use -- that is why I used the example I just used, so Time and Attendance, Expense Management. But people are starting to understand very well how, for example, the 401(k) plan as a bundle plus solution is such a tremendous value add for the client owner, that it builds momentum and trust, in terms of going through the demo of our new Retirement Services center, which is part of the Employee Service Center.

And seeing something tangible -- this whole idea of demoing the Employee Service Center and demoing the Retirement Services center, those kind of things make Workforce Optimization more tangible. And when you offer that combination of a variety of services, together with Workforce Optimization, we just expect that is going to achieve higher sales efficiency on our core service, plus additional sales for each of those adjacent businesses.

Jim Macdonald, First Analysis.

I think I might have missed it, but could you tell me the number of trained salesmen you have now, and what your expectation is for that to change throughout the year?

Yes, it's at about 260, 261, something like that. And we are going to make sure it stays at that level; might ramp it up a hair, but not much. We are -- again, this is a proficiency stage. We want to make sure people are doing what they are supposed to be doing, figuring out the new habits. We are gaining some natural efficiency year over year, because even though we are 9% down in number of business performance advisors from a year ago, but we are up a little from the fourth quarter. So, we will probably stay in about that same range and continue the efficiency gain that we have. But as things are moving the right direction, all the training is validated, we will get back to really growing that number in the not-too-distant future.

So, you don't see any issues expanding that or any high turnover in the salesforce?

No, sure don't. In fact, I think we are doing really well right there right now, and people are really engaged in learning. And I think we have our arms around making sure that in the recruiting process, we have the right type of person, we have that profile really identified well. And boy, this is an exciting career. I think our recruiting, even the new branding around what we do and how we do it and how this role has changed, is an exciting opportunity for people who really love to help businesses succeed. And so, we are finding we are attracting and bringing on a real high-quality individual, and I really think we are in a better position than ever on growing the salesforce, once we are ready to do so.

Okay. And on the ABUs, just another quick question -- so, it sounds like the growth there is really a 2013 type of story. But -- and it also sounds like you are still investing pretty heavily in them. Can you talk about how much extra earnings drag you have this year versus, say, last year for the ABUs?

Yes, I think we talked about that in our last call. And I think the real important thing to remember is that the investment made there is also an investment in growing the Workforce Optimization business faster. The whole idea of having these ABUs available, these other offerings, is to increase sales efficiency on Workforce Optimization. We felt like it was important to show both of those, but one is an investment in growth, and the other -- we were, I think Doug probably has exact numbers, but we were about $0.15 or something like that last year, in terms of an investment in ABUs. And we said it would be $0.17 to $0.20 or something like that for this year.

It's going to go up for this year, as you observed; but we are expecting that the payoff for that ultimately will turn in -- as those -- those will turn profitable, so we will recover that in the future. But more importantly, that becomes faster worksite employee growth and Workforce Optimization on a going forward -- but systemically, on a going-forward basis, and that is what we are really after by that investment.

Okay, thanks.

Jeff Martin, ROTH Capital Partners.

Was curious on workers' comp side if you could elaborate a bit on your comment that it's a transition market and that prices may be going up by other carriers, and how that would impact the business. I think you also said that it wasn't factored into your forecast right now. Could you maybe take a stab at quantifying what the impact could be if that does happen?

Yes. The transition market that I described was talked about quite a bit at the RIMs conference a couple of weeks ago -- that is the Risk Insurance Managers Society annual convention. And all of the P&C carriers are there, property and casualty, and workers' comp carriers. And so, in the meetings that we were in, they all talked about the fact that they have had basically an eight-year period of where they really haven't made any money, and now they are going to have to make profits on their underwriting, because they can't make money on the interest rate. So, what is happening is, they are all planning increases throughout 2012.

They are not calling it a hard insurance market; they are saying it's a transition market. So, that means that prices will start to increase. Well, what happens in our -- with us is that as we see that -- when we are getting proposals to quote for prospects, we are seeing what their rates are going to be. And as they increase, then we will increase ours in our allocations, which means that the spread between our allocations and our cost certainly won't get any worse, and possibly they will even get better. So, we may end up in a situation by this time next year with even higher surpluses than what we have right now in that particular cost center.

Okay, that is helpful. And then, on Phase VI of the plan, could you quantify what growth rate you are targeting? Back when things were in the 2004-2007 time frame, you were growing at 13% to 14% on a worksite employee basis. Are you targeting growth above that? And some insight into your expectation, assuming the economy improves modestly from here.

Sure. We laid out a range of expectations at our investor meetings last year, when we first laid out the long-term strategy. And we really love the way this business works at a mid-teen growth rate. It just really jams, and you can efficiently add new business and serve people well, keep the retention rates high. It's -- talk about optimizing profitability. You get into that 13% to 17% range, it's just the beautiful growth rate to grow at. You can grow a little faster on units, up to about 20 and more challenging, and a little more waste probably in there in terms of the chance or odds of attrition rates affecting you and some of those kind of things. But that is the range we want and expect to be in as we get better at what we are doing in this new strategy.

Okay, great. And then, final question, what are your -- what is the CapEx budget for this year? And do you see it accelerating next year?

We are still in the, I would say, $15 million to $20 million range on the CapEx budgets, so similar to the guidance that we set forth during our last quarterly conference call. And I think it's a little early to be talking about 2013 there, but that has been our historical run rate on our typical CapEx expenditures.

Okay, great. Thanks guys, good luck.

Michael Baker, Raymond James.

Just wanted to get a sense of when we might get some clarity on potential additional investments for the adjacent business units, and whether or not that would come before the fall sales campaign, in light of your objective there. Or is it just a function of finding the right mix at the right price, so to speak, and so it could slip beyond that?

Well, what we have been able to do is target some specific adjacent business offerings that we feel like are particularly well-suited to advance Workforce Optimization sales. Some of them are in the financial products area, we have a couple of other things that are -- that also try to find a good starting point with the customer if they're not ready for Workforce Optimization. And in both of these areas, we have been able to find a way to launch those without an acquisition or a major type of investment. So, most of the investment you are already seeing in this step-up, and a little bit of the costs associated with those solutions. So, we are out there looking at other things in the marketplace that we could buy.

There are opportunities available, some of them even -- if there was something that would boost a current ABU dramatically, we would do that if we found something. But we are not in a position right now where there is anything on the horizon that is major that we would be doing. So, it's kind of exciting; we are able to add these without making some huge offline investment and then having to integrate some type of acquisition.

That is helpful. I was wondering if you could also provide your thoughts on possible outcomes as it relates to the Supreme Court -- mainly from what you would anticipate to be an impact to the business.

Well, it's still a real grab bag out there, in terms of what the ultimate implementation is of healthcare reform. There is still a wide range of outcomes, and we see a tremendous amount of opportunity if we still go down this track; however, it's really complex. It creates a lot of complex options for business owners to try to figure out -- and for us, that is an opportunity, because we are here to be able to help businesses optimize their performance. And that is a big component; we are able to do that. But on the flip side, there is so much in this health reform that drives up cost without any real cost-containment measure.

It's -- to me, looking at the details, it's like whoever thought this was flat in the growth rate of cost, I just don't know how, when you just keep adding benefits for people, adding people on the benefits, you are taxing people to pay for the benefits for other people. And just -- it's just really a complicated, complex, and disjointed -- it's so big, it's so unwieldy, it's hard to get arms around it. And there are so many unintended circumstances, that it's just cumbersome. But -- so, then, you go to the prospect of it being uprooted. The Supreme Court, if they come in and if they decide it's unconstitutional and in its entirety has to be revoked or is declared unconstitutional, then the question is -- how much of what is already started still goes on, or what gets pulled back? How does that work?

Obviously, we are happy if we get to keep doing things like we are doing right now, we like that work. But there are some other things in between; and we have a whole group of people in our shop and Richard's group that are spending a lot of time at a deep level of detail on possible scenarios. So, that is the other side of it. It's just kind of a pain to be having to dealing with it all the time. But daily proclamations coming out of bureaucrats about what you have to or don't have to do -- and you have things like, for example, I think you are hearing it from the insurers right now that their costs have gone up, really due to a plan design change that happened over a year ago, and that had to do in January. Richard, was it January of 2011?

Yes, January 2011, where they said that they took away the co-payments and removed co-payments from preventative care at the physicians' practices. And so, we think that there is going to be some effect on everybody on health plans because of that over the next year or so.

But it was kind of a delayed effect, because it took time for the physicians to realize there is a no co-pay option for things that are coded as preventative. So, you have the whole game that goes on between how things are coded. And so, those are the devil in the details all over this. And so, we will just have to see how it works out; but I think we are ready in either event. We are all over it.

We try to keep it simple for everybody.

Thanks for the update, guys. I appreciate the thoughts.

Mark Marcon, Robert W. Baird.

Have a series of questions -- just wondering, first of all, with regards to the projections for this year, what is the implied sales efficiency?

Still in the range of what we talked about. We talked about moving up from, I think, the 0.75 or so that we were last year to about 0.85 to 0.9.

0.85 to 0.9?

Right.

And then, how would you think that is going to trend over the -- during the last quarter and going into the first quarter of next year?

Well, as you know, sales from the fall campaign impact your worksite employee growth in the spring, right?

Sure.

So, what I'm hoping is that the sales efficiency doesn't trend. I'm hoping it steps up. That is what this is all about. Now, reality is, maybe it steps up in 20% of the sales staff and then steps up in another 20% in the next quarter and another 20% in the next quarter, and so it looks more like the ramp up in the total. But what we are working every day to do around here is for this fall to have a step up in sales efficiency beyond what you normally have in a fall campaign.

That is going to mean that over this proficiency phase that we are in, people are going to learn well how to set appointments with the whole new brand and new language, et cetera -- which they are doing, but we are going to see that really step up in the fall and turn into a step up in number of appointments set. It has to start at the front end of the sales process -- step up in the number of appointments, step up in syntheses that are -- that come out of first call opportunities, because of the bundle plus approach and the multi-product recommendation. Then a step up in the validation step, and how many prospects move into that closing phase, and then a step up in closing rate. Now, all those have their own issues that we are developing the training and helping and learning. So, there is a learning process going on here. But I'm hopeful that we will see a step up as early as the fall campaign that will make a big difference going into next year.

Great. Along those lines, is there any plans for tweaking the messaging from the national campaign?

Actually -- boy, the -- our messaging, golly, is just so right on the money, in terms of what the survey results came out. And now, we are starting to see -- this is only our third round of advertising now, since the brand change. We had the spring last year after the March kickoff. We had the fall campaign. And now, here, after the convention started, in mid-March or so, started the advertising and promotion again. And we are seeing results, in terms of an increase in the number of leads that are coming in and first calls coming out of those leads. So, a lot of good signs there, and I think we are heading in the right direction. So, there is no reason to really do some major changing on messaging, and that is why we do have some tweaking here or there going on at some revision, but not a lot.

How about on the media budget?

Well, we have been able to do what we intended to do, which was try to get our advertising back up to prerecession levels. But I'm real happy we didn't have to -- the actual bubble of investment in advertising related to the rebranding, we got behind us last year; and we are not having to goose it more, because it's so new. That means the advertising was catchy enough, the image was enough to get people's attention. We have a lot of people who have said -- well, we -- Insperity, who are they? It seems like they have been around a long time. Well, that is perfect. That means -- it's like a new name that they feel like has been here a long time. That really sounds like a contradiction, but we really have knocked it out of the park in that regard, and it's gaining a lot of steam.

Great. And how are you thinking about new offices? Any thoughts there?

Yes, I think this year we want to keep that number of business performance advisors about in the same range. We want to start moving up a little bit, as we see that all of our trainings really worked and in place, if we can ramp it up a little bit we will, depending on managing the operating side of the business. But as -- once we validate some level of efficiency gain, then we are going to start growing the salesforce again. We have room. I think we can run up to about 320, probably, without any new offices. Don't hold me to exactly that number, I haven't calculated that one in a while; but it's about 300, 320 for sure. And then, we can -- at that point, we would start opening new offices, and we are anxious to do that. I would like to be opening a couple latter half of next year or something, if everything goes well.

Great. So, the 260 that you will have during the fall selling campaign, how will that compare to what you had during the last fall selling campaign?

Should be about the same.

Roughly about the same?

Yes, roughly about the same number.

But more experienced?

No, no. Well, in the fall campaign last year, we had, let's see, trained reps -- actually, it will be just a little higher. We were probably about in the 250 range, 250 to 252, something like that.

Okay. So, this time it will be a slightly higher number, and also more experienced, both from knowing the new concept, knowing the ABUs, and just time within the organization, correct?

Absolutely.

So, we should see a sales efficiency increase, if everything else remains equal. But you are just a little bit more cautious, with regards to some of the survey results that you are getting. Is that --

Well, yes. I think we just felt like we needed to take out any help from net hiring within the client base, and it seemed like that is something that we should count on. If it happens, well, it's upside, fine. But with an election looming, no tax -- trying to figure out what the tax code is going to be next year, fuel prices up, economic growth weakening, labor numbers decrease each month through the first quarter, this is not time to be counting on net hiring in the base. So, we thought we would leave that as upside.

Okay. And did you give the regional breakdown that you took?

No, we didn't do that. That is something we have been doing over the year is, primarily, as we have gone through the national expansion plan and have gotten out of the higher concentration in the Southwest. And typically, the growth, as you have seen, has been where we put the sales reps. And the growth has been nice up in the Northeast and some out in the West, but we are growing in each of the different regions. But that is something we didn't give this time; we are focusing more on the core business, and then Paul talking also a little bit about the ABU strategy.

Did the Southwest grow, though?

Yes, and there will be something in the Q. We will continue to do that revenue contribution, growth by region, in the Q.

Okay, great. And then, what is the ABU take-up rate on Time and Attendance and Expense Management?

Well, I don't know exactly how we would describe a take-up rate.

Yes.

But --

Like of the new sales, or -- you did mention that however you track it, just in terms of what percentage of the new sales that you are getting are also taking the Time and Attendance ABU.

It's a little early to go -- I hope to do that, and fairly soon. But what we are focused on now is making sure that business performance advisors know when to recommend which solution, and how that fits with the game plan at that particular client and what they are focused on, what their needs are. And then, we are not training our folks to go in there and just show everybody everything and let them pick. We are trying to advise them, based on our experience as to what combination of services will help their business improve -- either run better, grow faster, or make more money, as soon as possible. We are looking for quick hits, substantive changes that can make a difference that the Company can feel early on. So, it's a -- but hopefully over time we will have some better numbers for you on that.

Okay. And then, lastly, any commentary with regards to competitive activity? How are you seeing the competition at this point? How are they behaving? Are they having any impact?

Well, not really. We have been working so hard in what we are doing to be a category of one, different, unique and so meaningful to the client, that none of that matters. We haven't seen a lot of changes there. It's pretty much the same thing; a lot of what I would call price competitors-type thing. But more and more, this strategy is also about competitive advantage and it's about distinguishing yourselves -- ourselves in such a way that nobody else can do what we do. And we are on a good track for that.

There are no further questions at this time. I will now turn the conference back over to Mr. Sarvadi for any closing remarks.

All right. Well, thank you all very much for participating today, and we look forward to continuing this solid execution, going forward. Thank you.

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