Insperity Inc (NSP) 2012 Q2 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 second 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 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 with such as expect, contend, project, believe, likely, probably, goals, objectives, outlook, guidance, appears, targets, and similar expressions are used to identify such forward-looking statements 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 second 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 third 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 second quarter results. Today, we reported second quarter earnings of $0.22 per share, which was within our expected range and slightly down from the $0.25 per share reported in Q2 2011. This is largely due to the shift in timing of our gross profit and operating expenses among the quarters related to benefit plan migration and the timing of the Insperity championship. However, when combined with Q1 earnings, EPS for the first half of the year has increased 27% over 2011 from $0.59 to $0.75 per share.

As per our key metrics, paid worksite employees averaged 124,219 for the quarter, an increase of 8.3% over Q2 of 2011, and just below our forecasted range. Gross profit for worksite employee per month averaged $234 within our expected range, and operating expenses came in below our forecast at $78 million. We generated $17 million of EBITDA plus stock-based compensation, increased our dividend rate, and repurchased 327,000 shares ending Q2 with $133 million of working capital and no debt.

Now, let's review the details of our second quarter results. Revenues increased 10% over Q2 of 2011, to $519 million, driven by the 8.3% increase in average paid worksite employees. As for the drivers to our worksite employee growth, client retention remains at historical highs averaging 99% for Q2. We experienced some net hiring in our clients base during the quarter, including some seasonal summer help. Worksite employees paid from sales showed improvement throughout the quarter and Paul will share the details of our sales efforts with you in a few minutes. Our key pricing metrics gross profit for worksite employee per month averaged $234 for Q2. Richard will provide the details behind our results in a moment so I will just provide some brief comments.

Benefit costs for covered employee came in higher than expected, increasing by 6.5% over Q2 2011 to $882; however, it was offset by favorable results in both our workers' compensation and payroll tax areas. Workers' compensation costs totalled 5.3% of non-bonus payroll, including the $3.4 million reduction in previously reported loss reserves. This was below our forecasted range of 0.58% to 0.60%. As for our payroll tax call center, you may recall in our previous conference call Richard mentioning an outstanding $2.9 million tax refund claim filed with the State of Pennsylvania.

We were hopeful of a positive outcome this year and have, in fact, received good news. Not only did the State Supreme Court rule that sales tax should be not be charged on PEO services, we also received a definitive favorable ruling from the Court of Finance and Review on one of our two specific refund claims. Based on these developments, we recorded a credit for the total of both claims in the amount of $2.9 million in Q2.

Now, let's move on to Q2 operating expenses which totalled $78 million, or approximately $1.4 million below the mid-point of our forecasted range. The increase of 7.5% over Q2 2011 included the impact of shifting our championship golf event from Q4 to Q2 this year. We also experienced an expected increase in salary and wages and depreciation and amortization associated with our new adjacent businesses. These increases were partially offset by the non-recurrence of rebranding costs and a lower incentive compensation accrual.

Net interest in other income for the quarter was $176,000, down from $304,000 in Q2 2011. Our effective income tax rate declined from 42% in Q2 2011 to the expected 41% rate in Q2 of 2012. As for our cash flow, EBITDA plus stock-based compensation increased 20% from $39 million in the first half of 2011 to $47 million in the first half of this year. Year-to-date cash outlays included cash dividends of $8.3 million, capital expenditures of $8.3 million, and repurchases of 433,000 shares at the cost of $11.7 million.

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

Thank you, Doug. This morning, I will fill you in on the details of our second 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 the third quarter. As Doug just reported, our second quarter gross profit for worksite employee per month was $234, which was at the low end of our range. The gross profit was made up of $190 average markup, $32 of surplus, and $12 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 adjacent business contribution was $1 per worksite employee per month above our forecast, and the $32 surplus was right on our forecast. The $190 average markup was the same as it was last quarter and in Q2 year-over-year. This is in spite of a 26% increase in worksite employees in our mid-market segment, while experiencing just a 6% increase in our core market segment.

You may recall that our mid-market accounts have a lower markup and gross profit per worksite employee but have a comparable or higher operating income per worksite employee due to the economies of scale. Our adjacent businesses saw a slight increase in revenues as the training and implementation of our cross-selling activities have started to take hold. Looking at the details of the surplus, we did experience both positive and negative variations from our forecast in each of the direct cost centers, but in total, we were right on our forecast.

One positive adjustment came in the payroll tax cost center from the $2.9 million Pennsylvania tax credit, which contributed to a $10 per worksite employee per month better than expected results. The negative adjustment was a $2.4 million increase in our benefits cost for some claims that were incurred prior to this quarter that came in higher than we expected. In total, the benefits cost center deficit was $14 per worksite employee per month worse than expected.

Most of the shortfall was due to this adjustment and the balance was due to lower allocations because of continued migration of participants and to the lower cost higher deductible plans. Workers' compensation cost centers positive surplus was approximately $4 per worksite employee per month higher than we had forecasted. These results were primarily related to the success of our claims professionals settling previously filed claims for amounts less than our outside actuaries original estimates. In summary, we had some unusual items that basically offset each other this quarter and the bottom-line is that we came in at the low end of our expected range.

Now, let's shift our focus to the balance of 2012, beginning with our markup. We would expect to see our current markup remain the same for the balance of the year based on the mix of new business sold and renewal pricing. 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 third quarter surplus declines from the second quarter surplus as growth in worksite employees continues. Since our growth has been at the low end of our expectations, this cost center surplus should actually be slightly better than our original forecast for both Q3 and the full year.

Moving to the workers' compensation cost center, we expect the pricing side of the workers' compensation allocations for new and renewing business to continue to remain constant. On the cost side of the workers' compensation cost center, because we have had positive results so far this policy year, we want to be conservative with our estimates, so we are comfortable keeping our forecast and expense at the 0.58% to 0.60% of non-bonus payroll for the balance of the year.

Now, switching to the benefits cost center, let me tell you how we see our deficit changing beginning with the pricing allocations. As I mentioned a few minutes ago, we have continued to see significant increase in the number of employees selecting higher deductible health plan options, which automatically reduce our allocations. We are constantly monitoring costs and the appropriateness of our allocations for these plans. We will continue to increase our allocations on both new and renewing business to offsets the increases to our costs, which continue to be substantially lower than the small business marketplace for comparable plans.

On the cost side of the benefits cost center, when we consider continued migration into lower cost plans, trend, plan design changes back in January of 2012, and participants' deductibles being at satisfied, we expected the benefits cost per covered worksite employee will increase about 4% to 5% year-over-year for both Q3 and Q4, which is consistent with our prior guidance.

So when you combine all of the forecasted direct cost surpluses and the benefits cost centers deficit, we should generate a net surplus of about $33 to $36 per worksite employee per month in Q3 and $46 to $49 for the full year. Our last contributor to gross profit, which is our adjacent businesses services, should continue to add about $12 per worksite employee per month to gross profit for the balance of 2012 as cross-selling efforts continue to improve.

In summation, when you combine the service fee, the surplus, and the adjacent business contribution, we should see our gross profit per worksite employee end up in a range of $235 to $238 for Q3 and $249 to $252 for the full year, which is still in line with our original forecast.

At this time, I will turn the call over to Paul.

Thank you, Richard. Today, I will focus my comments on two topics that are catalysts for growth and profitability for Insperity. First, I will cover our progress establishing our cross-selling systems, which we call Bundle Plus selling. Secondly, I will discuss new adjacent business offerings that are ready to be staged in over the balance of this year. I will conclude my remarks with our outlook for the balance of the year based on the inputs we have from the small and mid-size marketplace and the macro-economic climate.

Insperity is in an exciting business transformation that dramatically expands our potential. We are changing from providing one highly successful service offering over our first 25 years into a diverse business performance solutions provider. Our workforce optimization offering is the most comprehensive business solution in the marketplace and our new strategy paves the way for faster growth and market penetration for this service, while offering many more options to help companies run better, grow faster, and make more money.

This plan requires a new approach to sales with an emphasis on integration or integrating cross-selling into our sales process. Last quarter, I described the six phases of our business transformation. In detail, the fifth phase, which we are in currently. In this phase, the focus is refinement of each element of the long-term strategy in gaining proficiency in any new processes and habits required to execute the plan.

Considering the breath an depth of these changes, we chose a deliberate change management process to manage the risks associated with such a wholesale change. Our biggest concern was the possibility of stalling or substantially reducing ongoing workforce optimization sales. I would say we get an A minus or B plus on this measure as our 2Q and first half sales came in at 95% and 97% of forecast, respectively.

The transition for our 288 person sales team involves learning and integrating many new habits into their new role as a Business Performance Advisor. Every stage of the sales process from prospecting to closing has very specific changes and the entire team is moving up the learning curve. The role of a Business Performance Advisor requires a more holistic dialogue and analysis of the state of a prospect's business and the ability to distill this information into a multi-product recommendation.

To accomplish this, the Business Performance Advisor must have a broader base of knowledge and business insight coupled with a high level understanding of a broad array of business solutions. For this reason, we partnered with the University of Houston and the Bauer College of Business to develop and implement a Business Performance Advisor certification program. Since last September, our Business Performance Advisors have been working their way through 80 hours of training around specific challenges, businesses-based, and the options they have to solve these problems.

The final step in the process is a comprehensive business simulation, which tests their skills by running a business and making the decisions over a multi-year period. We expect approximately 80 individuals will earn their Business Performance Advisor certification at the fall campaign kickoff in September.

So our sales team is moving to a new level of sophistication to support their new role as advisors to owners and managers of small to medium-sized businesses. In addition, they have many new offerings of products and services to add to workforce optimization or to recommend on a standalone basis. They also have new processes to learn to track and oversee progress toward validating their recommended solution set for each prospect. This quarterbacking role is also new and they are moving up a learning curve on this function as well.

Our new strategy also calls for the development of our inside sales team to handle adjacent business unit prospects that are handed off by our advisors. During the quarter, we have more than doubled the staffing level to 13 to build capacity to handle volume levels we expect as Business Performance Advisors become more adept at multi-product recommends.

Volume into the inside sales operation has already began increasing substantially as (inaudible) grew from 247 in April to 848 in June. Sales of adjacent business unit offerings from the inside sales operations have followed this ramp-up from 34 in April to 57 in June. Cross-selling into the current workforce optimization client base has also been accelerated. Through the second quarter, nearly 1,500 clients purchased one or more adjacent business offerings. This is further evidenced we are getting cross-selling into our DNA.

Another important aspect of our transition is integrating Bundle Plus selling in our mid-market unit among our business performance consultants that serve this segment. We have seen a ramp-up in activity and as we round out our adjacent business service offerings to this segment, I expect to track more and larger prospects. I also expect improved workforce optimization closing rates in this segment as a result of this strategy.

One of the most important developments during the second quarter was the progress we made in our sales performance improvement team. We were able to lay out the roadmap for Bundle Plus sales training and will roll out the full Insperity trusted advisor selling system at the fall campaign kickoff. This will include video role plays of each step in the process and allow for faster transition for our current Business Performance Advisors, as well as the ramp-up of new advisors that we expect in the near future.

The second major emphasis of our refinement phase of our transition revolves around our adjacent business units. We are rapidly improving our execution in sales, service, and management of these businesses and adding key product services over the balance of this year. Our adjacent business offerings have been carefully selected to complement our core workforce optimization service.

The offerings must fit in a premium product or service category and overcome an obstacle or build momentum and trust toward making a workforce optimization sale. Our Software as a Service businesses are excellent examples of a great fit for adjacent businesses. Insperity Time and Attendance, Expense Management, and Performance Management are offerings that can overcome a cost objection and demonstrate our technology and back-office expertise.

One adjacency that has been missing from the mix is payroll service, providing payroll options through a software in the service or traditional service has been on the list of desirable additions since the early days of developing our new strategy. Payroll is one of the first outsourced activities for small businesses. It serves as a feeder and hub for other offerings. Over the past two years, we have explored many options to enter this business.

We considered launching into the payroll business utilizing each of our bill, buy, or partner options. Over this period, there have been opportunities to acquire companies in the business for a price tag of $50 million to $300 million. However, after evaluating more than a dozen specific companies, we found a perfect fit solution for a unique offering in the payroll space at an extremely low cost of entry. In addition, this same payroll solution is a platform for several exciting new adjacent business offerings.

We found a powerful human capital management technology platform that is also used to support payroll service companies. After a thorough review last December, we purchased the source code for this application for approximately $4 million. I believe this will prove to be an extraordinary investment. Since the purchase, we have completed our business plan to establish a premium payroll service to differentiate from the commoditized services in the marketplace. We piloted the service over the past several months and expect a formal launch into the business as part of our fall campaign kickoff in September.

We will enter this business offering payroll, a basic human resource platform, workers' compensation, online 401(k), and time and attendance integration. This offering will be a perfect fit for prospects not ready for workforce optimization or for clients exiting our core service. As an added bonus, this application we purchased is an end-to-end HCM platform for mid-market companies. We expect to formally launch this offering for mid-market prospects this fall. Over the past five years serving this segment, I know of no other more pressing need for these prospects.

An HCM Software as a Service offering is also a perfect initial step for a mid-market company not quite ready for our full service offering. In addition, this platform is built in a manner that functionality of a single component or any combination of components can be toggled on and off. If a customer buys the HR administration component, once implemented, the entire application or any other component, like recruiting or performance management, can be upsold and turned on with the flip of a switch.

In order to take advantage of this dynamic platform, we reorganized our service technology development unit and merged in additional technology development resources. This group is charged with fully leveraging this investment into however many distinct offerings the marketplace demand. So with one investment of approximately $4 million, we found a platform for our premium payroll service, mid-market HCM, and an array of potential single applications from recruiting to learning management. We are very excited about the growth of our current SaaS businesses and the addition of these offerings is expected to increase our opportunity exponentially. In the last 12 months, we've had a 43% increase in SaaS seats and have recently reached 100,000.

Also on the horizon, once our pilot program is validated, will be a new financial services adjacent business unit. In our analysis of the needs of the small business community and the biggest challenges to completing a workforce optimization sale, we found two significant financial issues. First is the lack of accurate timely actionable financial information and the second is cash flow. We have three new complementary services that provide a unique and powerful solution to both of these problems.

Since over 90% of small businesses use QuickBooks, we have partnered to develop a downloadable application for QuickBooks users that converts their accounting data into actual financial information. This information includes a dashboard of key balance sheet and income statement metrics, along with a cash flow projection based upon actual invoicing and historical receivable collections. Users can see future cash flow issues and spot the need to accelerate collection of specific invoices to avoid a problem.

We've also partnered in the development of a back-office bookkeeping software with a service offering for those companies challenged with properly accounting for their business. If the company's financial data is flawed or incomplete, the dashboard clearly provides evidence of the need for this service. In addition, if cash flow is clearly an issue, which is true for many companies, we have a unique solution in the form of our previously announced relationship with the Receivables Exchange. The ability for our Business Performance Advisors to bring these tangible, practical financial solutions to the table for our prospects will be a great addition to the mix.

Now, one final product introduction I must mention is a game changer in our expense management business. Soon, we will announce the introduction of an expense controlled card for businesses. This one-of-a-kind card product was developed internally to allow a company to gain control over a very sticky issue, employee expense reimbursement. This card is a reloadable, and maybe more importantly a rescindable debit card. Yes, you can put funds on and take funds back off the card. Also, you can limit the card for a specific use by merchant code to enforce the purpose for the advance of funds to the employee.

This card is used with and managed through ExpensAble, our expense management Software as a Service application. You can preprogram this card to add a per diem for a specific number of days an employee is traveling. In this instance, if you provide $100 per day and the employee uses $85 at authorized merchants, then at midnight the card is automatically reloaded to $100, saving the company $15.

This will come with a capability within our mobile application for requesting and approving funds that proved quite amazing in testing. An employee filled out his request on his iPhone, which automatically routed the request for approval and then loaded the card in less than one minute. This card has endless application in the marketplace. Insperity earns transaction fees on the utilization of the card, and we expect the card to drive the sale of Insperity ExpensAble Software as a Service.

So we have a variety of targeted new offerings coming down the pike in the near future to give full effect to our new multi-product strategy. We are very excited about our internal developments and plans for the balance of the year. We do, however, see political and macro-economic headwinds ahead as we execute our plan.

Our survey information this quarter, coupled with the data we watch from our systems, signals continued weakness in the economy and the labor market for the balance of the year. Small business leaders are less optimistic and more anxious about the economy, the pending election and the fiscal (inaudible) immediately ahead. Every measure of optimism was down in the quarter, including hiring, sales, and economic expectations. Most of the data from the quarter does not indicate enough strength to offset this sentiment.

Commissions paid on behalf of our clients were up from 2.6% in Q1 to 5.2% in Q2 and bonuses were up 4.7%. But overall, average compensation only increased 1.9% year-over-year. As a result, we have a more guarded outlook for growth over the balance of the year and we have trimmed back our estimates accordingly. We now expect 7% to 8% year-over-year unit growth over the balance of the year, just slightly down 1% from previous estimates. This would result in 8% unit growth for the full year.

In summary, I believe we have navigated very well through a major business transformation and continue to grow profitably in a difficult environment. We are poised with a new strategy and exciting new offerings to appeal our future growth and create tremendous value for our shareholders.

At this point, I would like to pass the call back to Doug to provide specific guidance for Q3 and the balance of the year.

Thanks, Paul. Now, before we open up the call for questions, I would like to provide our financial guidance for the third quarter and an update to our full-year 2012 forecast. In general, we are forecasting our full-year financial results to be within our initial range, however, near the low end given the further softening in the small business economy and labor market.

As for our key metrics guidance, we are forecasting average paid worksite employee in a range of 126,500 to 127,000 for Q3, which considers our current sales and retention run rate and the typical decline associated with seasonal summer help. When combined with our expected growth in Q4 and bearing in mind that most fall campaign sales come onboard as paid worksite employees in the following year, we are revising our full-year guidance to a range of 125,750 to 126,250, or about an 8% increase over 2011.

As Richard mentioned, we now expect gross profit for worksite employee per month to be in a range of $249 to $252 for the full-year 2012, which is similar to our initial guidance. As for the third quarter, we expect gross profit per worksite employee per month to be in a range of $235 to $238. As for operating expenses, we are now budgeting in a range of $309 million to $310 million for the full year, which is down by approximately $4.5 million from our initial guidance due to changes in our operating plans to coincide with a lower worksite employee forecast and a lower corresponding incentive compensation accrual.

Remember that 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. For the third quarter, operating expenses are expected to be in a range of $75.5 million to $76.5 million. As for interest income, we are now forecasting a range of $900,000 to $1.1 million for the full-year and $200,000 to $300,000 for the third quarter. We are estimating an effective income tax rate of 41% and 25.8 million average outstanding shares. In summary, our key metrics guidance provides a range of 2012 full-year earnings per share $1.55 to $1.67, or a 33% to 44% increase over 2011.

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

(Operator Instructions). Your first question will come from the line of Jim Macdonald with First Analysis.

Good morning, guys.

Morning, Jim.

Could you tell us where you are in terms of number of Business Performance Advisors and what your plan is for the fall selling season and going into 2013?

Yes. We had 200 -- I believe it was 288 total, 261 I think is your trained count, and as I mentioned in my script, the great progress we made this quarter has to do with the ongoing training, the new training for Business Performance Advisor. That's being finalized and we're going to introduce all that at the fall campaign kickoff. Once we go through that one round of training, we will make revisions over the fall and start growing that sales force into 2013.

So not much growth from there into the fall?

No. For the balance of the year, we want to make sure this group are ready to rock-and-roll out there and gain proficiency and start to gain efficiency, and as that happens over the fall, which is what I expect, then we'll be ready to start bringing in larger numbers of new Business Performance Advisors and grow that base next year.

And then one quick follow-up. I was very interested in the payroll offering. You kept referring to it as a premium offering. Could you describe what you mean by that and also is it targeted towards kind of small users or mid-market users or where is it going to be targeted?

Well, it will begin at our core customers, small to mid-sized business customers. We have capability for larger and will be able to do that. And what we mean by a premium service, it's kind of interesting after the last three years that we spent digging so deeply into the payroll business as a whole, we found some very amazing things. For example, we found people that would advertise and be proud of a 91% accuracy rate, things like that, you know, with the payroll companies and we saw whole operating units that do nothing but correct incorrect tax files. And we found that those are things that in our workforce optimization business where we've been doing payroll for 26 years, we could never live with those numbers and we believe there are people out there who want payroll done on an accurate and timely basis, they want the kind of service that we provide within our workforce optimization unit, and with this new platform we have, with the capability that have some nice offerings around it, an HRIS system and some other components, we believe that there's a good target customer base out there that's under-served and not served at all that would appreciate a premium service.

And do you plan to offer it through your normal channels or through internet or what -- how would you differentiate it from a regional payroll offering or a national payroll offering?

Sure. The answer is yes, yes, and yes. Certainly create a powerful presence online which is where a lot of people to look to first make an inquiry. We also will set about in a very decisive way to build the CPA channel, which is always a great way for payroll businesses to grow, but we also have the benefit of a 288 person group of Business Performance Advisors that are also able to take advantage of the 25,000 businesses that we see face-to-face every year.

Okay. Thanks very much.

Your next question will come from the line of Mark Marcon with Robert W. Baird.

Good morning. I also have some follow-up questions with regard to the payroll offering. How are you going to price that relative to what's currently being offered by some of the national providers, going against those in the small business market?

Well, when you provide a premium service offering, it's always important for your pricing to match the premium service, so we would expect to be priced higher and be able to demonstrate the value and the reason that you should pay more. This also helps us to build a farm system, if you will, of premium service buyer style prospects for the other products and services that we offer because that's our target in the marketplace is still that type of buyer, there are people that want the best and they want it done right and they will pay for it. And payroll is not expensive anyway, so when you look at being a premium to what's in the marketplace, we don't -- in our pilot project, we have found our pricing was very well received.

Great. How big was your pilot?

Well, we started back in March, we're still in it, but so far we're doing very well.

Great. And in terms of when will it be rolled out to the sales force?

Well, the fall campaign kickoff in September, that will be the formal launch.

So they should be able to sell it this fall selling season nationally?

That's correct.

Great. And how are you going to set it up in terms of the incentive for selling that relative to the core offering?

Very carefully.

Yes.

We certainly want them to be focused on workforce optimization clients and their compensation will be weighted properly so that I don't think there will be any question if the customer is a prospect for workforce optimization, it would be handled that way.

Great. And how scalable is that source code?

It's phenomenally so. It's just fantastic. We couldn't be more thrilled about it. It was right in our wheelhouse in the type of development and technology that we worked with everyday here, so our folks are very excited about it, both from running the payroll business but also HCM for mid-market companies. I think that's going to be fantastic.

Great. And is it going to be -- is the payroll going to be included in the adjacent business units in terms of when we think about the gross profit for worksite employee?

Yes.

But you didn't change the forecast for the adjacent business unit gross profit for worksite employee guidance for the year?

Actually we did.

Oh, you did.

Just slightly.

Yeah, just slight.

How much did you take it up by?

$1 per worksite employee per month.

Okay. And is that basically just to account for this?

No. I think that's going to be more driven by the --

By where we are right now.

We're being very conservative about these new offerings until you get some runway with them.

Yes. And you don't know the timing of them either. Remember, there will be a lot of sales activity going on in the fall, but it won't show up until January.

Yes, they'll be January 1 start.

Got it. And you took the forecast assumption down by about $4 million for the year. Where is that coming out of?

Well, it's coming out of one thing that's driving that is with the lower worksite employee forecast, I think you're well-aware of how we tie our incentive comp program so it will be coming out of the incentive comp. Some of it is just coming out of when you have less worksite employees, there's a need for less headcount in various areas of the Company. So where we had projected a certain increase in corporate headcount for the year, we no longer need that same level of increase. I think we still need to invest in headcount in certain areas, even in both the core, workforce optimization, and in some of the ABUs, but not at the same level given the lower worksite employee forecast. Those are the primary two areas.

Yes. We have got everyone tied to managing expenses as part of our incentive comp, so it happens fairly naturally to keep operating expenses in line with our growth.

Paul and Richard, I mean with all the years that you've been in this, would you say this fall selling season might be one of the most difficult to predict just given the kind of the policy and political overhang that we have going into this fall selling season?

I definitely think in terms of macro-economic and political influence in this fall, it's going to be interesting, but I -- the momentum that we have internally from what we're doing is really strong. So it's going to be interesting to see how all that washes out.

Great. Appreciate the comments.

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

Thanks. Good morning, guys.

Hi Jeff.

I was curious if you could help us think about the adjacent business services this year versus next year in terms of the drag on earnings profitability. I know that you've mentioned it in the past, if you could refresh us on what your expectation for drag is this year and then for next year if you have that preliminary outlook?

Well, we really don't have anything pinned down for next year. I think this year, we're looking at $0.20, $0.22 or something is what we said last quarter. It's the same as whatever we said last quarter. And the way this will roll out over time, you'll have each ABU on whatever their path is to get to profitability and so you kind of look at it in the portfolio. Some will be getting there, some are behind, and so we look at when will we reach profitability on the portfolio in total. It's kind of hard to say. I wouldn't expect it next year, but I would expect some progress next year and then maybe 2014, or somewhere in there we start to see this thing really come out of the water.

Okay. And then can you give us an update on how you think the results are fairing for the renewed marketing strategy and the rebranding of the Company? And do you think you're not really seeing results in terms of the unit growth? Are we at the cusp of that or is it really bogged down by the economy? Some perspective there would help.

Well, first of all, boy, am I happy we did it. It's just so much better. It's such -- I mean, just the dialogue you have, without having this big obstacle in the way in terms of being a misnomer with the old name; much, much better. But I do think that we've been doing really well in terms of branding. In terms of lead development, we've kind of -- until you've got your sales staff fully prepared and fully trained and proficient in the whole sales process, you don't really want to push the other button that hard on lead development. So we're on a good track there.

We have, for example, coming this fall will be our Insperity.com 2.0, which is going to have commerce capability, it's going to have the ability for our Business Performance Advisors to have their own site. There's a lot going on in that front. So there's a lot of things we're doing that are more focused on lead production that are associated with the fall that I will be covering next quarter. So I would say, no, we haven't seen a lot of step up in lead flow, although it's been better than it was. And considering the economic climate, it's really kind of hard to tell how much better it really is or how bad it would have been if we were still with the other brand. So we're very pleased with it, but I think the best is yet to come.

I think when you blend in the uncertainty that is in the small business marketplace right now, that just adds another level of complexity to the analysis, and I think, I really do, I think the brighter side is coming.

Great. Good luck, guys.

Thank you.

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

I was looking to get what some of the things you're watching as it relates to the health reform from an implementation standpoint? What key variables are still out there to be decided and what are you keeping an eye on?

I will tell you that we have an entire dedicated team inside the Company that is working through a number of different scenarios based on how healthcare reform rolls out. You've got 15 states right now that are not planning to open an exchange. What does that mean for us? We've got some states that are talking about having an exchange and a plan that is similar to Massachusetts. What does that mean for us?

So we are, I would say, pretty close to neck deep into the weeds about the elements of healthcare reform and as we flush out and finalize some strategies over the next two or three months, we can certainly talk about those more and how we see them affecting us. I guess my big picture right now is that if you're a small to medium-size business, for you, you're going to kind of want to be with somebody like us because it's going to get pretty ugly out there and I will tell you that in 2014, the cost of healthcare will be going through the roof.

And I would add one thing to that, that part of our whole repositioning of the Company and our sales organization as Business Performance Advisors had an element of preparation for healthcare reform because one thing is certain that small to mid-sized businesses are going to -- you used to not have many options on healthcare. They're going to have a bunch of different options from providing it, not providing it, paying tax, subsidizing it, individual employees in a group plan, subsidizing them into the exchange. They're going to have a wide variety of option, including using our workforce optimization solution. But to reposition as advisors to be able to help small to mid-size businesses navigate through their decision-making process, I think that's going to turn into a favorable business for us.

Thanks for the update.

Your next question will come from the line of Tobey Sommer with SunTrust.

Thank you. Now that we've got an affirmation of healthcare reform and we're a little bit into some of it, at least, is it your expectation that your target customer base will shrink or grow as a result of it?

No. Actually, I don't think it'll shrink at all. I think, the fact of the matter is with all the options that may be out there for business owners to select from, there's still one overriding element that I think is going to drive business in our direction and that has to do with this concept of attracting and retaining employees. And if you don't have something other than just a paycheck to do it, you're missing the boat. What we see in our business right this minute is the -- when we talk about this churn and the migration that we see every quarter, a couple of things that are going on behind the scenes.

First of all, the customer base, the customers that are with us that have been in a particular plan from one year to the next, they don't change that much. It's the customers that leave and new customers that come on that weren't in one of our existing plans are the ones that create the churning and also cause this migration effect on our book of business. So my point there is that small businesses, once they get into a plan that seems to fit their profile, and their richer plans, they like to stay in those.

I would say we've always viewed our target market as about 600,000 perfect fit customers in the small to medium-sized business community that both fit demographically in terms of our tolerance for risk but also (inaudible) as a premium service buyer, someone who cares about their employee, someone who's already providing benefits, which I don't think the mandate on businesses is really going to affect our target customer base. I really think that we've got -- we're still after the same customers with a pre and post health reform environment.

I wanted to ask you a question on the adjacent services relative to the balance sheet and stock repurchase. You have been assembling services and executing that strategy in anticipation of this rollout and kind of selling from a bundled approach. Are you actively looking and do you need to add to that by deploying more capital or are we at a stage now where it's executing on what you have in the offerings and perhaps dedicating more of the resources in a stepped up repurchase? Thanks.

That's a good question. We -- as we have been going through this and as we've look at the full picture of what we think we want to offer that helps us sell workforce optimization and helps our customers in a Bundle Plus environment where they -- we help them run better, grow faster, make more money, we have now, I think, pretty much the spectrum of what we want to have. That's not to say we wouldn't find something else that's nice quick hit, real help to our customers. We'll keep looking for those kind of things. But at one point, we knew the payroll business was one we would eventually go in and we've built our (inaudible) up and even got -- how much is our lineup we've got, Doug?

About $100 million.

$100 million with an accordion of another $50 million or something. So we wanted to be prepared in case we were going to enter that way, but at this point, I think our ability to develop solutions in a lower cost environment with less investment, I think it's a lot better. We're really gotten a lot better at this over time. So I think our use of cash is more likely to reflect what you have seen recently. We've increased the dividend rate last quarter, we bought back 433,000 shared year-to-date, and, boy, at these prices, our share prices, I think we will continue to be active.

Last question is if you could comment on what trends are like in the mid-market and whether there are any nuances to mid-market sales as you look at the fall campaign? Thanks.

Sure. We have a really nice pipeline of potential business to add on for the fall campaign. That cycle starts a lot earlier. Those -- it's the prospects that we contacted earlier this year and we've got (inaudible) sales process we do called a business alignment survey and provide results from that as a step of the process that helps to develop a need and so forth. We've done a lot more of those this year than we have in the past and so we're in good shape in terms of the pipeline there. But whether or not you close them and what number you close in the fall, it's just hard to tell. And like I said earlier, we have the macro-economic and political scene out there that is somewhat of a drag, but we'll see how many we can bring across the finish line.

Thank you. I will now turn the conference back over to Mr. Sarvadi for closing remarks.

All right. Once again, thank each of you for joining us today and we're excited about where we are today and where we're going and we look forward to talking with you again next quarters or seeing you out on the road. Thank you.

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