Insperity Inc (NSP) 2012 Q4 法說會逐字稿

Good morning. My name is Regina and I will be your conference operator today. I would like to welcome everyone to the Insperity fourth-quarter 2012 earnings conference call. (Operator Instructions).

At this time, I would like to introduce today's speakers. Joining us are Paul Sarvadi, Chairman of the Board and CEO; Richard Rawson, President; and Douglas Sharp, Senior Vice President of Finance, CFO, and Treasurer. At this time, I'd like to turn the call over to Douglas Sharp. Mr. Sharp, please go ahead.

Thank you. We appreciate you joining us this morning.

Before we begin, I would like to remind you that any statements made by Mr. Sarvadi, Mr. Rawson, or myself that are not historical facts are considered to be forward-looking statements within the meaning of the federal securities laws. Words such as expects, intends, projects, believes, likely, probably, goal, objective, outlook, guidance, appears, target, and similar expressions are used to identify such forward-looking statements and involve a number of risks and uncertainties that have been described in detail in the Company's filings with the SEC.

These risks and uncertainties may cause actual results to differ materially from those stated in such forward-looking statements.

Now let me take a minute to outline our plan for this morning's call. First, I'm going to discuss the details of our fourth-quarter and full-year 2012 financial results. Richard will discuss our Q4 and full-year 2012 gross profit results and our expectations for 2013. Paul will recap the 2012 year and then discuss the major initiatives of our 2013 operating plan. I will provide our financial guidance for the first quarter and full-year 2013. We will then end the call with a question-and-answer session.

Now let me begin today's call by discussing our fourth-quarter results. Today, we reported adjusted fourth-quarter earnings of $0.47 per share, above both the implied EPS from the midpoint of our range of $0.45 and Q4 2011 earnings of $0.42 per share. Adjusted Q4 earnings exclude two special items, including an after-tax impairment charge of $0.10 per share associated with a 2006 acquisition and $0.03 per share related to the accounting treatment associated with the $1.00 per share special dividend.

As for our Q4 key metrics, paid worksite employees averaged 129,345 for the quarter, just below the low end of our forecasted range of 129,500 to 130,000 and a 2% sequential increase over Q3 of 2012.

Gross profit per worksite employee per month averaged $241 for the quarter, which was above our forecasted range of $238 to $240.

Operating expenses totaled $77.6 million. However, when excluding the $4.2 million write-down, expenses were at the low end of our forecasted range of $73.25 million to $74.25 million.

During the quarter, we generated $28 million of adjusted EBITDA, plus stock-based compensation. We ended the year with $116 million of working capital and no debt, and this was after paying a special dividend of $1.00 per share, totaling $26 million, and repurchasing 81,000 shares at a cost of $3 million during the fourth quarter.

Now for some of the details behind our fourth-quarter results. Revenues increased 7.5% over Q4 2011 to $532 million, and a 6% year-over-year increase in average paid worksite employees. As for the drivers to our worksite employee growth, client retention averaged just over 99% for the quarter.

Hiring in our client base exceeded layoffs during the first two months of the quarter. However, this metric turned slightly negative during December. And as you are probably aware, Q4 sales are generally converted to paid worksite employees in January of the following year. But Paul will update you on these results in just a few minutes.

Moving to gross profit, our results were above expectations due to favorable outcomes in the payroll tax and workers' compensation areas, partially offset by healthcare costs coming in just slightly above our forecast.

Richard will discuss the Q4 details and our 2013 outlook in a few minutes, but I'll just provide some brief comments.

As for our benefits program, approximately 72% of worksite employees were covered under our health plans in Q4 at an average cost of $897 per covered employee per month. Although the level of large claim activity came in higher than expected, benefit costs increased only 4.6% over Q4 of 2011.

As for our workers' compensation program, costs totaled 0.51% of non-bonus payroll for Q4 2012 and included a $4.8 million reduction in previously reported loss reserves. The reported cost was below both our forecast of 0.56% and Q4 2011's cost of 0.55%.

Payroll tax costs declined from 5.7% of total payroll in Q4 of 2011 to 5.5%, as an increase in [suitor] rates was more than offset by higher worksite employee payroll and bonuses.

Now shifting to operating expenses, we reported Q4 costs totaling $77.6 million, including the $4.2 million impairment charge. This charge was associated with a write-down of assets dating back to our 2006 HRTools acquisition. These products became the basis of our new suite of performance management products, including our PerformSmart SaaS offering.

Excluding this impairment, operating expenses increased less than 1% over Q4 2011 to $73.4 million. As for the year-over-year comparison, you may recall that Q4 2011 expenses included advertising costs associated with our rebranding and the Insperity champions golf tournament, which was moved to Q2 of this year.

Net interest and other income for the quarter totaled approximately $193,000, and our effective income tax rate of 41% came in as expected.

Now I'd like to take a few minutes to review our full-year results. Excluding the two special items mentioned earlier, full-year EPS was $1.67 and came in right on budget, increasing by approximately 26% over 2011 adjusted earnings of $1.33 per share.

As for some of the details of our full-year results, revenues increased by 9% over 2011 to $2.2 billion on a 7.5% increase in average paid worksite employee. Gross profit per worksite employee per month increased from $251 in 2011 to $253 in 2012.

As for a recap of our direct costs, benefit costs per covered employee per month increased by just 3.5% for the year from $835 in 2011 to $864 in 2012, due to effective management of our plan and some migration of employees into high deductible plans.

Workers' compensation costs as a percentage of nonbonus payroll remained at historically low level of 0.54% on favorable claim frequency and severity trends, and included a $13.1 million reduction in previously reported loss reserves.

And payroll taxes as a percentage of total payroll decreased slightly from 7.15% in 2011 to 7.05% in 2012.

As for operating expenses, excluding costs associated with the Q4 impairment charge, we reported just a 5.5% increase over 2011 to $311 million. This increase reflected ongoing investment in our workforce optimization offering, including our enhanced employee service center and the planned investment in our adjacent business units, including headcount, back-office systems, and amortization associated with acquisition. These additional costs were partially offset by the non-recurrence of rebranding costs in 2012.

Net interest income declined by approximately $360,000 from 2011 on lower interest rates, and our effective full-year income tax rate increased slightly from 40% in 2011 to 41% in 2012.

As for our balance sheet and cash flow, EBITDA plus stock-based compensation, adjusted for the impairment charge, totaled $101 million for the full year of 2012. Cash outlays included cash dividends of $43 million, repurchases of approximately 596,000 shares at a cost of $17 million, capital expenditures of $18 million, and acquisition and other investments totaling $4 million.

In summary, we are pleased with the execution of our 2012 plan, increasing adjusted earnings per share by 26% and generating adjusted EBITDA plus stock-based compensation at a record level. These results allowed for continued investment in the Company throughout 2012, while providing a return to shareholders in the form of a special dividend in our ongoing dividend and share repurchase program.

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

Thank you, Doug.

This morning, I will fill you in on the details of our fourth-quarter and full-year gross profit results, then I will update everyone on our gross profit outlook for 2013, and I will conclude my remarks with comments about healthcare reform.

As Doug just reported, our fourth-quarter gross profit per worksite employee per month was $241, which was $2.00 per worksite employee per month above the midpoint of our range. The gross profit consisted of $191 of average markup, $39 of surplus, and $11 from the adjacent businesses.

Now let me give you the details of each component. The average markup and the adjacent business contributions were right on forecast, meaning that the $2.00 additional gross profit per worksite employee per month came from the surplus component. Now this $2.00 per worksite employee per month of additional surplus came from, number one, $3.00 higher contribution from the payroll tax cost center and, number two, $6.00 higher contribution from the workers' compensation cost center, partially offset by, number three, an additional $7.00 deficit from the benefits cost center.

So here's the breakdown for each cost center. The extra $3.00 per worksite employee per month from the payroll tax cost center came primarily from higher allocations related to higher bonuses that were paid to worksite employees in December. The extra $6.00 per worksite employee per month from the workers' compensation cost center also came from same higher allocations due to the year-end bonuses and better-than-expected claims settlements during the quarter.

The benefits cost center's extra $7.00 deficit was due to lower allocations of $4.00 per worksite employee per month and $3.00 per worksite employee per month of higher costs. The lower allocations are the result of participants selecting the lower-cost, higher-deductible health plans.

In summary, the fourth quarter was very consistent with our overall forecast and we are very pleased with the results.

Now let me comment briefly on the full year's gross profit results. This year, our total gross profit grew $30.4 million from 2011 to a total of $382.2 million. This is an 8.7% increase and is particularly good when considering our worksite employee growth that increased 7.5% over 2011. I believe this demonstrates both pricing strength and effective direct cost management, resulting in another good year.

So let's move forward to 2013 and our expectations for gross profit, beginning with our markup. We would expect to see the average markup increase slightly from $190 per worksite employee per month in 2012 to $192 in 2013, due primarily to the mix of customers in the January base and a conservative outlook of further price increases.

Now let's look at the surplus component of gross profit, beginning with the payroll tax cost center. This year, some states have lowered their unemployment tax rates to us and we have adjusted client allocations accordingly. So at this point, we'll forecast a slight decline in the surplus from this cost center for the full year.

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 with where they are now. On the cost side of the workers' compensation cost center, we continue to have positive results and ended the year with an expense of 0.54% of non-bonus payroll.

We want to be conservative, so we'll forecast our expense for 2013 to be approximately 0.56% of non-bonus payroll and let the upside evolve as claims are settled for amounts less than their reserves. Therefore, we will initially forecast our surplus for the workers' compensation cost center to be slightly lower than 2012.

Switching to the benefits cost center, let me tell you how we see our deficit changing for the positive, beginning with the pricing allocations. As we move into 2013, we have seen a slowdown in the migration of worksite employees to lower-cost, higher-deductible plans. In addition, we have also seen an increase in our pricing allocations because those clients that left at the end of the year had lower allocations than the client base that stayed.

Therefore, we have a nice improvement in our allocations automatically built into our forecast for 2013. On the expense side of the benefits cost center, we added -- we ended 2012 with an overall trend increase of 3.5% over 2011. It would not be prudent to forecast a trend that low for 2013, even though we did make a few small plan design changes to help reduce trends.

So to be conservative, we'll forecast a 4% to 5% increase in benefit costs for the full year over 2012. The bottom line is that we expect the deficit in the benefit cost center to decline in 2013 compared to 2012.

When you combine all of the forecasted direct cost surpluses and the benefits cost center's deficit, we should generate a surplus of $52 to $55 per worksite employee per month for the full-year 2013.

Now our last contributor to gross profit, which is our adjacent business services, should also add more to gross profit in 2013. We have seen an increase in sales over the last few months, and the pipeline for new business looks good for most of our adjacent businesses. So at this time, we are conservatively projecting an increase of $2.00 per worksite employee per month to gross profit for the year from $11 to $13.

In summation, when you combine the service fee, the surplus, and the adjacent business contribution, we expect to see our gross profit per worksite employee per month end up in a range of $257 to $260, which is a slight increase from the $253 in gross profit per worksite employee per month for 2012.

Before I turn the call over to Paul, I would like to comment on healthcare reform and what we are doing to prepare for it.

Last spring, we launched a task force comprised of three members of our senior management team and 13 other individuals from various departments within the Company. The purpose of this task force was to study all aspects of the 2,500-page legislation and to develop and implement appropriate strategies which will bring the best solutions for clients and prospects beginning later in 2013.

Just since the election, HHS has added almost 1,000 pages of regulations to the already mammoth law, and there are still thousands of pages of regulations to come.

We started the task force with two full-time people, but now that number will be growing to 14 this year as we digest the rules and regulations and execute the strategies which we have developed.

We do see how healthcare reform can allow us to expand our current offerings and we will speak to those opportunities as they come to fruition later this year.

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

Thank you, Richard.

Today, my comments will fall into three categories. First, I will comment on our 2012 financial and non-financial highlights. Second, I will describe specific inputs into our starting point for paid worksite employees and the resulting plan for 2013. And third, I'll provide some color surrounding investments we expect to make throughout 2013, including expanding the number of business performance advisors, opportunities related to healthcare reform, and growth of our adjacent businesses.

We are very pleased with our 2012 financial results in a period of a high level of uncertainty throughout the year. Our adjusted earnings per share increase of 26% year over year on 9% revenue growth is strong performance in any environment.

Adjusted EBITDA exceeded $100 million for the first time in our Company history and continues to demonstrate the strong cash flow dynamic of our recurring revenue business model.

We also had an excellent year laying the groundwork for a very bright future for Insperity. The most significant accomplishment was completing our business transformation, establishing Insperity as a leading HR and business performance solutions provider.

We began this effort over two years ago, and each of the fundamental components that are necessary to broaden our range and accelerate our growth 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 also sold on a standalone basis to extend our reach in the small to medium-sized business community.

We have established a powerful new brand in the marketplace that leverages our key strengths in HR and business performance, consistent with our positioning as a premium service provider.

We also retrained our entire sales force, established the business performance advisor role, and completed the Insperity selling system training program. We are now ready to grow the number of business performance advisors with a sales efficiency level that creates unlimited growth potential. We established an inside sales operation that extends the daily activity of our business performance advisors into a major channel for each of our adjacent businesses, adding new customers and driving additional gross profit contribution.

These fundamental changes now provide a platform for faster growth and profitability into the years ahead. The potential for revenue and income from a wide array of services to a much broader customer base is in sharp contrast to our previous business model with one offering to a narrow target customer.

Now this transition did not occur without some risk to the former business model, which was solely driven off of paid worksite employee growth and our only business that existed, our workforce optimization service.

One of the biggest risks of the transition was some interruption in the worksite employee growth pattern while we retrained the core sales team and before we were ready to increase the number of EPAs. The time of year with the least visibility into worksite employee growth in the workforce optimization model is in the fourth quarter (multiple speakers) attempting to determine the January paid worksite employee count. This is due to the three factors that determine the starting point of paid worksite employees, including year-end client attrition, net change in existing clients from layoffs and new hires, and fall campaign sales.

All the way through mid-December, we were on track for promising year-end attrition as termination notices were in line with our previous record-setting client retention year. The client base had experienced a small but positive net gain from new hires, exceedingly layoffs in November, and the pipeline for new business was good in both midmarket and core sales.

It seemed the risk related to the year-end churn of customers leading to a material decline in the starting point of paid worksite employees was low. However, our client base is comprised of what I like to refer to as the best small businesses in America. The owners of these businesses are precisely the individuals and companies most affected by the recent tax, healthcare, and regulatory activities in Washington.

And with this backdrop, two of the factors that affect our starting point -- attrition and layoffs -- increased, resulting in a significant difference compared to last year. The number of clients terminating in the January-February combined period was identical to those periods at 496 accounts. However, the number of worksite employees associated with these accounts was 32% higher, driving attrition to levels we had not seen since 2010.

To put this in perspective, in all three years including 2008, 2009, and 2010, the percentage of worksite employees from terminating workforce optimization clients was approximately 11%. In 2011 and 2012, this metric was 9%. This year, the number came back up to 11%, due to the loss of a number of large cost-sensitive accounts that terminated very late in the year-end cycle.

So the loss of worksite employees from client attrition reverted back to historical levels, generating approximately 3,600 more worksite employees than last year to make up from a new sale.

Compared to last year, eight more midmarket accounts and 18 more emerging growth segment accounts terminated in the January-February combined period and account for just over 3,400 of these worksite employees.

Also in December and January of last year, we had new hires exceed layoffs by approximately 1,900 employees. This year for the same period, we had a soft spot and layoffs exceeded new hires by 700. The difference creates an additional 2,600 employees to replace with new sales compared to last year.

In new sales, we have some good news and some bad news. The good news is that our core sales team had an excellent fall campaign and achieved 103% of our goal of 13,000 worksite employees. Sales efficiency was 1.18 sales per BPA per month during the campaign, which is critical to our going-forward plan.

The number of business performance advisors and their sales efficiency is the centerpiece of our long-term growth strategy. This is an excellent efficiency number for a newly retrained sales force in the midst of a difficult market. This confirms our new sales strategies and our decision we made in the fall to grow the number of business performance advisors.

For the full year, core sales came in at 98% of target and efficiency was up slightly by 4% to 0.73 during this transition to bundled-plus selling.

The bad news is our midmarket sales results, which were 68% of target for the fall campaign and only 55% of target for the year. We have been working this issue for a number of years and we were quite disappointed with this outcome, especially in light of the loss of a number of larger accounts.

Our analysis of the January-February terminating accounts reveals the gross profit per worksite employee was only $216, which is 15% lower than the $253 Richard just reported for the entire base last year. This was due to the mix of larger cost-sensitive customers that left the workforce optimization service. So we lost the right accounts, but did not replace them with enough midmarket sales as we expected from the pipeline we had generated.

In January, I spent the better part of three days working with the midmarket sales team as they dissected the activity and the obstacles they were unable to overcome. There is a silver lining here in that we were much improved in 2012 in each of the steps of the sales process that perceived a final closing space. The number and quality of discovery calls, business alignment surveys conducted, and proposals presented all showed marked improvement. This makes the lack of production even more frustrating, in some ways, but the reality is we have honed in on the final stage of the sales process and isolated key obstacles to closing business and have resolutions ready to implement in 2013.

So the bottom line is the starting point for paid worksite employees will be lower than expected since our last conference call. Higher attrition of large accounts and less hiring within the base compared to last year was not offset by new sales. Even with the highly successful fall selling campaign in the core market, the sheer number of business performance advisors was not enough to overcome the higher attrition, less hiring in the base, and lack of success in midmarket sales.

Now with this information, you would immediately want to kick-start hiring of business performance advisors. Fortunately for all of us, we made that decision in October after validating our training program and announced a hiring plan on our call in November. As a result, we will begin the year with a stepdown from the fourth quarter in paid worksite employee, which has a significant effect on this year's guidance which Doug will provide a few minutes. However, the effect on our growth plan will be very short-lived as sales increase as we increase the number of business performance advisors.

We've been very successful in hiring and training business performance advisors since our last call. We are over 300 business performance advisors hired as we speak and we expect to ramp up the training advisor count to that number by the end of the first quarter.

Trained BPAs are expected to average around 260 in Q1 and 300 in Q2. This 25% increase of trained BPAs from the 239 in Q4 to 300 in Q2 represents an investment of approximately $4 million in 2013.

We also have a near-term investment of approximately $2 million in 2013 to comply with healthcare reform legislation and to capitalize on the opportunities created by the new law.

Our first opportunity is to use the complexity and confusion surrounding health reform requirements into more opportunities in front of qualified prospects. We have prepared an executive briefing for small and mid-sized firms to be delivered by our business performance advisors and also to be offered as a WebEx group presentation.

BPAs will go through training on this executive briefing at our sales convention this month, and shortly thereafter we will include this offer in our advertising.

Our second opportunity is to offer more options per coverage for our prospects and clients within and outside our co-employment workforce optimization model. This will be accomplished as we add our insurance services offering and ramp up our insurance agency to include these services.

We also are considering and will be prepared to establish a private exchange under the new law if the opportunity pans out the way it looks right now. It appears providing a private exchange alternatives to the public exchanges may provide a competitive advantage in the ability to offer the full spectrum of purchasing options to our clients and prospects.

In addition, these healthcare alternatives under the new law puts the finishing touch on our adjacent business strategy. We will now be able to describe a full continuum of offerings from which prospects and clients can choose with a wider range of cost and value. We will simply have more solutions to match more prospect and client need.

Two years ago, we had one service for only the perfect fit customer at just the right time. Now we have the right range of solutions for a wide range of customers over the entire lifecycle of their company. And Insperity now has a platform of products and services and a delivery system of business performance advisors to engage in customers for life. We can start where their most critical need exists and grow the relationship with solutions to match their needs as they change.

This approach to the marketplace translates into a powerful business model with more recurring revenue opportunities for more businesses and lower risk. These seeds we planted are now sprouting out of the ground.

Our capability to develop new products and grow new businesses is increasing, and so are the results. In 2012, we saw some nice revenue growth in our adjacent businesses as we refined the operations to grow faster and more efficiently. For the full year, retirement services grew 94%, recruiting services 29%, employment screening 16%, performance management 12%, time and attendance 9%, expense management 7%, and the portfolio as a whole over 10%.

The number of SaaS seats increased 37% to over 116,000 at year-end in our three SaaS solutions we had last year. And recently, we launched three new powerful SaaS applications, including Insperity HCM, OrgPlus RealTime, and Insperity Reveal.

In the fourth quarter, we saw an increase of 32% over Q3 in the purchase of additional ABU solutions by workforce optimization clients. 1,474 additional ABU solutions were purchased in 2012 by workforce optimization clients, validating our cross- and upselling strategy.

So in summary, we are full steam ahead and ready for growth on every front. We are disappointed with the starting point in paid worksite employees in our workforce optimization business, but far from discouraged by it. We had an excellent year last year and established a dynamic foundation for growth in the years ahead.

At this point, I'll pass the call to Doug to provide our initial guidance for 2013.

Thanks, Paul.

Now before we open up the call for questions, I'd like to provide our initial 2013 financial guidance. As Paul discussed earlier, our forecasted unit growth takes into account the lower January starting point. We expect client retention to return to historical levels over the course of the year and are conservatively budgeting for slightly less net hiring of our client base than last year.

Our unit growth guidance also considers a 25% increase in the number of business performance advisors at initial sales efficiency levels, combined with the improving sales efficiency on our more experienced BPAs.

When considering these factors, we expect to begin the year with average worksite employees paid in a range of 123,250 to 123,750 for Q1. Thereafter, we expect sequential growth between 3% and 4% for the remaining quarters of 2013 to end the year around 138,000 worksite employees. This results in average paid worksite employees in a range of 129,500 to 130,500 for the full year.

As for gross profit for worksite employee per month, based upon Richard's earlier comments we expect to be in a range of $257 to $260 for the full year. The expected improvement over the $253 achieved in 2012 is due to slightly higher service fees, healthcare pricing, and gross profit contribution from our adjacent businesses. Consistent with prior years, we are initially budgeting lower surpluses in our payroll tax and workers' compensation area.

As for the quarters, we are forecasting Q1 gross profit per worksite employee per month from $287 to $291.

The quarterly pattern for the year is expected to be similar to 2012. We expect gross profit to be higher in Q1 because of the surplus we generate on a higher level of payroll taxes prior to worksite employees reaching certain wage limits. Additionally, with the recent growth in high-deductible health plans, costs are lower in Q1 and step up in Q2 through Q4 as deductibles are met.

So, considering the seasonal impact of these factors and price increases rolling in throughout the year, we expect a sequential decline in Q2 of about $40 per worksite employee per month, an increase of approximately $5.00 in Q3, followed by a decline of about $15 in Q4.

Now shifting to operating expenses, we are forecasting total operating expenses in a range of $336.5 million to $340.5 million. This year's larger incremental items include costs associated with the increased number of business performance advisors and the implementation of our healthcare reform strategy.

As for some of the details behind our operating expenses, we expect salaries and wages to increase by about 10%. This is largely driven off of costs associated with the sales force expansion, as other corporate headcount is budgeted to increase only 2%.

As for stock-based compensation, we expect that 2013 restricted share grant to be at a similar level as that granted in 2012. However, with a three-year vesting period, we have a lower-priced 2010 grant, which occurred during the economic downturn, being replaced by a grant at higher price levels. This is expected to result in a 13% increase in 2013 expense over 2012.

Missions are expected to increase by about 6% on higher projected sales with the sales force expansion. Advertising costs, which had historically included a component for government affairs, are expected to increase by approximately 11%. This increase includes activities surrounding healthcare reform and some additional marketing of our adjacent businesses.

G&A costs are expected to increase by just 5%. Depreciation and amortization is expected to be up by approximately $3 million over 2012, and includes purchase price amortization on recent acquisitions, including our new financial services payroll SaaS offering and our new time and attendance product offering and channel relationship. In 2012, we also invested in our infrastructure to support the growth of our adjacent businesses and made significant enhancements to our website and employee service center, including online enrollment.

Now as for the quarterly spend, Q1 operating expenses are expected to be in a range of $85.5 million to $86.5 million, and include the usual expenses associated with the restart of payroll taxes on our corporate employees, our annual sales convention, and sales incentive [drip]. We expect a slight step-up in operating expenses of approximately $1 million from Q1 to Q2, and then sequential declines of about $4 million from Q2 to Q3 and a little over $1 million from Q3 to Q4.

Now similar to prior years, the high end of our full-year operating expense guidance is tied to additional incentive compensation, which will be accrued only upon achieving higher operating results.

We are forecasting net interest income in a range of $100,000 to $200,000 for the full year in this very low interest rate environment. And as a point of reference, we were earning as much as $12 million in interest income in 2007. We are estimating an effective income tax rate of 40% and 25.7 million average outstanding shares for both Q1 and the full year.

So looking at the full year's earnings expectations, our guidance implies an EPS range of $1.47 to $1.56 for 2013. This estimate includes the negative impact of a lower January starting point from our initial expectations of about $0.25 per share and the investment in our healthcare reform strategy of about $0.05 per share. Also, the expansion in the number of business performance advisors equates to about $0.10 per share.

As for the quarterly pattern, our guidance implies a Q1 EPS range of $0.46 to $0.53 per share, with a sequential decline of about $0.30 per share from Q1 to Q2, an increase of $0.24 per share from Q2 to Q3, and a decline of about $0.03 per share from Q3 to Q4.

As for our cash flow, our full-year guidance implies EBITDA plus stock-based compensation of approximately $97 million. We are budgeting 2013 capital expenditures of $15 million. With our expectation of continued strong cash flow and the fact that we are beginning the year with $116 million in working capital and no debt, we are in a good position to invest in our initiatives and continue our ongoing dividend program.

Additionally, with the low participation in our tender offer at a $31 per share repurchase price in Q4, we only used $3 million of the allocated $50 million, so we are entering the year with $47 million designated to repurchase shares.

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

(Operator Instructions). Jeff Martin, ROTH Capital Partners.

Jeff, your line may be on mute.

Jim Macdonald, First Analysis.

So, could we dig in a little more to the sales issue? I mean, the 6,000 sequential drop seems pretty large. You talked about 3,400 from 3,600 from sort of the midmarket extra losses, but then with the sales campaign going so well, it just seems like particularly large drop. I guess you've explained it, but I think as we thought we had midmarket in hand, what can we do about it?

Like I said, I spent a few days with the midmarket sales group, and there are a lot of things we can do about the closing rate, and that's where we fell short. As we came into the fall, we had a very nice pipeline of midmarket prospects and we just were unable to convert them.

So we've got lots in store to work on that for the coming year.

But where the shortfall really comes from for this year was those termed accounts in the larger customer base that were very cost sensitive. We looked at our -- we can look at that group as a whole and look at exactly how they're priced, and as I mentioned, the gross profit contribution is about 215 -- $216, I guess, or so, compared to our average.

We also sent out a consultant to do a full investigation of what happened on those accounts, and they literally were basically cost-sensitive accounts that right at year-end decided they needed to make a change.

So the point I was making in my script was we just didn't quite have the size of our core sales staff large enough to overcome that, especially the out midmarket sales hitting at their level. But it's almost like a problem that appeared after the solution is already in place because we've already started ramping up the sales staff, so that's why this thing will be fairly short-lived.

So where did these -- what did the midmarket accounts do to save costs? I mean, you have a pretty attractive health offering, and they're going to need health offerings, so what was their solution? A different (multiple speakers) PEO or a different type of solution?

It was about the same mix as we've seen in the past of some going to take it back in house and some going to other PEOs, and then some using kind of a hybrid of finding some other bundled solutions, but not a full solution, and just not having as much as they used to have. So we reflected a cost-cutting mindset that we saw right there at year-end.

You mentioned your customers are specifically affected by the fiscal cliff. Could you just kind of remind me why you think that would be the case?

If you look at the most successful small and medium-sized business owners, they are in a situation where all the regulation that's coming out affects their businesses directly, both the regulation and then, on top of that, healthcare reform, which is really huge. But at the same time, the tax increases that came at year-end also play indirectly for those individuals and were significant enough to cause some actions. There's some steps to take place.

You know, we saw that significantly in bonuses at year-end with people doing tax planning. [Did] a large bonus deal this year for those owners and management.

That was another question I had. Your bonuses were up dramatically in Q4. Are they going to be presumably down in Q1? So was there sort of a big shifting there that also impacts results?

Not a lot. We do make some fees on bonuses because you're processing transactions and so forth, and certainly bonuses will be substantially lower, but that wasn't a big contributor to the [chain].

Then I just had one more general question, I'll get back in the queue, you mentioned starting up a health exchange. Would you do that by yourself or with UnitedHealth, and the cost of that could be large, I believe, so maybe you could talk about what would be involved in starting up your own exchange?

Well, Jim, this is Richard. We have spent quite a bit of time in that project. Remember, I talked about this task force that we have, and one of the groups in the task force is working on that particular program all by itself.

Oddly enough, there are some opportunities out there that I think could work for us, but we're still in the research phase and so don't want to start making commitments about what we are or what we're not going to do until we've got it all put in place a little bit later on in the year because business owners, by the time we get to July, are going to be needing to have answers for their worksite employees because these exchanges, theoretically, are supposed to go and be open for business to start enrolling on October 1.

I still am not sure if that's even possible. But having said that, we are going to be prepared with our full array of opportunities for the business owners by the time we get to the summer.

We have a variety of options, but I think it's important for you to understand when you think about what an exchange does, which is to bring together plans from various providers, line them up side by side, and help customers choose from among them and make a choice and implement a plan, that's what we do. We do that all. So in terms of the mechanics of what you actually do to make that happen, we do that.

Now, would it be on a different platform? We'll probably be working with some other outsiders and we have various options for different size accounts, but we're well down the path to be prepared to do that if the need and the opportunity arises.

Okay. I'll get back in queue.

Tobey Sommer, SunTrust.

Paul, I just wanted to see if you could elaborate a little bit more on what your assessment is of why the customers left and see if there's a change in the value that they're looking for. Thanks.

Sure, we -- that's a good question. Obviously, that's one we would be all over. It's why we've spent a lot of time over the last four weeks or so really digging in on that and comparing to previous information that we look at with customers as they depart, with exit interviews, so on and so forth.

And in some ways, it's unfortunate there's not a lot of difference there. It's basically you had cost-sensitive accounts that felt like they were in a position in their own economic environment that they needed to try to come up with another way to literally save dollars. So it wasn't very exotic. That's what happened.

Now we also had, of course, the usual -- we had a number of companies that, I'd call it our success penalty, that sold at year-end and moved to somebody else. We actually were able to sell one of those, the new company, and bring extras on. So you have some of that.

We also had some companies that were in more desperate financial shape, either going into bankruptcy or near, and obviously those for credit reasons we had to let go. But it's as plain as I laid it out in the script. We just had a higher number of larger accounts that were cost sensitive, and at year-end it was kind of a sour tone and they departed.

Thanks. When I think about your initiatives on the expense side, how do you think about your ability to moderate or accelerate those throughout the year? And how would you -- what kind of milestones or signs would you look for to step on the gas pedal or the brake?

Sure. What we're really looking for right now and all over is making sure that that business performance advisor count ramps on up. I'm not talking about the trainer count. We already have more than 300 hired. That number needs to get to about 320 or so to have the trained count be at that 300 level number.

And then, we're going to be looking very closely at the sales efficiency of the 240 or so that were here at year-end and the new 60 that are here, and making sure that all gets managed well.

I'm very excited about that because we just had a successful fall campaign, so those 240 went through the whole new training system, the whole new selling system, and they were successful. So they are ramping up. They're at the bottom of that nice curve that moves up for sales efficiency as you succeed.

And then, the other factor that is interesting is that on new BPAs, the new ones don't have the old system to get rid of. They get to come in and learn the new system and go out, so I'm very excited to see how new BPAs are able to perform with the new selling system.

Thanks, Paul. My last question is how much in earnings did the adjacent business unit cost in 2012 and what's your assumption for 2013? The reason I ask is that with a 37% growth in seats, I'm wondering about the timeline of potential conversion from a drag to breakeven and ultimately profitability.

Yes, I'll just in a general sense, and Doug has specific numbers, but I'm going to -- we had talked in terms of a drag of about $0.25 coming from all these businesses we've established, et cetera, and now you have to look at the ABUs that were in place last year, and those are going to be less of a drag next year than they were.

But we also added the payroll service and some financial service offers late in the year, and they're going to cost a little bit, and so we're expecting this year to be that year -- should be about the same as a budget. We budgeted that to be about the same. We were hoping to blow that number away, but at the beginning of the year we believe in budgeting fairly conservatively on each component.

And of course, when you look at -- which is really the way that we are really measuring these guys right now is in their gross profit contribution, and we do see a nice step up coming, even though it sounds like a couple of bucks, for worksite employee per month for the year. Well, that's several million dollars of gross profit contribution, and that's been our game plan all along was to bring those adjacent businesses to a point that they could materially contribute at the gross profit line because they're such high-margin businesses. So we're seeing some real positive there.

Right. Doug, do you have the numbers for the EPS impact in 2012 and what is modeled for 2013?

Yes, I mean, it goes back to what Paul mentioned earlier. It's about a $0.25 drag or so in 2012 and we expect a similar drag, but if you look at two different components, on the businesses that we've had the recurring type ABUs, we expect about a $0.05 improvement on those and then a $0.05 investment on the new ones, which are the financial services, the new payroll product that came out mid to late last year, and then on the financial service products, the Reveal software, that we've announced.

And the HCM.

And the HCM, right.

(Multiple speakers) major (multiple speakers) very promising.

Thank you very much.

Mark Marcon, Robert W. Baird.

Good morning. I was wondering, what's the percentage now of the clients that are in the midmarket?

Well, we were up to about 19% and I think at this point it is, I think, 17%. Yes, that's right.

And within sales, what's -- the business process advisors, how many of them are dedicated to the midmarket?

Right. We have eight business performance consultants. In the midmarket, we use that term to describe them and differentiate them from business performance advisors.

Okay. And then, with regards to the -- you know, we have the starting base. In terms of achieving the sequential growth, does it imply any sort of ramp up in terms of productivity levels within the core BPAs?

In the core BPAs, you'll have some ramp up in their sales efficiency that will offset the lower sales efficiency you have with new folks. But it's very modest. It's strictly -- and we all know how these numbers work. When you grow your sales staff 25%, you're going to get a lot more sales, so it's -- we think it's a -- more than a doable forecast for that component.

Can you remind us how many BPAs you had at the beginning of 2012?

Yes, we had -- for most of the year, we were right around the 250 number. And basically this -- in the fall campaign this year, the slightly smaller sales staff produced more than or actually produced the same amount of sales as the group the year prior. So -- in the new selling system, so I was really pleased with how that worked out.

And with regards to the new Affordable Care Act, and there are certain provisions of that that go into effect even starting this year, how does that -- how would a smaller company view themselves from the perspective of -- and this is something that a number of investors have been asking about. If you're part of a PEO, do you suddenly become a -- if you had 20 employees and you weren't subject to the Affordable Care Act but you join a PEO and you now become part of an organization with 120,000 employees, that you are now subject to it? Or how should we think about that?

(Multiple speakers). Here's how we should actually think about that. When you think about customers that are in our universe of a workforce optimization, there are customers providing benefits, want to provide benefits, there're the best small businesses in the country, they are competing to hire and keep the best people.

So whether they have to provide it or don't have to provide it is really a nonissue. They want to provide it. But the real issue for them is, does this open up any new options or new ways to provide the coverage and it would be better for them?

And what we're prepared to do, and Richard's group has done an amazing job on getting prepared for this, but we believe we're going to be able to offer more of a continuum of solutions for companies, both in the workforce optimization solution and outside, to where you can mix in either brokered solutions or being involved in our large plans, depending on which is better for that particular investor.

So we think it opens up a lot of opportunity for us to do more for more customers.

I think the other item that's important to be aware of is that while there is no specific requirement for those that have less than 50 full-time equivalents, and by the way, that has still not been defined yet, so.

You mean, full-time equivalent --

Full-time equivalent employees, right. But the other thing is this whole topic of cost, you haven't heard people talk about yet because it is the, if you use the colloquialism, it's the light at the end of the tunnel and it's not light. It's a train.

The whole of healthcare reform is requiring the transition to a community rating kind of concept. And what that does is that forces all of -- in this particular bill, it forces all of the way that the insurance companies rate their prospect. If they're covered people, it goes to a new rating system whereby people are going to get -- a number of people are going to get really nice decreases and a number of people are going to get really huge increases.

So if you're forced into that environment, you're going to be, as a small business owner, seeing increases in the 30% to 40%-plus beginning in 2014. And of course, in our situation, because of our plan and how it works, they won't be having to experience that kind of a situation. So it's not just about offering or not; it's about the cost of offering it and what that's really going to mean.

I think one other factor that's really significant here is that the amount of data and information and reporting that a business is going to have to do to comply with the healthcare reform act is really significant.

It has them doing things they're not even calculating today, or data they're not even collecting today, and that's one of the reasons we created -- we've developed this executive briefing, a PowerPoint presentation and information that we're going to train our advisors on this month when they come into the convention. So that we can offer that to small and mid-sized business owners so that they can get briefed on what the requirements are going to be.

And basically, we're going to be able to lay out an option where you can handle all this complexity, all this compliance, and all this cost, or you can just sign up with Insperity.

Great. And then, when we take a look at your client base in terms of roughly 73% getting the health care coverage, do you have any clients that don't participate in the healthcare. I'm assuming that 73% is basically three out of every four employees at your clients opt for the healthcare.

Right. Actually, when you look at the number that are eligible, the coverage is over 90%. The thing that report every quarter is just the pure math, that that month of the number we've got on the plan. But (multiple speakers)

Some are ineligible because of part-time or temporary, some are new and aren't eligible (multiple speakers)

Some of them -- and the rest of them are covered under a spouse's plan or whatever.

Military coverage.

Right, so I don't know if that answers (multiple speakers)

That answers the question. And then, I would imagine that your medical loss ratio is more favorable. Is there any opportunity to, with your medical loss ratio being what it is, that you could actually utilize that in terms of negotiating even better rates with UnitedHealthcare?

I think the answer to the question is, you know, the way that our plan operates, it is called -- it's a fully insured plan with a partial self-funding treatment from an accounting perspective.

Right.

So our plan includes the -- all of the cost of the claims is the basic part of the plan that we're responsible for, and then we negotiate with the carriers for administrative fees and other things.

So the real opportunity is -- I mean, we just posted a year where our trend for healthcare, the total book of business that we've got on $900 million of healthcare expense this year was 3.5%, so it doesn't need to get any lower than that because I don't think there's too many people that are walking around the street talking about a 3.5% increase in healthcare costs for 2013 and beyond.

No, it's terrific. I was just wondering, I was under the impression that there might be the potential for UnitedHealthcare to actually use your population in terms of calculating their medical loss ratio, given that yours is superior, presumably, to theirs, but there's an arbitrage there in that you might be able to capture some of that.

Yes, no. They're not able to do that because it's our nickel.

Got it. Thanks for the clarity.

Michael Baker, Raymond James.

Thanks a lot. In terms of your worksite employee base, what percentage are with employers with less than 10 employees?

Very small.

Okay, that's helpful. And then with the private exchange, can you give us a sense of what part of the market you think that works best with as it relates to the small business dynamic and their needs?

I think the answer to that question is still unknown, and so as a result, you know, maybe in a year from now we might be able to answer that question. But in the meantime, we've got to be prepared to have that as a solution so that for those that decide to go that route can use it.

I think the other thing that's pretty important to realize here about this exchange and all that kind of stuff is that, if you'll recall, the worksite employee base that we have, the average compensation is about $60,000 a year. And so, they are not going to fit -- be able to go into the exchange to get a subsidy from the federal government because of their base wage.

So I think as we answer some of these questions for you all, they're going to be different than what, like, the Darden's restaurant group is going to be dealing with. Or Sears are going to be dealing with. So (multiple speakers) it's different.

I think (multiple speakers) the other way you have to think about it, though, I think this is more -- you have to think about customers in a lifecycle. You know, customers may need to be in an exchange when they're not very profitable, they're small and young and trying to make it. And then, maybe you can grow out of that as they get not just in size, but in profitability and can afford more and better and do more things to hire and attract key people.

So we want to be able to provide the full spectrum of possibilities. I want to be able to analyze their options side by side with them and help them choose what their best option is.

Would one of the potential implications be moving away from the bundled pricing on the PEO side as people consider shifting from one or making adjustments or doing hybrids?

Yes, I think we can look at possibly some tiered pricing within the co-employment model. We can look at pricing in a brokered solution that is in an exchange within the bundled price. There's a lot of different options out there and these are the things that -- this is why we're investing another $0.05 a share in health reform, because it's moving fast.

And as you guys have dug around and done your work, is there -- what's the potential that it actually gets pushed back? My understanding is the National Association of Insurance Commissioners, there was some cry out to the administration. What do you think the probability of that happening is?

You know, it's hard for me to tell, Michael. My gut says and has said all along that I just don't think that the country is going to be ready to handle all this stuff in less than six months.

I mean, it's not January of 2014. The current rules say that you've got to have these exchanges in place to start enrolling people in October. And I just -- I know what we're going through and what's -- and being involving for us to be ready for all these different eventualities, and I think we're a little bit more efficient than the federal and state governments.

Well, I thank you for your thoughts. I appreciate it.

You bet.

I will now turn the call back over to Mr. Sarvadi for any closing remarks.

Once again, we thank everybody for participating today and for your interest in following the Company. So thank you, and we'll see you next quarter.

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