Insperity Inc (NSP) 2013 Q1 法說會逐字稿

Good morning. My name is Tia, and I will be your conference operator today. At this time, I would like to welcome everyone to the Insperity first-quarter 2013 earnings conference call.

After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions).

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

Thank you. We appreciate you joining us this morning.

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

Now, let me take a minute to outline our plan for this morning's call. First, I'm going to discuss the details of our first-quarter 2013 financial results. Richard will discuss trends in our direct costs, including benefits, workers compensation, and payroll taxes, and the impact of such trends on our pricing. Paul will then add his comments about the quarter and the major initiatives of our growth plan. I will return to provide our financial guidance for the second quarter and an update to our full-year 2013 guidance. We will then end the call with a question-and-answer session.

Let me begin today's call by discussing our first-quarter results. Today, we reported first-quarter earnings of $0.51 per share, which was above the midpoint of our forecasted range. As expected, earnings declined slightly from the $0.54 per share reported in Q1 of 2012. This was a result of higher worksite employees and gross profit per worksite employee, offset by recent investments, including the expansion of our Business Performance advisor group and the implementation of our healthcare reform strategy.

As for our key metrics, paid worksite employees averaged $123,391 for the quarter, an increase of 1.2% over Q1 of 2012 and within our forecasted range. Gross profit per worksite employee per month averaged $292. This was above both our Q1 forecasted range of $287 to $291 and the $282 reported in Q1 of 2012.

Operating expenses were in line with our budget, totaling $86.1 million. We generated $30 million of EBITDA plus stock-based compensation and ended the quarter with $114 million of working capital and no debt after repurchasing 472,000 shares at a cost of $13.5 million.

Now, let's review the details of our first-quarter results. Revenues increased 3% over Q1 of 2012 to $612 million on the 1.2% increase in average pay worksite employees. You may recall from last quarter's conference call that our January starting point was lower than initially anticipated as an improvement in worksite employees paid from new client sales was offset by declines associated with lower client retention and net hiring on our client base. The good news is we returned to sequential growth in worksite employees by the end of the quarter.

In addition, the loss of cost-sensitive lower-priced clients showed up in improvement in gross profit. As you're probably aware, our key pricing metric is gross profit per worksite employee, and our Q1 results exceeded our expectations. The average gross profit per worksite employee per month or $292 was $3 above the midpoint of our forecasted range and a record high for our first quarter. Favorable results were achieved by an improvement in our benefit cost center and an increase in the contribution from our adjacent business unit offerings. This more than offset a sharp fall in the payroll tax area, which expected to impact only Q1. Richard will provide the details behind these results in a few minutes, so I'll just provide some brief comments on our direct costs.

Benefit costs per covered employee increased by just 3.6% over Q1 2012 to $862. And approximately 72% of worksite employees were covered under our health plans during the quarter. Workers compensation costs totaled 0.53% of non bonus payroll below our forecasted Q1 cost of 0.55% and include a $3.6 million reduction in previously reported loss reserves. This reserve reduction was similar to that reported in Q1 of the prior year. Payroll taxes as a percentage of total payroll were 90.4%, just a slight decline from the 9.6% in Q1 of 2012. (inaudible) rates declined slightly from the prior year.

Now let's move on to Q1 operating expenses, which were in line with our budget of $86 million. In addition to the impact of some investments made during the prior year related to the buildout of several new business lines, the 7.7% increase over Q1 2012 included the recent ramp-up in the number of business performance advisors and investments made in our healthcare reform strategy.

Net interest and other income for the quarter totaled just $80,000 in this very low interest rate environment, and our effective income tax rate remained at 40%.

As for our Q1 cash flow, EBITDA plus stock-based compensation totaled approximately $30 million. Cash outlays included the repurchase of 472,000 shares at a cost of $13.5 million, cash dividends of $4.3 million, and capital expenditures of $2.8 million.

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 record-setting first-quarter gross profit results. Then I will update everyone on our gross profit outlook for the balance of 2013, and I will conclude my remarks with an update to healthcare reform and how we see it affecting our business.

As Doug just reported, our first-quarter gross profit per worksite employee per month was $292, which was $3 per worksite employee per month above the midpoint of our range and the highest gross profit we have ever had. Gross profit consisted of $192 average mark-up, $87 of surplus, and $13 from the adjacent businesses.

Now let me give you the details of each component. The average mark-up and the surplus were $1 per worksite employee per month better than expected, and the adjacent business gross profit contribution was $2 per worksite employee per month better than expected. The additional $2 per worksite employee per month of adjacent business gross profit came from better-than-expected revenues as we saw a nice increase in cross-selling opportunities that began in the fall of 2012 and have continued into 2013. The $1 per worksite employee per month of additional surplus came from a $7 per worksite employee per month lower surplus in the payroll tax cost center, a $1 lower surplus from the workers compensation cost center, and offset by a $9 per worksite employee per month improvement in the deficit of the benefits cost center.

Here are the details of each cost center. The $7 per worksite employee per month lower surplus in the payroll tax cost center came primarily from the distribution of worksite employee payroll in states with higher state unemployment tax rates than we had originally forecasted. Even though it affected us in Q1, this mix change should not adversely affect our forecasted surplus for the balance of the year.

The benefit cost center's lower than expected deficit of $9 was due primarily to higher allocations than were originally budgeted. Part of the increase of allocations was due to the successful execution of our pricing strategy along with the favorable impact of a mix change that we discussed last quarter.

In summary, the drivers to this quarter's positive results provide the opportunity to raise our gross profit expectations for the balance of 2013. So let's start with our mark-up. We are conservatively forecasting the average mark-up to remain at the current levels for the rest of 2013 due to the volume of new business that we expect. The mark-up on new business sold is typically lower than the mark-up on renewing business, so we expect these to offset.

Now let's look at the surplus component of gross profit, beginning with the payroll tax cost center. As I mentioned earlier, the sharp fall in this cost center surplus in Q1 should not repeat. Therefore, our forecast for the balance of this year remains unchanged.

Moving to the workers compensation cost center, we expect the pricing side of the workers compensation allocations for new and renewing business to continue to remain fairly constant with where they are now for the balance of 2013. On the cost side of the workers compensation cost center, we continued to have good results. Even though we have recently experienced an increase in the severity rate over the last policy year, our frequency has been slightly lower. Therefore, our expense should still average about 0.54% of non-bonus payroll for the rest of this year and our surplus for the workers compensation cost center should be about the same as our previous estimate for 2013.

Switching to the benefits cost center, we expect improvement in both pricing allocations and in the cost. We continue to improve our allocations, as I mentioned earlier, even as participants migrate to lower-cost plan options. As this year goes by and more prospects find out how healthcare reform is going to raise their healthcare costs, I believe this will allow us to continue to increase our allocations.

On the expense side of the benefits cost center, we know that our costs will go up each quarter as participants' deductibles and co-pays are satisfied. Our first quarter's results were definitely below trend, so that should positively affect our full year's final costs. Therefore, we are reducing our benefits cost estimates to reflect a 4% to 4.5% increase over 2012, further reducing our expected deficit in this cost center. When you combine all of the forecasted direct cost surpluses and the benefit cost centers' deficit, we should generate a net surplus of $56 to $59 per worksite employee per month for the full year.

Our last contributor to gross profit, which is our adjacent business services, should maintain its current level of gross profit contribution. Although sales have exceeded budget over the first few months of this year, we will remain conservative and not forecast any further increase in contributions to gross profit for the full year.

In summation, when you combine the service fee markup, 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 $260 to $263, which is an increase from our guidance last quarter.

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 quarter, I talked about the creation of a healthcare reform task force and how it would help develop and implement our strategies for 2013 and beyond. We have now developed and are currently executing a comprehensive game plan to address what business owners need to know this year about how healthcare will affect them in 2014. All businesses will experience new and significant compliance, complexity, and cost issues next year, but they have to prepare now to deal with five major provisions that will affect them this year. While we don't have the time on this call to go into detail, I will tell you what the provisions are.

Number one is the individual mandate. Number two is the employer play or pay responsibilities. Number three is the government reporting and information tracking. Number four are costs, taxes, and fees. And number five are the state and federal exchanges. Recently, all of our business performance advisors and consultants were trained to present an executive briefing to prospects that explain how each of these provisions will affect their businesses in 2013. Very early feedback from prospects that have seen the briefing indicate that Insperity's business solutions can take away much of the pain that healthcare reform is going to inflict on their business throughout this year.

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

Thank you, Richard. Today, my comments will focus on three of our 2013 major initiatives. First, I will discuss the business performance advisor ramp-up designed to fuel our future growth. Second, I'll discuss our plans to leverage the complexities, compliance, and cost of healthcare reform into more selling opportunities and options for Insperity. And, third, I'll discuss the first signs of gaining traction in our adjacent business strategy and what this means to Insperity over the long-term.

Growing the number of trained business performance advisors was the central focus for the first quarter. The number of trained business performance advisors is the leading indicator for future growth for the Company. Throughout our history, as we grow the number of trained sales staff, acceleration, and worksite employee growth follows within 6 to 12 months.

Last October, we determined our business performance advisor training program, the Insperity selling system, was ready to roll out and we announced a plan to increase our team of advisors from approximately 240 to 300 in 2013. Since we made this decision, we hired 114 new business performance advisors, bringing our total number of BPAs to 325 today. New BPAs are counted in the trained BPA count after two months and two levels of training have been completed.

74 new BPAs completed their training in the first quarter, bringing the total trained BPA count to 264 in April. An additional 28 completed their training in April, and 26 are scheduled for completion in May. I'm very pleased to report, over the next two months of this quarter, we expect to exceed our goal of 300 trained business performance advisors, a 25% increase over the fourth quarter of 2012.

In addition to training new BPAs, we continued our certification training for experienced advisors through the University of Houston. In Q1, 74 advisors achieved the Certified Business Performance Advisor designation, bringing the total number of CBPAs to 150. We also held our annual sales convention in Houston, training advisors on many aspects of the selling system and the wide array of business performance solutions now available from Insperity. Our emphasis was the introduction of our Customer for Life philosophy and the paradigm shift required to execute our long-term growth plan.

Our Customer for Life philosophy brings together the completed business transformation of Insperity. We have gone from offering one solution to a perfect fit customer at just the right time to offering a wide array of HR and Business Performance solutions that fit almost any prospect at any time. This new paradigm requires BPAs to gain a holistic view and understanding of the customers' needs initially and on an ongoing basis thereafter. This allows us to establish a relationship, an appropriate set of solutions and upsell and cross-sell other solutions as the customers' needs changed.

To be successful over the long term, we are establishing the role of the Business Performance advisor with necessary foundational training to identify business issues and properly match Insperity solutions. This is where healthcare reform has teed up an excellent opportunity for Insperity.

On January 1, 2014, the Patient Protection and Affordable Care Act will bring a wave of complexity, compliance, and costs to the business community. The implementation happening now will affect every company. Business owners and managers are feeling the anxiety that comes with the uncertainty of how this law will affect their company and their people. The time to become informed cannot be put off any longer, and we are ready to fill this pressing need.

As Richard mentioned, there are five major elements of healthcare reform taking effect on January 1. We have condensed the analysis of more than 15,000 pages of regulation into an executive briefing, and trained our advisors to take this information to the marketplace. Our Business Performance advisors are equipped to explain these changes and help business owners understand the decisions and choices they must make in the months ahead.

I cannot think of a better way to establish the relationship between our advisors and our prospects than conducting an executive briefing on healthcare reform. These meetings provide an opportunity to demonstrate our expertise in all things HR related and the clear advantage of our comprehensive workforce optimization solution. Just like it says in our new advertisement, a business owner can spend their time and money to figure out healthcare reform or simply trust Insperity to handle it for them.

Our goal is to leverage healthcare reform to increase the number of sales opportunities throughout 2013. I believe once a prospect receives the value of our executive briefing, they will welcome an ongoing relationship with our advisor and very likely consider working together to help them comply with the new law. Compliance with healthcare reform can take many forms for these prospects, many of which lead to new customers for Insperity. Our time and attendance, HCM and payroll solutions are ideal for meeting the reporting requirements of the new law. Our Insurance Services unit is prepared to help customers choose their best alternative to provide benefits from the new options coming available or traditional sources. And, best of all, the complexity, compliance, and cost of healthcare reform points a customer directly toward our premium workforce optimization solution.

The issues surfaced by healthcare reform reinforce the co-employment benefits of Insperity workforce optimization. There is simply no other way in the marketplace to eliminate the need to even be concerned about healthcare reform. The combination of administrative relief, government compliance, and the reduced liability that comes with the co-employment relationship is a perfect fit solution for healthcare reform. This became crystal clear in our recent interaction with customers and prospects at the Masters. Over five days, we entertained over 60 clients and a guest of their choice. Essentially, our customers brought us a prospect with them and the contrast between them on the issue of healthcare reform was amazing. The guests had a visible level of anxiety as discussions ensued about specific requirements coming on January 1. Our clients stated openly and clearly how they have no concern at all because, in their words, Insperity handles all that for me. So, we are being served up against in an unlikely form of healthcare reform and we are focused on conveying this -- converting this into more selling opportunities for workforce optimization or our adjacent business performance solution.

These adjacent businesses provided a highlight in the recent quarter by exceeding our gross profit contribution expected from these offerings. Year-over-year growth exceeded 30% in gross profit per employee from our adjacent businesses increasing from slightly less than $10 to just over $13. The exciting aspect of this, from my point of view, is the validation of our improved business model. There is tremendous potential for this margin expansion to continue as we gain traction in these businesses through our BPAs and other channels.

We are developing a very nice software as a service business with 42% year-over-year growth in SaaS fees in Q1. This establishes a nice foundation of recurring revenue underneath the 23% revenue growth in our ABU portfolio over the same quarter last year. In addition, these businesses are new and, as a portfolio, are not yet contributing at the operating income line. Seeing this growth points to the progress made and the potential for the operating income drag to become a contribution in the not-too-distant future.

Also, as these businesses grow, the prospect base for Workforce Optimization opportunities increases. In fact, the opportunity for cross-selling our entire array of offerings increases and the synergy of our new strategy and business model is clear. Although this was an exciting quarter in this respect, we have not built in any acceleration into our forecast beyond what we previously budgeted at the beginning of the year. These businesses are too new and developing to consider this a trend, so we will leave this as upside potential.

So in summary, we are off to a very good start for 2013 and for our three major initiatives expected to fuel future growth. We are very pleased with our increase in the number of Business Performance advisors, our preparation to leverage healthcare reform, and the traction we are seeing in our adjacent businesses.

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

Thanks, Paul. Now, before we open up the call for questions, I'd like to provide our financial guidance for the second quarter and an update to our full-year 2013 forecast.

In general, we are slightly increasing our full-year guidance as follows. We are continuing to forecast sequential unit growth over the remainder of the year within the range of our initial guidance. We are increasing our forecast of gross profit per worksite employee per month based on a slightly improved outlook on pricing and direct cost trends coming off of first quarter's positive results.

As for our operating expenses, our revised forecast includes only slight changes in our spending, including incremental costs associated with being ahead of plan on the hiring of Business Performance advisors. It also assumes a higher incentive compensation accrual to be paid only upon achieving higher operating results.

Additionally, with the benefit of the actual first-quarter results, we are able to refine a seasonal pattern in gross profit over the balance of the year. This resulted in some tweaking of gross profit between the quarters.

So, as for our key metrics guidance, we are forecasting average paid worksite employees in a range of $126,500 to $127,000 for Q2 and have updated our full-year guidance to a range of $129,750 to $130,250. As Richard mentioned, we expect gross profit for per worksite employee per month to be in a range of $260 to $263 for the full year, which is slightly higher than our initial guidance.

As for the second quarter, we expect gross profit per worksite employee per month to be in a range of $253 to $255. The expected step-down from first quarter's results reflects the seasonality associated with payroll taxes and the impact of increased participation in a high deductible health plan. We now expect a sequential increase of $5 per worksite employee from Q2 to Q3 followed by a decline of about $20 from Q3 to Q4 on higher benefit costs associated with the high deductible health plan.

As for operating expenses, we are now forecasting full-year 2013 to be in a range of $340.5 million to $342.5 million. For the second quarter, operating expenses are expected to be in a range of $87.75 million to $88.5 million. Taking into account some seasonality in our operating costs, we expect a sequential decline of approximately $4 million from Q2 to Q3 and a decline of approximately $1 million from Q3 to Q4.

As for interest income, we are forecasting $200,000 to $250,000 for the full year. We are estimating an effective income tax rate of 40% and 25.6 million average outstanding shares for both Q2 and the full year. Consistent with our previous methodology, this estimate of average outstanding shares does not assume further share repurchases although you've noticed that we have recently been actively repurchasing our shares in the open market. In summary, our updated key metrics guidance implies a range of 2013 full-year earnings per share of $1.51 to $1.61, or an improvement of approximately $0.04 from our initial budget.

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

(Operator Instructions). Jim MacDonald, First Analysis.

Could you give us an update on your sales in the first quarter and kind of how you expect new sales and attrition -- how you expect that to pan out through the year?

Yes, we had a solid quarter on both the sales and the retention front, you know, once we got past the year-end issues that we reported on last quarter, so retention settled back into the 1% range, and we expect are expecting that to continue monthly retention -- monthly attrition, excuse me.

And then, on the sales side, we were at about 92% of our budget for the quarter. Of course, first quarter always has a low budget and then it accelerates throughout the year because of all the sales convention and training, et cetera, that goes on. So things are in line on that front. We are expecting to see some acceleration now.

Okay. And on the adjacent business units, can you talk a little bit and give us some color on which ones are doing better and what made up for the excess performance?

Yes, we have really worked diligently over the last six months to get a selling system -- the individual systems within each of the business units, and the integration between that and our BPAs and our inside sales staff. So now that all that is in place and we're getting enough repetitions, we are starting to see it really gain some traction over the past year or, so Time and Attendance has kind of led the way and that continued, but we also had a very nice quarter out of our Performance Management and Organization Management units. And, as a portfolio, it was a 23% year-over-year revenue increase and of course over 30% of the gross profit line. So that's good.

A lot more to come, but, again, as I mentioned in my remarks, these businesses are new and we're going to allow that to kind of come on as outside as opposed to up in the forecast at this time.

One quick one maybe for Doug and then I'll get back in queue. Was the repurchase activity mostly late in the quarter? There doesn't seem to be too much of an effect on this quarter's share count and you are not kind of forecasting much of a carryover impact for next quarter, so just some thoughts in general on what you've done and how you expect to continue the repurchase activity.

Yes. I mean, it's a combination of being a little bit late in the quarter. Now, you also know that we have restricted shares to our employees that vest every year and those are typically granted in the first quarter. So you had some offset of those that vested versus what we repurchased in the quarter, although we did repurchase in excess of the restricted grant testing. And, as I mentioned in my comments, although we don't forecast further share repurchases throughout the year, you can tell we've been active and I'd say, at this point, our plan is to continue along those lines.

Thanks very much.

Tobey Sommer, SunTrust.

A question for you about healthcare and benefits. On the last conference call, you mentioned that the opportunity there is significant, but how it unfolds is a little bit fluid. And it you mentioned healthcare exchanges. Do you have any refined thoughts on what the Company's view is on healthcare exchanges and whether you have any plans to develop anything internally?

Yes, Tobey, the situation with the healthcare exchanges right now is just kind of -- it's still out there. It's still something that we can do if we need to. The demand for that right now doesn't seem to be as high as it was maybe a quarter ago and especially as we look at the carriers and their commitment into some of these markets. And we think there's not going to be near as much rush to create exchanges like there was in the past. So, it's kind of steady as you go, from our perspective.

Yes, I think the biggest difference since last quarter was the admission that the exchanges are going to be weaker than originally expected and some of the implementation seems to be stumbling. We stand ready to implement a private exchange for expressed purposes, if that becomes a way to go. There are some signs of some -- the resurgence of defined contribution plans for benefits, some handled through an exchange. That may be a positive. So we are ready to -- our commitment was to be in a position to move forward with any options that make it better for a customer. But I would say, at this point, as Richard said, one quarter further along, that's less of a threat and less of an issue.

Okay. Thank you. That's helpful. I wanted to ask a question about the sales force growth. You said you were running a little bit ahead of plan and you've baked that into slightly higher expenses. How do you go about -- or when should we see kind of milestones to enable us to judge the success of the efforts to increase the sales force? Thanks.

Sure. I think the first step we have to look for is activity numbers. So that's what we are all over for this quarter that we are in right now. I want to see activity numbers up. You've got the number of advisors out there. Let's get that first-call number up, get the number of censuses and referrals for adjacent business opportunities. Let's see that activity move up. And then, of course, in the next quarter, we'll start looking more at closing rates in the third and fourth quarters in our fall campaign. Things are lining up very well to be in a position to really see actual sales numbers in the fourth quarter be considerably higher.

And, my last question has to do with payroll taxes, Richard. Any kind of change in trend there or something of note that we should anticipate as 2013 unfolds, or are you just pretty set?

Yes, no, we are fine. As I mentioned in my remarks, the real change was each year when we go to forecast for the year of the payroll tax side of things, we are estimating how many employees we're going to have in each state that's going to be sold and renewed going into the new year. And then that obviously multiply it times the tax rate in that state and the payroll dollars produces the amount of expense.

So, what happened this quarter was we actually had more employees in some higher unemployment rate states than what we forecasted, so the expense was actually higher in the quarter. Now, now that we've made that adjustment into our forecast, it just didn't seem to be that big of a difference going into the second and third quarters and beyond because the difference between the allocation and the cost is kind of accentuated in the first quarter and basically flattens out as employees earn their wages throughout the balance of the year.

Many employees hit their pseudo wage limits in the first quarter --

Yes.

-- so the surplus that we earn on the pseudo piece of payroll taxes is generally first-quarter related. So it shouldn't impact, to any significant degree, quarters going forward.

Thanks. That makes a lot of sense. Doug, could I get one last another question from you? What's the share count as of today so we can see kind of what the flow-through is from the first-quarter late repurchase?

I don't know. I think it's about 25.6 million or so, maybe a little bit less than that since that was the average for the quarter and we bought some more towards the tail end of the quarter, but it's not materially off that number.

Michael Baker, Raymond James.

As you get a better sense of some of these state regulations or state-based regulations, are there any that stand out as better than average opportunities?

Are you talking about healthcare reform?

Yes, healthcare reform and, as you know, it's going to vary by state. And just wondering if there are any particular ones, given recent dynamics, that are standing out in your mind as even greater than average opportunities.

Yes. I would say that quite a few of them are going to be really good opportunities for us. And I'll just leave it at that for right now, but, no, it's really with the amount of regulations that hasn't been published yet, we see that as a big opportunity. We continue to look at how we have operated in the state of Massachusetts for five years now, since Romneycare went into existence, and it's been a great opportunity up there, and we just see that happening in all of the other states.

And then has reform itself changed your target market, both in terms of employer size as well as type, industry type?

No. Not at all. We typically have always used the client profile and selection process that deals with the type of businesses from a workers' compensation perspective and from turnover and low pay. And those will still be, obviously, at the forefront of our Workforce Optimization solution, but we still see some pretty significant opportunities in non-Workforce Optimization solutions with customers, just with HCM, our payroll -- separate payroll offering and our Time and Attendance, because, you see, one of the things that healthcare reform is bringing to the table is a significant amount of reporting. And the tracking of the information that businesses are going to have to provide comes out of three systems. One is the payroll system; one is the benefits system; and one is the human resource system. And so trying to accumulate all that separate information to do monthly reporting that's going to be required is going to be pretty onerous for a lot of businesses. And we see an opportunity there that's really good.

I would add to that that, even though our target market for Workforce Optimization has not changed, like Richard mentioned, healthcare reform has teed up an opportunity for us to have more flexibility in how benefits get provided to our customers. And I believe it's going to create some new options for us on combinations of services that might fit more prospects beyond our original target for Workforce Optimization. So, that's why we have geared up our agency, our insurance agency, so we can place coverage for customers that may want to be covered outside of our plans that are under our co-employment relationship. There's new flexibility, and that always expands your market. And so we are looking forward to seeing that develop a little bit further as we go through this quarter and get some other items in healthcare reform locked down so we make sure we have the freedom and flexibility we are looking for.

And then, based on conversations with prospects, is there any indication at this point which way -- which of your services is having greater potential?

Well, what is so interesting to me is here, after 27 years, now it's like this spotlight on healthcare reform highlights the advantages of a co-employment relationship where you become a part of a much larger buying group for benefits and you end up in a situation where you are not the plan sponsor; you don't have the liability; you don't have so many of the issues that are very scary, frankly, for a business owner. And you don't have all this administrative work and complexity to figure out. You just say, you take care of it. And, I'm telling you, it's really an opportunity to highlight our core business and I think it's going to get a lot of people to take a look at that that maybe wouldn't have taken a look at it previously.

Thanks for the update.

Jeff Martin, ROTH Capital Partners.

I'm going to ask a similar question in a different way. Let's say someone wants to let Insperity handle their healthcare reform issues and the administration of it. Does that mean they become a Workforce Optimization client or is there another way for them to get your help?

Sure. It's not necessarily. Workforce Optimization, I think, is the best way because it solves so many of the issues. In fact, it goes all the way to saying, okay, fine, now you're done. Don't worry about it. We'll take care of the rest. So, that's the ultimate solution for healthcare, but if they are not ready for that, let's just take the reporting issues. Richard just mentioned there are three systems in involved. Normally, right now, there's information to do the reporting -- the ongoing, monthly reporting. The data is in three systems. We have worked and are in the process, and very soon our systems will be what I will call healthcare reporting compliant so that if somebody wants to solve that with our HCM system, having us do the payroll, and we have all the HR information and the benefits at the moment information, the HCM system, we'll have those reports ready to rock and roll. So if that's their biggest issue, is the reporting side, we can help them there. But also, if they just simply want to evaluate what their benefit options are and find out what is their best benefit solution, we can handle that through the agency and, in our case, of course, we would always want to group that with other offerings that we have.

So I can see someone saying, hey, look, I need to deal with health reform, but, you know what, I am not ready for co-employment. Maybe they end up with our payroll HCM, Time and Attendance system, as an administrative and reporting solution, coupled with our pay-as-you-go Workers' Comp and benefit plan through our agency, and they have a non-co-employment, fairly comprehensive solution, handles a lot of the health-care reform issues, but leaves them with the liability and responsibility.

And the cost.

And the cost.

To that nature, with the sales force having more complex things to talk about, are you concerned at all that the number of first calls per salesperson may go down?

Well, actually, I think the biggest issue we've had now since the recession is getting in the door with business owners because they have been kind of hunkered down and not very open to having meetings to discuss things, but their openness to having a meeting to discuss healthcare reform is very significant, and so that becomes our entree in the door. I would be surprised if this doesn't create more of those opportunities.

You are correct that our advisors have been kind of drinking through a fire hose the last six months or so on training and so forth, but they are doing great. And it's a matter of getting out and having the repetition so that they can be very effective. I can tell you, what we've equipped our advisors with, when they walk in the room, they are the smartest person in the room on healthcare reform. I can tell you that.

That's fantastic. And, Paul, you mentioned the adjacent business units may be reaching an operating contribution a little earlier than expected. I was curious if you could just elaborate on that in whatever way you want to.

Well, I am looking forward to that day. It's not in the immediate future, but it's certainly in the foreseeable future. And I don't want to put a date on it because, for the reasons I said, these businesses are young and developing, and many of them have some huge upside potential in just a phenomenal number of deals. So when those occur, I don't know. The fact that I expect them to occur -- our confidence level in that occurring has gone up tremendously, and this quarter was a good reason to increase that confidence.

Okay. And I wanted to let you know I saw your commercial on TV, Paul. You look good.

Thanks. They talked me into that, but (multiple speakers).

Thanks. Good luck, guys.

Mark Marcon, Robert W. Baird.

I was wondering if, on the ABUs, can you just talk about which ones are actually seeing the most traction?

Well, Time and Attendance has probably seen the most, and I think that Time and Attendance system is going to be really critical for healthcare reform. And so, in fact, I can't see a company that doesn't have a Time and Attendance system at January 1, 2014, those people are crazy. They aren't going to be having to track down all that data somehow. It becomes a major input to their reporting.

Yes.

So that's going to -- I think the traction there is excellent. We are in good shape on our sales team and our service team, our implementation teams. So that business is in decent shape. We've just got to keep our nose to the grindstone.

Our HCM system is new and just launched and just got new customers, and it has incredible potential. It wasn't a big contributor in the quarter, but it has a lot of potential for us in the immediate future, also healthcare reform related.

As far as the traction in the recent period, I mentioned the Performance Management and Organization Planning part of our organization, they had just a really good sales quarter. It just speaks well of how nicely those SaaS products are being received in the marketplace.

Great. And then, can you talk a little bit -- you know, I know some of it is still unfolding, but to what extent have you received clarity from some of the states with regards to the potential to offer single employer plans versus whether or not you're going to have to do multi-employer plans on the healthcare side?

We haven't had any dialogue or any new information on that front. It seems like, across the board, that the type of plan that we offer is certainly going to be allowed, we haven't heard of anything to the contrary of that.

We have a group working on that state by state to keep track of it at the state level. And you do have flare-ups here and there and now and then where something comes out about how will this be viewed. And we are on the ground there very quickly to communicate how this works, how it's different. And at this point, we are comfortable with the structure of our program. And it is unique. The way we deliver our program, the way we've managed our plans has a uniqueness to it that's identifiable and demonstrable. And so far, so good, and we will stay on top of that.

I mean, when would you expect to get final clarity on that, or is it possible it's going to stay open ended?

Yes, I would say that it's going to be open ended for a long period of time. I mean, the states are focused on trying to get the exchanges up and running, and there's a lot of consternation going on about that. And what we are hearing now is that some of the states that have committed to having their exchange open in October is going to be nothing much more than a website. I mean, there's a lot of wood to chop between now and October, and I wouldn't be surprised if even some potential discussion about extension happens.

Can you talk a little bit more about Massachusetts, just in terms of your experience over there and to what extent you think that that's transferable to the nation at large from your perspective?

Yes. I would say it's 100% transferable. We've actually got some videos from testimonials from clients of ours in Massachusetts that, I think, are either up on the website or getting ready to be put on the website where they talk about the fact that, using Insperity, how that has absolutely taken all the pain and agony of healthcare reform off the table for these companies. And they are all different sized companies and they all have different -- they are all in different businesses and, but, they all have the same end result that this has really been a real savings for them in every way.

Yes, we just put three Massachusetts customers in a room around a table to talk about it, and they said exactly what we are seeing out there. They said, well, I don't know why anybody wouldn't go this route because you can't afford to take the time to learn about it; you can't afford to take the time to comply, and why would you, because you've got to focus on your business. And so that aspect, in terms of how a business person needs to react to a sweeping legislative reform, that is exactly transferable to this situation across the country.

And is Massachusetts like a higher-penetrated market than the other Northeastern markets around it?

No. I wouldn't say that. I would say that --

But we did have great success in that market once we got this in place.

We did. Yes.

We had a lot better results once we solved this problem.

So once the problem came along, then it actually picked up?

It absolutely did.

Your sales growth rate increased post-?

Yes.

Yes, it did.

Absolutely.

Okay. Great. And then, can you talk a little bit about the OPEX pattern for Q3 to Q4, just the sequential changes?

From Q3 to Q4?

Yes. Just going from Q2 to Q3 and then Q3 to Q4.

Q2 to Q3, you know, we have it going down by about $4 million or so. And that's primarily in the advertising line item. So, as we just mentioned, we are having some advertising around healthcare reform as we speak today and promoting that. And then we're going to take a little bit of a break in Q3 on that, and it's going to pick up a little bit again in Q4 on the advertising line item as we go into the fall campaign.

Yes.

Okay. So that's one of the major drivers from the Q2 to Q3 sequential pattern. And then from Q3 to Q4, we got it going down by $1 million or so. It's primarily in the G&A area. I don't know the details behind that, but a little bit of a lesser increase in seasonal pattern from Q3 to Q4.

Great. Thank you very much.

Ladies and gentlemen, we have reached the end of the allotted time for the Q&A session. At this time, I would like to turn the conference over to Mr. Sarvadi for any closing remarks.

Well, thank you once again for joining us today. We really appreciate all of your interest and your questions, and we look forward to seeing you again next quarter. Thank you.

Ladies and gentlemen, thank you for participating in today's conference call. You may now disconnect.