Insperity Inc (NSP) 2012 Q3 法說會逐字稿

Good morning. My name is LaPortia and I will be your conference operator today. At this time I would like to welcome everyone to the Insperity third quarter earnings conference call. (Operator Instructions).

At this time I would like to turn today's call over to our speakers, 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. Mr. Sharp, please go ahead.

Thank you. We appreciate you joining us this morning. Before we begin, I would like to remind you that any statements made by Mr. Sarvadi, Mr. Rawson or myself that are not historical facts are considered to be forward-looking statements within the meaning of the Federal Securities laws. Words such as "expects," "intends," "projects," "believes," "likely," "probably," "goal," "objective," "outlook," "guidance," "appears," "target" and similar expressions are used to identify such forward-looking statements 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 third quarter 2012 financial results. Richard will discuss trends and 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 have made to position ourselves for growth in 2013, I will return to provide our financial guidance for the fourth quarter. We will then end the call with a question-and-answer session.

Now let me begin today's call by discussing our strong third quarter results. Today we reported third quarter earnings of $0.45 per share, significantly above the high end of our expected range, and a 36% increase over the $0.33 per share in Q3 2011 when adjusted for the $0.17 per share of costs related to two nonoperational items. Year-to-date EPS has increased 32% to $1.20 per share from the 2011 adjusted EPS of $0.91. As for our key metrics, paid worksite employees averaged 127,096 for the quarter, above the high end of our expected range and an increase of 7.5% over Q3 of 2011.

Gross profit per worksite employee per month averaged $258. This was significantly above the high end of our expected range and an increase over the $245 reported in Q3 of 2011. Operating expenses came in above our forecast of $79.3 million, and included an accrual for incentive compensation tied to our favorable Q3 financial results. During the quarter we generated $26 million of EBITDA plus stock-based compensation. We repurchased 82,000 shares and ended Q3 with $140 million of working capital and no debt.

Now, let's review the details behind our third quarter results. Revenues increased 8.5% over Q3 of 2011 to $512 million, driven by the 7.5% increase in average paid worksite employee. As for the drivers to our worksite employee growth, client retention remained at historical highs, averaging 99% for Q3. We experienced some net hiring in our client base during the quarter that was partially offset by the reduction associated with seasonal summer help. Q3 total sales were just slightly below budget.

However, we ended the quarter with September exceeding our budget. In a few minutes, Paul will share further details of our recent sales efforts. As I just mentioned, our key pricing metric, gross profit per worksite employee, averaged $258 per month for Q3. This was significantly over the forecasted range of $235 to $238.

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 significantly lower than expected, declining by a little less than 1% from $849 in Q3 2011 to $845 in Q3 of this year. Workers compensation cost totaled 0.57% of non bonus payroll including the $3.9 million reduction previously reported loss reserves. This was just below our forecasted range of 0.58% to 0.60%. Payroll taxes as a percentage of total payroll remain relatively flat at 6.4% as an increase in SUTA rates was offset by higher worksite employee payroll and bonuses.

Now, let's move on to Q3 operating expenses which totaled $79 million. This was approximately $3 million above the midpoint of our forecasted range, due primarily to the accrual in incentive compensation tied to the strong Q3 operating results, a year-over-year increase in operating expenses of 8.7%. It also included a budgeted increase in salaries and wages, project costs and depreciation and amortization associated with our new adjacent businesses.

Net interest income and other income for the quarter totaled $140,000, down from $245,000 in Q3 2011. Our effective income tax rate increased slightly from 40% in Q3 2011 to 41% in Q3 of 2012. As for our cash flow, year-to-date adjusted EBITDA plus stock-based compensation increased 24% from $59 million in 2011 to $73 million in 2012. Year-to-date cash outlays included cash dividends of $13 million, capital expenditures of $12 million, and repurchases of 515,000 shares at a cost of $14 million. In summary, we are pleased with our results through the third quarter, particularly given the economic and general uncertainty in the macro environment.

Unit growth in the high single digits combined with stable pricing and improvement in our Direct Cost programs has contributed to strong earnings growth and a solid balance sheet. 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 excellent third quarter gross profit results. Then I will update everyone on our gross profit outlook for fourth quarter and conclude my remarks with comments on our new UnitedHealthcare contract extension. As Doug just reported, our third quarter gross profit per worksite employee per month was $258 which was $22 per worksite employee per month above the midpoint of our third quarter range.

Gross profit consisted of $191 of average mark-up, $56 of surplus and $11 from the adjacent businesses. Now, let me give you the details of each component. The $191 average mark-up was $1 per worksite employee per month higher than our forecast. The adjacent businesses contributed $1 per worksite employee per month less than our forecast, leaving all of the $22 additional gross profit coming from the surplus component.

In looking at the details of the surplus, $21 of the $22 upside came from the Benefits Cost Center. The Payroll Tax Cost Center was right on forecast and the Workers' Compensation Cost Center was $1 per worksite employee per month better than our forecast. When we analyzed the elements of the Benefits Cost Center, we found that our allocations were $8 per worksite employee per month lower than our forecast, and our cost was $29 per worksite employee per month lower than our forecast. The $8 in lower than expected allocations is the direct results of participants selecting lower-cost higher-deductible health plans.

We have discussed this topic many times over the last couple of years. The revenue allocation declines immediately and the benefits cost should decline in future periods. However, we did not expect to see a $29 per worksite employee per month decline in cost all in one quarter. Our large loss claims per participant were 14% lower than last quarter, and the pharmacy claims per participant were 10% lower than Q2. Last but not least, and consistent with UnitedHealthcare's third quarter experience, utilization was unusually low in both doctor and hospital visits during the summer months.

In fact, we will likely see much higher utilization in Q4 which will result in a shift of expense between the quarters. So let's move on to the fourth quarter expectations, beginning with our mark-up. We would expect to see the average mark-up remain at $191 per worksite employee per month for Q4, based on the mix of new business sold, which was at $11 per worksite employee per month more than Q3 of 2011, and renewal pricing which increased $3 per worksite employee per month in the third quarter. Now, let's look at the surplus component of gross profit for Q4 beginning with the Payroll Tax Cost Center. Typically our fourth quarter surplus increases slightly from the third quarter of each year. So we will forecast a slight increase in the surplus for this cost center in Q4 over Q3.

Moving to the Workers' Compensation Cost Center, we expect the pricing side of workers' compensation allocations for new and renewing business to continue to remain fairly constant. Excuse me. On the cost side of the Workers' Compensation Cost Center we have had positive results for the policy year which just ended September 30. For this policy year, we had a 12% increase in the number of claims filed over the last policy year, but the severity per claim was 12% lower than the prior policy year. We want to be conservative with our estimates but our most recent results would suggest that our expense should be in a range of 0.56% to 0.58% of non bonus payroll for Q4, slightly lower than our previous forecast.

Now, switching to 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 a significant increase in the number of employees selecting higher deductible health plans options which automatically reduce our allocations. We constantly monitor our costs and the appropriateness of our allocations for these plans. We will continue to adjust our allocations on both new and renewing business to reflect our experience which continues to be substantially better than the small business marketplace for comparable plans.

On the cost side of the Benefits Cost Center, we know it would not be prudent to forecast our fourth quarter's cost using the third quarter's expense as our base. Due to the expected shift in expenses into the fourth quarter, we see a trend of 4% to 5% in cost over Q4 of 2011. When you combine all of the forecasted direct cost surpluses and the Benefits Cost Center deficit, we should generate a net surplus of $37 to $39 per worksite employee per month for the fourth quarter. Our last contributor to gross profit which is our adjacent business services, should continue to add about $11 per worksite employee per month to gross profit for the fourth quarter which is consistent with the third quarter.

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 range of $238 to $240 for Q4 which would result in approximately $253 for the full year which is at the top of our $249 to $253 range of our original 2012 forecast. Before I turn the call over to Paul, I would like to comment briefly on our relationship with UnitedHealthcare and our new three-year agreement. Earlier this year as we celebrated our tenth anniversary of working together, we discussed the turmoil that most employers will experience over the next few years as a result of the implementation of health care reform.

We believe that together we can bring stability and certainty to the small and medium-size business community in a very uncertain environment. So we refined our next three-year cost structure, built in discounts to our admin fees as we grow and reduced inflationary caps to our dental plan. Bottom line is that we should save several million dollars through 2015. In addition, our client owners, worksite employees and their families can rest assured that the complexity, compliance and the cost challenges related to health care reform will not be a burden compared to those businesses that choose to go it alone. At this time I would like to turn the call over to Paul

Thank you, Richard. I will discuss three topics today to inform investors regarding the outlook for Insperity in both the near and long term.

First I will highlight the progress we made in the third quarter, finalizing our business transformation into a multiproduct business solutions provider. Secondly, I will describe our plan for growth acceleration as we finish off 2012 and look ahead into 2013. I will also provide some insight into our year-end outlook and the ongoing fall campaign which determines our starting point for 2013. Our third quarter and year-to-date financial results were strong in spite of the sluggish economy and the deliberate business transformation we've been executing. Over this period, we achieved our goal of laying the groundwork for future growth while continuing solid financial performance with operating income up 27% year to date. This was achieved by continuing excellent performance in retaining Workforce Optimization clients.

Attrition for the recent quarter was 1% which matched the second quarter and continues to reflect systemic process improvement and historical highs in client satisfaction. Sales in the face of the slowing economy were challenging in the quarter, coming in at 88% of forecast, which results in 94% of forecast year to date. These results reflect some reluctance in the marketplace to make buying decisions due to uncertainty over the election and fiscal cliff as we reported in our recent survey results.

In addition, we have been making dramatic changes in our sales effort, including what we sell and how we sell it. With this as backdrop, I am pleased with the overall results. The most significant accomplishment in the quarter is completing our refinement phase of our business transformation and entering our growth acceleration phase of this new strategy. We began this effort two years ago and each of the fundamental components that are necessary to broaden our reach and establish Insperity as a leading business solutions provider are in place. Over this period, we established an array of business performance solutions to help businesses run better, grow faster and make more money.

These targeted solutions complement our Workforce Optimization Service and are sold on a standalone basis to extend our reach in the small to medium-size business community. This year, each of these businesses have gone through a refinement phase and they are well positioned to grow and move toward profitability. Recently we launched two additional adjacent businesses that round out our strategy in this area, Insperity Payroll Services and Insperity Financial Services. Insperity Payroll Services was launched with a complete set of related service offerings, including pay-as-you-go workers' compensation, online 401K and time and attendance. This payroll offering is a lynch pin in establishing a customer relationship with thousands of prospects we see each year that are not yet ready for our full service Workforce Optimization offering.

We also launched Insperity Financial Services at our fall campaign kickoff after a successful pilot program earlier in the year. This adjacent business unit has three complementary offerings including Insperity Reveal, Growth Force and the receivables exchange. This business unit is designed to help companies obtain accurate, timely and actionable financial information and link this information to the investment these businesses make in human capital, supporting our Workforce Optimization Growth plan. Also this quarter, we continued the development of our inside sales operation to support our Business Performance Advisors as they make multi-product recommendations to our prospects. We now have the infrastructure in place to complete sales in this unit for each of the adjacent businesses.

The implementation of this critical component of our cross-selling system is now operational. We also had 75 individuals recognized at the fall campaign kickoff as the first certified Business Performance Advisors for completing the 80-hour certification program through the C.T. Bauer College of Business at the University of Houston. This program is ready to equip our Advisors to provide a unique level of support and insight to our clients. In Q3 we also completed our brand transition with introduction of our Insperity.com site and some minor message tweaking and updates. The Insperity brand is off to a great start and we are confident this round of fall advertising will continue to build awareness and reinforce our positioning.

We're also very excited to report we completed the development and introduction of the entire Insperity Trusted Advisor selling system. All 252 of our Business Performance Advisors completed the training in conjunction with the fall campaign kickoff in September. This training included video production of each step of the sales process, including manager interaction and support. This show-and-tell, step-by-step training program was very effective in completing a picture for the new role of our Business Performance Advisors.

This is particularly significant in establishing our readiness to grow our sales organization and ramp up individual performing. Now, this brings me to my second topic and the main message for today. The fall campaign kickoff in September formally marked the beginning of our growth acceleration phase of our business transformation. While continued improvement and progress within each of the fundamental elements of our new strategy will continue, from now on our central focus is growth acceleration. Over the last quarter of this year and throughout 2013 we will be executing a game plan to produce consistent, predictable, faster growth.

This plan includes a sales efficiency gain among current Advisors, the addition of 50 new Business Performance Advisors, and channel development to increase leads. Our current Business Performance Advisors are implementing our new Insperity Trusted Advisor selling system for the first time in this fall campaign. Last quarter, I used the analogy of a first run around a track in a new race car, and we're confident this run is going well and the room for efficiency gain is tremendous. We're closely monitoring performance and helping each Advisor to develop the new skills and habits to achieve success. The team is moving up the learning curve and I expect a nice efficiency gain in Q4 and into Q1 of 2013. While this efficiency gain is occurring, we are ready to grow the sales staff.

We're confident that we have training ready to reestablish a growth plan for the number of Business Performance Advisors. Therefore we have implemented a project that will hire and train enough new Advisors to create a step up in the number of Advisors by the end of Q1 2013. We plan to hire and train enough new Advisors to increase staff 20% from approximately 250 Business Performance Advisors we've had for the last year or so up to 300 by the end of March. We're also ready to leverage our new brand and array of business performance solutions into new channels to increase leads for all of our product line. We're formulating a plan to establish a number of significant channels to be up and running, producing leads as the size of our sales team increases.

So for next year, our growth acceleration will be driven by our current Advisors moving up the learning curve, a 20% increase in the number of Advisors and new channels to increase leads. Now, as for the immediate future, we're focused on our critical sales and retention season as we approach January of 2013. Our core residual income business model was driven off of our starting point of paid worksite employees in our Workforce Optimization solution.

This starting point is determined primarily by the success we achieved in retaining clients at year end and replacing any attrition with new sales. We have some visibility in the client retention due to notice provisions in our contracts, and what we see today looks very good. It appears we will continue to have excellent retention through year end, although this visibility is certainly not 100%. The sales pipeline has filled nicely in both mid-market and core sales in spite of the heavy lifting it has taken to get in the door to see prospects. As I mentioned earlier, we have seen some reticence in the business community awaiting the election results and the fiscal cliff ahead.

One way or another, these issues will be resolved in the near future but the effect on the fall campaign sales and retention is impossible to determine at this stage of the campaign. Over the next month or so, we will have a clearer picture of the expected starting point of paid worksite employees and will lock in on a budget for next year. Until then, we can only talk about next year in general terms as opposed to any specific guidance. Broadly speaking, we expect our business to grow from current single-digit unit growth levels up to low double-digit unit growth over the course of the next year and average high single digits over the full year. We believe our direct costs are in good shape for next year and gross profit levels should rise accordingly with the growth of the business.

Our operating expenses are under control and current levels allow for an investment in growing the sales staff to increase future growth. We expect our portfolio of established adjacent businesses to increase the contribution at the gross profit line as they grow revenues. And some of these businesses should also add to the bottom line reducing the total loss from these businesses from 2012 levels. We expect the investment in our two new adjacent business units will offset these gains, so at the bottom line, the entire portfolio of adjacent businesses should be in line with current levels.

So in summary, we've had a strong 2012 thus far and expect a solid finish to the year. In 2013, we will focus on growth acceleration and begin to see the fruit of our new business model represented by the Insperity brand. At this point I will turn the call back over to Doug.

Thanks, Paul. Before we open up the call for questions I'd like to provide our financial guidance for the fourth quarter of 2012. In general, we are now expecting Q4 earnings to be fairly consistent with Q3, given the expected shift in health care utilization from Q3 to Q4 as Richard just mentioned, offset by lower operating expenses. This guidance implies an improvement in our outlook for the full year by about $0.04 per share from our previous forecast. As for our key metrics guidance, we're forecasting average paid worksite employees in a range of $129,500 to $130,000 for Q4, or a sequential increase of about 2% over Q3. Keep in mind that most fall campaign sales come on board as paid worksite employees in the following year when we also have our heaviest client renewal period.

As Richard mentioned, we now expect gross profit per worksite employee per month to be in a range of $238 to $240 for Q4. As for Q4 operating expenses, we're forecasting a range of $73.25 million to $74.25 million. An expected sequential decline of approximately $5.5 million from Q3 is due primarily to lower travel costs as our fall campaign kickoff occurred in Q3 and a lower incentive compensation accrual due to the impact of the expected shift in health care costs on our Q4 gross profit.

As for interest income, we're forecasting a range of $100,000 to $200,000 for the fourth quarter. We're estimating an effective income tax rate of 41% and $25.7 million average outstanding shares. In summary, our key metrics guidance implies a range of 2012 full-year earnings per share of $1.62 to $1.67 or a 40% to 44% increase over the 2011 reported EPS. At this time, I would like to open up call for questions.

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

Can you talk a little bit on the health care about what level you have now of high deductible planned participants and what that's doing to kind of average pricing growth for the combined book? You know, what's the mix impact?

Jim, I don't have those numbers right off the top of my head. But I'm going to say it's about 12% to 14% of our total is in the high deductible health plans now, in one of the high deductible health plans. You know, it continues to, you know, we have the ability to look in our system and see, you know, when clients renew and they change plans or new business that's being sold now. A lot of those are actually buying the higher deductible plans even more so than we have seen in the past. So it's driven that number up quite a bit over the last two years

Maybe just as a follow up, so is that growing, like, 5% a year and what's the average price point since some of it's borne by the customer. How much lower than your normal price point for the high deductible?

Well, if it was a static model, I could answer the question. But we're continuing to increase our allocations for those high deductible plans. So all you can do is look at it on a client-per-client basis and that translates somewhere in the, you know, 8% to 8.5%.

What's 8% to 8.5%, Richard?

That would be the increase in what clients see going from one year to the next in the same kind of plan. That's probably not the question you were wanting me to answer. But it's a little bit -- it's a good question, it's just a complicated answer.

Can you give me just a random ballpark? I mean, is a high deductible 20% less than a normal plan, 30% less?

Oh, yeah, yeah, you're talking about planned value. Yeah, it's in 15% to 20%. I'm sorry. Yes.

Okay, 15% to 20% less. Moving over to the ABU's. You're now in, I assume, the growth acceleration phase applies not only to the PEO business but also the ABU business. You have sort of been stuck here at $11 or $12, the gross profit of the ABU's. Do you see that to starting to accelerate as well now and grow faster than your core business or when do you think that will start to happen?

Yeah, I do, and I'll tell you what. This year, like we said earlier, was really focused on more of a refinement phase. Getting those businesses ready to take on volume, getting their sales operation up and in place to handle higher volume of leads as they come through and so, yeah, the growth acceleration phase certainly applies to the core business but also the adjacent businesses.

I assume you expect the adjacent businesses to grow faster than the core at some point?

I think what we're looking for ultimately is for those to grow at about 30% or so revenue growth. Because they are small and we ought to be able to really put some volume on top of them. That will be kind of like an average. And, you know, we do expect as I mentioned in my prepared remarks that it is a portfolio businesses. They are at different stages. Some are real close to break -- some may make just a little bit of money. But you will have more of a move over into profitability as we move along. That will happen because they are growing faster and you're putting more volume over the infrastructure.

Not to hold you to a timetable but is it possible to get to that 30% next year or year after?

Oh, no, it's possible.

Okay. I will jump back in queue. Thanks.

Thank you.

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

In the context of in the kind of GDP growth that we have now, so not a real change in the economy and that backdrop for sales, what sort of expectation do you have for your plans to accelerate growth impacting the rate of growth headed into 2013 or 2014?

Well, you have several factors or several different things that we're doing to accelerate growth. If you take them into pieces, first of all, efficiency gain is your most profitable type of growth. You know, when salespeople just become more efficient you get more out of each individual's effort. And we do expect that to happen. Like we say, we have been through a transition. We've taught a lot of new skills, lot of new concepts.

Lot of new things are going on and this fall campaign kickoff was awesome in terms of the progress we've made on everybody understanding the full picture and understanding what the specific expectations are. And now, they are out doing it. And when you start something new there's a learning curve. They are moving up the learning curve. I expect that to show in improved efficiency over the next two quarters a pretty decent ramp up. So that's your most profitable growth.

The most certain and predictable growth is always adding more sales staff which is the second component of our strategy for next year. We're going to have 50 new Business Performance Advisors trained, ready to rock and roll (inaudible) second quarter. You can kind of figure out how that ramps in new growth. If you grow that 20% you're going to get some substantial growth as you get into this period next year. So that's kind of like a forward indicator of how much new growth you are getting based on that 20% increase.

Now, the other thing that is more of a -- it's harder to get your arms around, but we have so many more substantial channel opportunities now that we have a wide array of product offerings, from bank channels to CPA channels to specific distribution channels in the software world and the Cloud business. So we have got so many great opportunities. It's really kind of hard to predict how those might layer on. But I announced internally here, next year from marketing perspective is going to be the year of the channel. And we're going to really focus on high-impact channels that can produce some real quality of high volume of leads which will really make a difference with the sales organization.

From an investment standpoint is the hiring and the push towards channels is that -- are those investments starting to be outlaid in the fourth quarter?

Those are already kind of baked in to a large degree. We kind of have some channel management or channel development staff kind of spread out throughout the ABUs and the core business, we bring that together in a consolidated unit. Not necessarily bring them together from a reporting perspective. I was talking about in terms of really getting that team focused and getting our processes in place to develop higher impact and deeper channel relationships. So there's not a lot of costs in that beyond what we're already bearing.

The increase in the sales force itself starts to occur in the fourth quarter or is already underway?

The project of the recruiting and selection is underway. Sure, we will bring some of them on here in the fourth quarter. We need to have all of them on in the January time period for the schedule of training programs that will happen in the first quarter so they are up and running at the end of Q1.

And what kind of financial costs should we think about for a 20% increase in the sales force?

We haven't put the whole picture together like I mentioned because you don't know the starting point of paid worksite employees yet. But this is a comfortable level of investment in sales. If you look at our investment last year or actually in 2012, you know, we've had heavy investment in the infrastructure in our adjacent businesses and we've had some other costs. Last year it was the rebranding and some costs that were being built in. So this, to me, is not a major, you know, disruptive thing in our operating expense picture. It should fit in nicely because we're in good shape across the rest of the organization. We will obviously grow our service teams in line with expected unit growth and make sure our service operation continues their excellent performance. But beyond core service and new sales personnel growth, there's not much else that has to grow

My last question. Just based on the Q and A that preceded me, it sounds like there is more room for a transition toward high deductible plans over time because you are not at a very large percentage of the mix currently. Is that accurate?

Yeah, Tobey, we continue to see an increase in that number every quarter for the last, I'm going to say 11 quarters and so we expect to continue to see it.

But it's slow and steady. It didn't jump up to a huge number in any quarter. It just continues. In fact, as Richard was saying earlier, a higher percentage of new business is coming in in the higher deductible plan.

Yeah.

And then obviously at this big renewal period at the year end, you know, we may see a significant percentage of the base start to move. We may have more migration in the first quarter than you're seeing quarter to quarter right now. But I think that's good for everybody. Remember in our world it's all about matching price and cost anyway. And the good news is we have a wide range of offerings that our clients can choose from to meet whatever business need they have at the time. And having a 20% -- it's a little over 20% I think if you go from our richest plan to our lowest cost plan it's 20% or 25% differential. So that gives people some flexibility.

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

Thanks a lot. I was wondering, obviously you have the fall campaign underway, if you could comment on, at this point, which adjacent business services appear to be attracting the most attention and just kind of general expectations of which one will be kind of the greatest contributor to incremental revenues.

That's a good question. You know, we've had a couple of areas of nice success this year. In our Retirement Services Business we've had pretty good adoption of what we would call bundle-plus selling of the retirement -- of 401K plan with workforce optimization, a real good uptake rate on that. It's nice to turn that business into a contributor and so we've done well there.

Also, you know, one of the easiest things for companies to try -- it is kind of a try and buy world if you will, and our services are employment screening business. We've been making good progress on that front with some steady sales growth there. But I would probably say that the service that's been most prevalent across our current base and for new accounts would probably be our Time and Attendance business. We have some new products offerings out there that I think are really going to shake things up. We've got our expense control card that is integrated with our expense management business, has tremendous upside for customers and for Insperity because you literally can put your policy into effect through these cards.

You can control the expense by being able to put money on or take it off of a particular-- It's a reloadable and rescindable debit card that you can, day in and day out, limit the dollars you're putting on the card to certain merchant codes. You have just much more control over how you direct your expense management of employee-related business expenses. So we have other products within each of these offerings that could come out of the woodwork and really hit their stride.

Thanks for the update.

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

I was just curious if you could, with respect to the adjacent business services, give us more of a best case scenario with what you see three to five years from now in terms of the contribution? How meaningful is it to profitability and is that the right time horizon to look at in terms of where you start to see it really contribute?

I'm sure hoping it's closer to three than five, but certainly in that time period I can see this adding comfortably. The way we look at it today at the gross profit line, you're only looking at $11. It can be, you know, $30, $40, $50 of additional comfort if you will, buffer to the gross profit in the model. And then, you know, as we reach profitability, a lot of these businesses are the type of business, for example, if you look at our technology offerings at our Cloud businesses, software as a service -- in our world we call it Software with a Service -- those businesses, as you grow them, they are really cash efficient.

They really spin off a lot of cash. In this quarter, we reached a 100,000 SAAS seats on our different SAAS business. Basically there are three today. It's the Time and Attendance, Expense Management and our Performance Management business. But later this quarter we will have our Organization Planning, our Org Plus business will launch its Software as a Service offering. The Payroll Service we just launched has a software as a service option with it.

We've got HCM coming down the pipe. We've got a substantial Software as a Service business. Why there can't be millions of people on it, I don't know. That will be our goal. Those -- that business -- those are very profitable businesses once you get that volume going over that infrastructure.

Could you help us characterize, when you are selling those, your current experience today, how much of that is with your existing client base? How much of it is brand new clients?

Well, the selling system that we just put in place is to put in front of our customers, our prospects if you will, a Business Performance Advisor that makes a multiproduct recommendation. So the goal there is for every customer we see, we will make some kind of recommendation of what we can do to make their business run better, grow faster, make more money. We should not call on a customer that we don't have something that should be helpful to them. But today in this first phase, the real focus is for the -- our BPAs are out there looking for that Workforce Optimization customer and bundling additional services on top of workforce Optimization. That's been effective so far. We think that will continue to ramp up substantially as our Advisors get more comfortable with each of the business solutions.

Now, we haven't been quite as effective yet. But we are, like I say, it's starting for our Advisors to maybe when they see somebody that is not a Workforce Optimization customer to go in and make recommendations three or four non-Workforce Optimization offerings. That is going on but not quite at the level. That's part of the (inaudible) I expect that you'll see going forward this quarter to next. So, you know, there are steps and stages and phases for this to take place.

I wanted to ask a clarification question on your 2013 kind of high-level guidance. When you speak of gross profit levels should rise with growth in this business, does that mean you expect stable gross profit per worksite employee per month contribution next year relative to this year?

I think we don't see anything today that kind of moves that one way or another. But keep in mind, we're not really giving guidance today. This is just a general framework. When we sit down to start to pin that down we'll have a little better feel. But Richard and his team have done an awesome job this year on that front and things appear to be just rocking along in that area and we think at this early stage, to be in the range where we were this year as a starting point is fine

Okay. And then one final question in terms of sales force. Adding 50 is a pretty monumental change from what you have been doing in the last two or three years. Do you see that as phase one of several phases? What ultimately so you see as kind of an optimal size for the Business Advisor force?

Now, that we have all the training ready to rock and roll, we've got the experience we need to help people reach the right level of efficiency, we're ready to bring in that first wave and start to grow the sales staff. We were as high as 350 or so at one point. So first priority is to get these 50 and back up to 300. Let's see how that goes over the -- three to six months after they're out there we'll probably bring on, you know if we're on the right track. You should get back up to where we're bringing somewhere between, you know, 10% to 15% every year. 15% would be the ideal number where you add 15% sales staff as you ramp the business up.

Excellent. Thank you, guys. Good luck.

Thank you.

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

That line of questioning -- what's the current sales force retention rate?

Well, our turnover there has been in the low 30%. And, you know, that's one of the numbers we're hoping the new selling system really does help. You know, it's funny because business-to-business sales of this type where you -- takes a level of expertise, that 30% number is about right. I don't like it. But that's kind of what you see for example in some of your wealth management businesses and other type of businesses where you have pretty sophisticated operation. But I'm hopeful we can move that down in the mid 20%.

And in terms of -- so when we think about net hires and we're probably talking about something that is closer to 100, right? I mean, gross hires, in order to get to the 300 level.

It's 86.

Okay. And in terms of the expenses that are associated with that, how much is -- when we take a look at the salaries and compensation and commissions, how much of that is just purely on sales side?

Oh, you mean of total operating cost?

Yes. I'm just trying to ask.

What I would suggest you do on that front, I mean, there certainly is a slug of new expense related to that sales staff. But the way we've managed it internally, this is all timed right and, you know, basically this is an investment replacing an investment we made last year that's already baked in.

It's not like you're going to see a big step up in operating expenses because we went and hired some people.

That's what I was trying to get at.

There will be a step up but not in sync with the growth rate. It's not going to be a bubble.

Or a cliff. So, I mean, basically the expenses as a percentage of revenue should remain relatively constant, is that what you're saying?

Generally speaking. If we grow, like, high single digits, you know, with this kind of investment you're probably going to grow the operating expense in the high single digits as well. Not have any leverage that year. Does that make sense?

It does because I knew that there were some expenses that should have been coming off because of all the investments behind the ABUs and the new branding. I was just trying to get a sense for that just in terms of whether or not we should be keeping the operating expenses roughly constant as a percentage of revenue or how to think about that.

For this early stage in planning next year, that's appropriate

Okay.

Be able to kind of lock things down closer on our next call

I was going to say even with the addition of growth in the sales staff, we don't have to open new offices. We don't have all that kind of expense. We have got existing space in all the offices. So it's really a very economical growth strategy.

So, I mean, essentially for the same expense profile, we should be able to bolster the revenue growth is essentially the --

To me, it's an added confidence level in the growth levels.

Are you actually seeing a pick-up with regards to the efficiency in terms of the sales force in terms of the number of closes per month?

Absolutely. Actually our closing rates are really good. Good activity levels. But, you know, you have a combination of things going on. Our efficiency gain kind of happens. Increases as the year goes on anyway. It's hard to attribute -- to break that down and attribute it to each contributor. We will see over this fall campaign.

We're optimistic that we will have a good campaign and good sales efficiency. But like I said, there's so much new -- so many new skills, new habits that are being developed that there's just a lot of upside in terms of individual, you know, individuals moving up the learning curve on their own performance. So this ramp up the learning curve should really continue for several quarters for our current base. What's different about right now, we always have some at that level that are ramping up the curve, you know, the newer Business Performance Advisors, and the difference here is that the entire 252 Advisors all got their -- this year they have been retrained to do something different from what they were doing. And so we have managed our way through that and kept everything rocking and rolling pretty well.

And so what are you seeing in terms of the efficiency rates at this point?

Well, you expect them to be in the, you know, .8 or so range about this time of year. I don't have that number right in front of me. I've got the guys scrambling around looking for it. But it's probably in the .75 to .8 range which is pretty good.

Great. And then what are you seeing with regards to the new payroll ABU? I know it's early but how is that being managed from, you know, in terms of cross-selling it with the existing sales force, pricing, any early indications in terms of take-up rates?

Oh, yeah, on the payroll side? It's really, really too early to tell there. We had great little pilot effort to get that rolling during summer. It was very well received at the fall campaign. And we got a lot of prospects in the pipeline. And we're closing business but it's really too early to tell. I just looked at a bunch of those numbers in the last few days and you're still at the stage where a couple of accounts can change all those metrics on you. So it's too early to really to lock in on any of that.

Can you just disclose how you've trained the people to sell it?

Oh, yeah.

Or how the pricing is going?

Again, the launch of our payroll business, it's important to understand that our payroll operation is what we call a premium payroll operation. So it has a high level of service with it. It's for a target market that fits well into our whole universe of offerings. So it's priced a little bit above the market. But we clearly demonstrate the value you receive both in technology and on the service side so we're very comfortable with where we price the offering and what value we're delivering and how our cost structure should work for that.

And no indications of cannibalization at this point in terms of your pilot markets, right?

No, in fact, what we have been kind of excited about is there's -- you can probably build a pretty big payroll business if you can just keep the ones that leave Workforce Optimization into the payroll operation. We're still working on the, you know, nuts and bolts of that process but we've had some good success already. You know, one thing we have always had around Insperity is that when companies leave us, they leave as friends and they loved what happened while they were here. A lot of times it's just either they got bought or the financial world changed a bit. If they are continuing on and they're still going to need payrolls it's not a bad way for us to stay and keep them as customers.

Great. How much is the savings going to be from the new UnitedHealthcare agreement on an annual basis?

Well, I'm actually going to tell you what I am allowed to say. It will be several million dollars over the period between now and the end of 2015.

Is several million -- is that closer to $2 million or to $10 million?

The answer is it all depends on how fast we grow. The faster we grow the more it is.

Great. Thank you.

You bet.

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

Once again, thank you, everybody, for your interest and for your support. We look forward to having an excellent fall campaign and a strong year end and we will look forward to providing more specifics about 2013 next time we get together. Thank you very much. Have a good day.

This concludes today's conference call. You may now disconnect.