Insperity Inc (NSP) 2013 Q2 法說會逐字稿

Good morning. My name is Dennis and I will be your conference operator today. I would like to welcome everyone to the Insperity Second Quarter 2013 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 Chief Executive Officer. Richard Rawson, President, and Douglas Sharp, Senior Vice President of Finance, Chief Financial Officer 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, believe, 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 second 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 provide an update to our major growth initiatives. I will return to provide our financial guidance for the third quarter and an update to our full-year 2013 guidance. We will then end the call with a question-and-answer session.

Now let's begin today's call by discussing our second quarter results. Today, we reported adjusted second quarter earnings of $0.24 per share, which was above both the implied EPS from the midpoint of our range at $0.21, and Q2 2012 earnings of $0.22 per share. Adjusted Q2 2013 earnings exclude the previously-announced impairment charge of $0.10 per share associated with our minority investment in the receivables exchange.

As for our key metrics, paid worksite employees averaged 126,696 for the quarter, an increase of 2% over Q2 of 2012 and at the midpoint of our forecasted range. Gross profit per worksite employee per month averaged $257. This was above both our Q2 forecasted range of $253 to $255 and the $234 reported in Q2 of 2012. Operating expenses totaled $87.5 million, just below the low end of our forecasted range. And we generated $19 million of adjusted EBITDA and ended the quarter with $119 million of working capital and no debt.

Now let's review the details of our second quarter results. Revenues increased 5.4% over Q2 of 2012 to $547 million on the 2% increase in average paid worksite employees. As for the drivers to our worksite employee growth, client retention averaged just over 99% for the quarter. We experienced modest hiring in our client base throughout the quarter, including some seasonal summer help. Q2 sales came in above budget and Paul will share the details of our sales efforts with you in a few minutes.

As I just mentioned, our key pricing metric, gross profit per worksite employee per month, averaged $257 for the quarter, exceeding our expectations. Richard will provide the details behind our gross profit results in a moment, so I'll just provide some brief comments. Benefit cost per covered employee came in slightly lower than expected increasing 1% over Q2 2012 to $891. Higher than expected claim costs for the current quarter were more than offset by lower than expected premium taxes and claim costs from prior periods. Workers' Compensation costs totaled 0.55% of non-bonus payroll and included a $3 million reduction in previously-reported loss reserves. Payroll taxes as a percentage of total payroll were 7.1%, which was relatively flat compared to Q2 of 2012. Gross profit contribution from our adjacent businesses came in higher than forecast and increased 17% from $12 per worksite employee per month in Q2 of 2012, to $14 in Q2 of this year.

Now let's move on to Q2 operating expenses, which totaled $87.5 million, just under the low end of our forecasted range. The 12% increase over Q2 2012 included costs associated with the recent ramp up in the number of Business Performance Advisors. Although the Q2 average BPA count was slightly less than planned, we ended the quarter with 331 total Business Performance Advisors and 299 trained BPAs, which puts us back into position as we head into this year's fall selling season. These additional BPAs, along with other budgeted headcount and a higher incentive compensation accrual tied to our improved operating results, resulted in a 14% increase in salaries and wages over Q2 2012. Stock-based compensation increased 18% over Q2 2012. Now consistent with our budget, our 2013 restricted share grant was 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 grants at higher price levels.

Advertising increased by approximately 14% over Q2 2012 as we move forward with our budgeted marketing plan and increased activities surrounding health care reform. T&E expenses increased by about 8% and included travel and training associated with the recent hiring of Business Performance Advisors. And depreciation and amortization increased by approximately 18%, due primarily to the amortization of recent systems and software enhancements to support our workforce optimization and our adjacent businesses.

Net interest and other income for the quarter totaled just $64,000 in this low interest rate environment. Our effective income tax rate for Q2 was approximately 54% and was impacted by the tax treatment associated with this quarter's impairment charge. Tax deductibility associated with this expense must be deferred until the asset is sold and then can only be taken to the extent of any capital gain. Excluding the tax treatment associated with this item, our effective tax rate for Q2 was 40%, which was consistent with our forecast. As for our Q2 cash flow, adjusted EBITDA totaled approximately $18.9 million. Cash outlays included cash dividends of $4.3 million, capital expenditures of $3.8 million, and the repurchase of approximately 60,000 shares at a cost of $1.6 million. For the first half of the year, we've now generated adjusted EBITDA of approximately $48.5 million and repurchased 532,000 shares at a cost of $15.1 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 better-than-expected second 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 on health care reform and how we see it affecting our business.

As Doug just reported, our second quarter gross profit per worksite employee per month was $257, which was $2 per worksite employee per month above the midpoint of our range. The gross profit consisted of $191 of average markup, $52 of surplus and $14 from our adjacent businesses.

Now let me give you the details of each component. The surplus in the adjacent business gross profit contribution were each $1 per worksite employee per month better than expected, while the average markup was right on our forecast. The additional $1 per worksite employee per month of adjacent business gross profit came from better-than-expected revenues as we continued to see increases in cross-selling opportunities that we talked about last quarter. The $1 per worksite employee per month of additional surplus came from a slight improvement in the deficit of the benefits cost center. So in summary, this quarter's results give us a lot of comfort that we should have a solid gross profit picture for the balance of the year.

So let's start with the markup. We are conservatively forecasting the average markup to remain at the current levels for the rest of 2013. The markup on new business sold is typically lower than the markup on renewing business, therefore, we expect to see an offset in the new business pricing versus the renewing business pricing. Now let's look at the surplus component of gross profit, beginning with the payroll tax cost center. As most of you know, our surplus in this cost center declines throughout the year, especially when we are growing. So for now, we will conservatively maintain our forecasted surplus in this cost center at essentially the same levels that we discussed last quarter.

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 flat with where they are now. On the cost side of the workers' compensation cost center, we have some interesting dynamics to talk about. We have continued to see a decline in the incidence rate, however, the severity rate is up primarily due to a higher number of large claims, compared to the prior policy year. The good news is that these particular accidents were not the result of systemic problems in our client base and we do not see this as a trend going forward. However, we will be conservative and increase our expense forecast to about 0.58% of non-bonus payroll for the rest of this year, thus reducing our surplus in this cost center from our prior forecast.

Switching to the benefits cost center, we expect to see further improvement in both pricing allocations and in our costs. As I mentioned last quarter, we continue to increase our allocations, even as participants continue to migrate to lower-cost plans. As more and more prospects find out how health care reform is going to raise their health care costs, that should allow us to continue to increase our allocations as well. On the expense side of the benefits costs center, we know that our costs go up each quarter throughout the year as participants' deductibles and co-pays are satisfied. However both our first quarter and second quarter results have been below our previously-forecasted trend so that should now translate into lower health care costs for the full year than previously forecasted. Therefore, we are reducing our benefits cost estimates for the full year to now reflect a 3.5% to 4% increase over 2012. The net effect of the allocation increase in the lower cost plan will be -- result in a further reduction to our deficit in this cost center. When you combine all of the forecasted direct cost surpluses and the lower deficit in the benefits cost center, we should generate a net surplus of $56 to $58 per worksite employee per month for the full year.

Our last contributor to gross profit, which is our adjacent business services, should maintain their current level of gross profit contribution. Sales have again exceeded budget over the second quarter in a row, however, we will remain conservative and not forecast further increases to gross profit for the balance of this year from these adjacent businesses.

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 $261 to $263, which is consistent with our last quarter's discussion.

Now let's shift gears and talk about health care reform. Last quarter, I shared with you all the things that we have been doing to prepare our clients and prospects for what to expect beginning January 1, 2014 as it relates to health care reform. As you will see from Paul's remarks in a few minutes, our efforts have begun to pay off. We are well-positioned to help businesses of all sizes deal with ObamaCare. A couple of weeks ago, you probably heard that the Obama Administration announced that it was delaying the reporting requirements and associated penalties for large employers until January 1, 2015. This was done because the administration recognized that the reporting requirements were too complex. Since the reporting requirements are necessary to determine which employers would be subject to the penalties, the administration had to delay the employer penalties as well. However, the real issues of cost, taxes, fees, state exchange reporting, and the individual mandate are still scheduled to go into effect January 1, 2014. These are the significant issues that businesses have to deal with this year. We are seeing an increasing amount of activity as we continue to educate and inform clients and prospects how Insperity's Business Performance Solutions can take away much of the pain associated with health care reform.

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

Thank you, Richard. Today, I'll provide an update on our current plan for growth acceleration, including three major initiatives. First, I'll address the ramp up in Business Performance Advisors and the corresponding sales activity increase we expect. Second, I will comment on our Customer for Life Program and specifically our mid-market changes we made to improve sales and retention. And third, I will provide some color to continued margin expansion we expect from successes we are having in our adjacent businesses.

Last fall, after validating our Business Performance Advisor Training Program, we set an objective to ramp up the trained Business Performance Advisor count by 25% to approximately 300 over the first half of 2013. Our average trained BPA count increased from 239 in Q4 last year to 243 in Q1 and then stepped up to 292 in Q2, an increase of more than 20%. Although this is slightly behind our target of 300 for this leading indicator for the second quarter, we are starting the second half of the year with over 330 hired and over 300 trained Business Performance Advisors. This ramp up is already beginning to generate the desired results.

Sales for the second quarter were 112% of budget and sales activity is ramping nicely. The number of discovery calls, which are initial face-to-face visit with a qualified prospect, was up 36% sequentially over Q1 and 14% over Q2 last year when we had 11% fewer advisors. We also had a substantial increase in leads due to our health care reform initiative. Our television advertising generated an increase of more than 40% in qualified leads over the same quarter last year and over Q1 of this year. Leveraging the complexity, compliance, and cost of health care reform into opportunities to meet face-to-face with business owners has been very successful. Our Executive Briefing on Health Care Reform has opened many doors and established Insperity and our BPAs as trusted advisors and led to further discussions of our services. In fact, as a result of the success we have had getting leads and getting in the door, we are shifting marketing dollars Q4 to Q3 and weighting the advertising spend more toward health care reform. The delay in the employer mandate, in my view, is a positive for Insperity. This reprieve ensures that health care reform will be an issue for employers for an entire additional year. We intend to capitalize on this delay throughout 2014.

So we are looking to continue to ramp up in the third quarter in discovery calls and in obtaining census and business profile information necessary to bid Insperity Workforce Optimization and other services. We expect this ramp up in sales activity in Q3 to translate into strong Q4 sales and accelerating work site employee growth into 2014.

The second major area of emphasis to ensure growth acceleration is to improve our midmarket sales and retention results this fall compared to last year. During the second quarter, we completed development and implemented a pilot program which we expect will have the desired result of losing fewer and selling more midmarket clients on a variety of services. Our Customer for Life Program is a way to bring together the entire new Insperity growth strategy on a client-by-client basis. It requires an ongoing analysis of client needs and the commitment to flexibility in order to alter our client's service plan as their needs change. This mindset has led to a repackaging of our services to align with a wider range of possible client needs for HR service options.

Midmarket clients and prospects will now be able to choose from among four business service bundles to meet their HR needs. Our premium workforce optimization offering on our unique co-employment platform will remain the flagship service for companies that want to move ahead as far and as fast as possible. Customers and prospects that want a full-service solution, group buying advantage, reduced employment risk, and no impediments to any HR service project will continue to choose the Insperity Workforce Optimization. However, we will also introduce an alternative lower cost co-employment solution called Workforce Synchronization. This service does not include project-related HR services in the bundle. These services will still be available, but will be quoted and purchased on an as-needed basis. In the pilot, we are also introducing two traditional employment packages that are not on our co-employment platform. These options were developed in response to customer and prospect input we have received over the last year. These offerings will target midmarket customers that, for whatever reason, are not ready for co-employment and may prefer more flexibility and autonomy over lower risk and group buying advantage. We have bundled Insperity HCM, TimeStar, and Insperity Payroll to form Insperity Workforce Administration. This service will target customers with the need to gain control over HR information and processes in order to grow their company. The fourth option for midmarket customers is Workforce Collaboration, which adds brokered benefits, workers' compensation and a dedicated service team to workforce administration in a traditional employment model.

These options are precisely suited to specific target prospects and clients and allow them to self-select, based upon the level of service, risk, cost, and integration desired. This also provides the opportunity to move from one service to another as priorities and needs change. The simple introduction of make-sense options is a dramatic improvement over our previous all or nothing approach. Response from midmarket Business Performance Consultants and prospects has been very positive and we are hopeful will lead to a better midmarket sales results this fall. These changes have contributed to a step up in sales activity in the midmarket. So far this year, we have an 84% increase in midmarket prospects over the first half of last year. Hopefully, the new approach will convert this pipeline into a healthy increase in midmarket sales.

We have also piloted this approach with a number of midmarket renewing accounts with favorable results. In some cases, a new service option is a better fit and in others, the current service is validated through a discussion of alternatives. In either case, our customers have appreciated the flexibility and clarity these options provide. We believe these options will also help in discussions with prospects when competitive offerings are being considered. With four Insperity options, it's easier to align with competitive offerings, distinguish the differences, and highlight the value of Insperity.

The third initiative feeding our growth acceleration involves our adjacent businesses and the gross profit contribution they provide. This portfolio of business service companies have been established over the last several years and include operations at varying degrees of maturity. These operations are contributing at the gross profit line but are still a drag on operating income. We are, however, making substantial progress increasing the gross profit contributions and moving this portfolio towards profitability. This is the second quarter in a row with an increase in our contribution from our adjacent businesses exceeding our forecasted gross profit per worksite employee. We are gaining traction driven by establishing sales and marketing systems in each business, focused on producing consistent predictable growth, and increasingly the activity from Business Performance Advisors.

In the second quarter, we experienced a 94% increase in leads into the inside sales team from the BPAs for Business Performance Solutions in our adjacent businesses. This cross-selling activity is the tip of the iceberg in terms of the potential for daily selling efforts of Business Performance Advisors driving sales growth in these businesses. We are also seeing progress toward our goal of reaching profitability as these businesses mature. As you will see from Doug's guidance in a few minutes, we now expect 2013 EPS to be approximately $.05 better than our initial budget for the year? This outperformance is expected to be driven by a $.02 beat in the core workforce optimization business and a $.03 outperformance from a smaller loss from adjacent businesses than previously expected.

In order to get a feel for the progress we've made in this area, it's helpful to look at the established adjacent businesses that existed prior to 2012 and the new adjacent businesses started since that time. As expected, the new businesses are creating a drag at the bottom line as investments are made to develop these business units, however, the loss from the established adjacent businesses is falling faster than previously expected. In 2012, the established adjacent businesses resulted in her $.22 loss and the new adjacent businesses had a $.03 loss for a total of $.26. Our original budget for 2013 included an expected improvement of $.04 to an $.18 loss from the established adjacent businesses. As a result of our outperformance over the first half and the current sales activity, we are now forecasting a loss of only $.13 for 2013 on these established adjacent businesses, a $.05 improvement over our original budget and a $.09 improvement over 2012. We do however expect this $.05 improvement in established adjacent businesses to be offset by a slightly higher $.02 loss on the new adjacent businesses, primarily to shore up our new standalone payroll business infrastructure now that our growth plan for this business has been validated.

So in summary, we are quite pleased with the trends and activities underpinning our new growth strategy. We formally launched our business transformation with the Insperity brand just over two years ago. We knew cross-selling would have to become part of our DNA as a company and many paradigms would have to shift. At this point, I believe every critical element of our new strategy, including the new brand, the Insperity selling system, and adjacent business development have been validated. It is time to pour gas on the fire on all fronts and return to the double-digit growth rates that have been a hallmark of our 27 year legacy. When we announced the reinvention of our company a couple years ago, I stated my belief that once implemented, we would enter the 3 to 5 year period of the highest value creation in the history of our company. It appears to me we are on the doorstep ready to enter that period.

At this point, I will bring Doug back to provide guidance for the balance of the year.

Thanks, Paul. I will now provide our financial guidance for the third quarter and an update to our full year 2013 forecast. However, as Paul just mentioned, our main focus at this time of the year is on our fall selling season and year-end renewals, which primarily impact next year's growth rate. But in general, our guidance for the second half of the year is consistent with that provided in our previous conference calls, with a few slight changes among the key metrics and in some timing between the quarters. The timing of the ramp up in hiring of BPAs was slightly behind our initial plan, therefore we are bringing the average worksite employee forecast for the full year down just slightly. However, we are forecasting strong sequential unit growth of around 3% in Q3 and 4% in Q4, as the newly hired BPAs transition from training to full-time selling. We are maintaining our forecast of gross profit for worksite employees as the upside for the first half of the year is offset by a more conservative estimate of our workers' compensation costs.

As for our operating expenses, our revised forecast includes a reduction of approximately $2 million and some slight changes in the timing of our spending between the latter two quarters. So as for our key metrics guidance, we are forecasting the average paid worksite employees in a range of $130,000 to $130,500 for Q3 and have updated our full year guidance to a range of $128,750 to $129,250. As Richard mentioned, we expect gross profit per employee per month to be in the range of $261 to $263 for the full year, which is similar to our previous guidance. As for the third quarter, we are forecasting a range of $260 to $262. And you may recall from our previous conference call that we expect a step-down of about $20 from Q3 to Q4 on higher benefit costs associated with the high deductible health plans.

As for operating expenses, we are now forecasting full year 2013 to be in the range of $338.5 million to $339.5 million. Remember that the high end of our full year operating expense guidance is tied to additional incentive compensation, which will only be accrued upon achieving higher operating results. For the third quarter, operating expenses are expected to be in the range of $84 million to $84.5 million and takes into account a slight shift in some advertising dollars from Q4 to Q3 from our previous guidance. Taking into account this shift and some seasonality in our operating costs, we expect a sequential decline of approximately $3 million from Q3 to Q4. As for interest income, we are now forecasting $250,000 to $300,000 for the full year. We are estimating an effective income tax rate of 40% and $25.6 million average outstanding shares for both Q3 and the full year. The full year effective income tax rate excludes the treatment associated with the Q2 impairment charge.

So in summary, our updated key metrics guidance implies a range of 2013 full year earnings per share of $1.52 to $1.61, which is an improvement of approximately $0.05 from our initial 2013 budget.

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

(Operator Instructions). And your first question is from the line of Tobey Sommer with SunTrust. Please go ahead.

Thank you. I was wondering if you could give us the growth in seats, year over year, in the adjacent business units and then maybe describe the areas that are maybe driving that growth.

Well we are making a lot of progress in that area in terms of our SAS offerings and increasing the number of seats. It's driven a lot by our time and attendance business, but also we're doing really well in the performance management business as well. But on the year-over-year basis, we're looking at approximately, well we're around 140,000 seats now, which is about a 40% increase on a year-over-year basis.

Okay that's helpful and then Paul, what do you do to kind of manage internally, in a smooth fashion, the rolling out of multiple packages for the midmarket, because I'm sure that can be a challenge, particularly as you gear up for the selling season.

Yes, fortunately that group, in terms, the sales group is not that large. It's a growth between the 8 or 9 sales staff, plus the support team. It's a nimble and a group that's been with us a long time and we're able to work directly with them to implement and test things. Also, on the service side, we have a good team there that are definitely able to work with our renewal group and keep a handle on where each customer is in terms of their service plan and how their needs are changing and I think that's really been a great improvement over last year in terms of how closely tied and aligned we are with each of these midmarket customers. A lot of that was because that's who we wanted to meet with and understand the changing needs so we could design a service bundle set would more appropriately fit their needs going forward.

And just two last questions for me. You think these new bundles will kind of adequately prepare you for the selling season such that any surprise departures could be minimized? And then what's your expectation for hired and trained sales people by the end of the year?

Well on the midmarket side, we are really deeply involved in that all year and I think we're way ahead in terms of being more in touch with customers and what their plans are going forward and we're much more of the front of it than I think we were, say a year ago. So we're hopeful. You know we've already mitigated some client anxiety with clarifying some options and really, it's exciting to see how just having these options can put us in a position of being a little more agnostic with the client as to which service actually fits and in many cases, it simply validates the choice they've already made and helps them to understand better the value and the investment they're making and what they're getting for the investment. So we're pretty pleased on how that's going.

Now as far as the growth in Business Performance Advisors, we've hit our target, but we feel strongly that it really is time to pour gas on the fire and we're going to make sure we stay above this level that we're at in Business Performance Advisors and if we have an opportunity to grow with that a little more as the year progresses, as we have prospects or candidates that we think are excellent, I think we're likely to hire those and see that number -- we don't plan for it to creep up but if it does creep up, that's because we intend for it to keep going into next year.

Thank you.

Your next question is from the line of Jim MacDonald with First Analysis. Please go ahead.

Good morning, guys. I want to start with a couple measurement questions. So can you talk, remind me how you measure seats? Am I thinking about this right, that you, with 140,000 seats, that's kind of an average of one per existing customer, although the customer's not, I guess, the same, but so is that how you -- and how many SAS-type offerings do you have? So how many seats per customer could you have?

Right, those seats really don't relate directly to worksite employees at locations. We do have, for example, in performance management and time attendance, I think we have about 20-something percent, 25% or so of customers are now using a time and attendance system but the numbers of seats inside workforce optimization relate to how many different services were there on that system paying us a fee for, per employee per month fee, for that system. But most of these numbers are outside of workforce optimization with clients that we're selling every day that become prospects for other services as we go along.

And how many of your 9 or 10 offerings would you count as seats?

Well as SAS offerings, we have performance management, time and attendance. We recently launched OrgPlus RealTime, which is an organization planning and management tool and modeling tool. We also have now Insperity HCM, which is a full-blown end-to-end HCM system with the first customers just now coming on and being reported as live seats. And we've got some other things in the hopper. We also have, of course, expense management, which is also a SAS offering.

So about five. And while I'm on my measurement bent, so with the -- congratulations on the new midmarket offerings -- the non PEO offerings, I guess you'll still count those customer employees as employees, but they won't have the same revenue impact -- is that right or how will that, sort of, be measured?

Yes, worksite employees relate to the co-employment relationship. The other bundles are really comprised of some of our adjacent businesses and over the last few years, because we added these adjacent businesses, we were in a position to put together a traditional employment bundle. But those won't be counted as worksite employees.

You would just see the gross profit from the adjacent business contribution continue to increase.

So if somebody shifted from the PEO offering to one of the other bundles, it would show up as a decline in worksite employees but gross profit could be -- you'd still have some gross profit from that customer?

That's correct.

Yes, that's right.

So if they're in workforce optimization or synchronization -- both of those are on the co-employment platform. Those are paid worksite employee.

And back to your hiring and your slightly reduced worksite employee guidance (technical difficulty). So you've ramped up the sales but yet you're slightly reducing your worksite employee guidance. Can you talk again about what sort of impacting that and why it's maybe a little slower than you thought before?

Yes, this is just a slight error of timing of when they ramped up and when that turned into paid worksite employees and then it's also a little bit of -- we're seeing a little bit of weakness in the labor market. It was a little bit of a tailwind last quarter but not much and not much happening there, and so I think we just want to be conservative about that as the rest of the year goes on.

So specifically on that, I mean, how was hiring in your existing customers in Q2?

It was still a slight positive but less than I would've expected for that time of year and again, the labor market has continued to kind of limp along and we would've expected a little more aggressive hiring plans this year than what we saw.

Okay and are you impacted, or how are you impacted, if at all, by the -- and I guess these are mostly larger customers than you would generally have but by some employers dropping people's hours down to 29 hours to avoid the impact of ACA.

Yes, we haven't seen a lot of that yet.

Not at all.

We're ready to watch for it and keeping an eye on it and advising clients on that. And you do see some evidence of real concern. I mean when we first started advertising about health care reform, we got a significant percentage of the responses came from customers and prospects that had 40 to 60 employees. So customers in that range, they are concerned about how their business is going to be affected by that requirement to provide the coverage. Now that that's put off a year, that takes off a little heat on that one subject for those few customers that fit that description, but all the other changes are still coming fast and furious.

I mean when you think about the fact that when we look at our total worksite employee base, you've got really about 92% of the ones that are eligible are covered under one of our health plans, it doesn't really -- the people that are talking about doing this layoffs and stuff like that, for the most part, are in businesses that don't become part of our target market anyway, Jim, so it's not going to be quite the same.

That's what I expected. I just wanted to check. And just finally, you repurchased a lot of shares in the first quarter but the second quarter was kind of a big dip. You were willing to buy back a lot more shares under the tender last year, can you talk about what your thoughts are there?

Yes, we'll revisit that again with our board. You know we've kind of put a plan into place which we kind of do every quarter and the stock just run away from us.

Okay, thanks very much.

Your next question is from the line of Michael Baker with Raymond James. Please go ahead.

Thanks a lot. Paul, I was wondering if you could give us a little bit more color on the conversations that your sales force has been having with prospects and how that changed around when the employer mandate was pushed back. In other words, it sounds like there are a number of drivers to reform that will still drive some decisions, but I'm just trying to get a better sense as to, in the prospects, how many you expect are going to be pushed by some of these nearer-term drivers, versus some that may make some decisions later on.

Well, for your small companies, the biggest hammer coming is the community rating and I think people are just now starting to hear a little bit about pricing, for example in exchanges and this is going to be a wholesale change in the pricing of the small and midsize company benefit plans and it's going to be massive, because the younger folks are going to pay a lot more. And first of all, everybody's going to pay considerably more because of the taxes and fees and all of the necessary parts of the law that help to fund covering the uninsured because that is a huge cost that's going to be socialized. And then, depending on what age group you're in -- if you're young you get a higher increase. So there's going to be sticker shock big-time from October through the end of the year.

We've already calculated out that just in the fees and taxes that people are going to be paying next year in the small group market -- those fees and taxes are going to equate to an automatic 3.5% to 4% increase in the cost of health care, just across the board, just in those items. There was an article in the Post yesterday that talked about the fact that the delay of the penalties and the reporting requirements is going to cost the federal government -- the OMB or Congressional Budget Office, said that they believed that those costs are going to be reduced by $12 billion. In other words, the federal government's going to lose $12 billion in revenue in 2014 because of this one delay but that doesn't include the rest of the fees and the taxes that are going into play January 1. So it's going to be interesting.

It also sounds like or seems to me that the insurers would be incented to have lives go through you, per se, than the exchanges. I was wondering if they're doing anything kind of above the call of duty, so to speak, to support your efforts.

I would say yes, absolutely. I mean United Healthcare has already indicated that they are going to only be in about ten states with an exchange and the rest of them they're not going to touch. While United Healthcare has about 90% of our business.

Yes, I think it's been recognized already to this point that we are a very good option for even some of their customers who need to look at other options, so I'm hopeful it's going to lead to a lot of increased activity as we get into the fall renewal season.

Thanks. Another topic that I was interested in is it sounds like or seems as though one of your competitors is pretty active on the M&A front and I know you're very focused in on your organic dynamics, but was wondering if you could provide some commentary on maybe why you shied away from that or haven't seen that as a vehicle to growth as well.

Over the years we've looked at possible acquisitions within our own space and we end up kind of in the same place where the customer bought a lower valued service and the margins are much smaller and it doesn't really fit the profile of the client on a good percentage of the business. So when you buy the business, even though you might get, say, 30% or 40% of customers that fit the profile that you'd have to raise price some to fit our model and you'd increase the service a lot to match it, but you've got too much waste there -- 60% that you have to find something to do with. Now that the change in the future as we develop some more of these other options. That may actually open up the opportunity for us to consider some of those.

Thanks for the update.

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

Good morning. Was wondering if you could talk a little bit more about the pilot programs that you have going into effect. First of all, are you just limiting those to the midmarket clients or could you potentially also explore that with your more traditional small client base?

Yes, we're focused only on the midmarket for those options at this point. If something comes out that we think might be valuable for the core market, we would work on that next year.

And how are you thinking about the pricing, just on the service side, relative to typical midmarket pricing?

Well the beautiful thing about the way this has worked out is that when we look at, let's say the two options in the workforce -- in the co-employment side workforce optimization and workforce synchronization -- we were able, since we know so much about our cost, we were able to formulate another option that reduces the price and reduces our associated cost in tandem, which kind of makes us more agnostic about it -- which service do you want? Which way do you want to buy the services? And that's a nice position to be in. It just gives them more flexibility. Some customers, they feel better about only paying for the projects when a project has occurred. Some of them don't like that, some of them say -- look, I don't want to have to bid anything. I don't want to have that impediment holding up something I need done to move the ball forward. So it's just an option, which do you want? Do you want a little tighter ongoing cost structure with an opportunity to have flexibility to increase that when you want to buy certain services or do you want the all-in approach that gives you know impediment to moving ahead as fast as you can? So that's nice and from our perspective, we pull the cost out as you pull the services out and we're still in good stead on how that works from a margin perspective.

On the other two non-co-employment services, you know, it's interesting 'cause if you look at the traditional employment, the workforce collaboration where you've assembled the workforce administration services, the HCM and time and attendance and payroll, and then you've added brokered benefits and workers compensation, that service model gives the customer some more flexibility but they lose the group buying advantage of being in the co-employment model. But it's just clear choices. Which do you want? Do you want some more flexibility and a little more autonomy and you're not worried about risk -- in other words, you're willing to take the employment risk? Then that's the model for you. We can support that and make a good fee on that. But if not, if you are concerned about risk, you have to give up a little flexibility but you get some group buying advantages. These are just easy conversations to have, perfect for an advisor or consultant to say here's the grid, here are the four choices, here is why customers fit in this group or that group. Pretty soon, they pick where they belong for the right reasons or just validate, in the case of a renewing customer, this is where I should be. And so far, we like it a whole lot better than the take-it-or-leave-it approach we had over the last few years.

Makes all the sense in the world. Just to get back to the question, can you give us a little bit of a feel with regards to how differently those services would be priced or --- I know you negotiate with each client on a case-by-case basis, but just trying to get a general sense.

We try to target it where it made a big enough pricing difference that, if you recall last year when we had some customers go away and we did a lot of research on that, we had a lot of customers who said they would have stayed with us and would have paid more, but they just couldn't pay as much as they were paying. And so we've structured this based on the feedback about what customers want to buy and what they value. So I really think we're in a good spot in terms of giving people some options with some different cost ranges so they can say this is what I can afford to invest right now and this is what I'm getting for that and you know what, maybe next year I'll step up to that service. So it gives people a little bit of a track to run on and the same goes the other way. We may have somebody who came on workforce optimization, they've been with us five years, we've done every project you can think of and maybe for the next year or two they're going to have fewer projects. So maybe they want to go back to workforce synchronization for a while and maybe come back to the full-service, all-in service, at another time. So I like the approach. We're testing it now -- so far, so good but it's early and hopefully it really makes a difference in this fall.

And would you anticipate that just being defensive in terms of the existing clients or are you going to use it for approaching new midmarket clients as well?

No, it's both for new sales and retention.

Great and then can you just go back and talk a little bit, again, about what you saw in terms of the increase in terms of qualified leads that came from the campaign and how we should think about that?

We had a lot of increase in qualified leads from different sources but the health care reform advertising and our ability to offer this Executive Briefing through webinars -- we've been invited to go conduct luncheons and breakfasts and meetings everywhere to do this Executive Brief and it's been extremely well received. It's reducing some anxiety and giving people a feel like they've got a little bit more understanding of what's coming down the pike. And it's continually leading into more opportunities for us to visit about our services as well. It's almost like it's a natural thing. After we've given them that kind of information, that kind of advice, that kind of support, they say --- well now let's talk about how we can work together and of course, if they really want to eliminate the need to learn about health care reform at all, you just sign up for workforce optimization. That kind of increase in leads has been good. We also, though, have had increases in leads coming from BPAs, this whole notion of getting cross-selling in our DNA, we're getting there. We're getting there. It's starting to really happen, but there's so much more room for improvement. So we're still early on the learning curve but you can see it ramping up and people are really starting to understand that if you go into any prospect -- we now have a wide array of business service offerings that fit just about any prospect at any time. That's a far cry from having one offering that was just for a perfect fit customer at just the right time, which is where we were just a few years ago.

And we have a brief follow-up question from the line of Tobey Sommer with SunTrust. Please go ahead.

Thanks. Doug, I was wondering if you could review the annual EPS guidance in the revision again. I just don't think I jotted down the numbers correctly and squaring it against the previous guidance. Thanks.

Yes, I think if you look at the key metrics that we provided it would imply the EPS for the full year of $1.52 to $1.61, so the mid-point of that is about $1.57 and I think the previous estimate was in the $1.54 range or so, okay? So you got the second quarter beat by about $.03 and we talked about the fact that we're maintaining the full year, the second half of the year, where we were. And the reason for that is, basically, we put forth a little bit more of a conservative workers' comp estimate based upon Richard's discussion and we feel we're being conservative on that but I hope that answered your question in rolling forward where we were previously in our guidance to where we are today. So at the end of the day, we're about $.05 above on the EPS line in our current guidance versus where we were in our initial budget.

And the annual guidance range excludes the --

The impairment charge.

-- non-cash impairment charge? Okay. So $1.57 is the midpoint, you say $1.54 was before would it have been $1.52 if you're saying there's a $.05 improvement?

On the beginning of the year, yes.

Yes, from the beginning of the year.

Oh from the beginning of the year. Okay.

Right.

All right, thank you very much.

And ladies and gentlemen, that is all the time we have today for questions. I will now turn the call back to Mr. Sarvadi for any closing remarks.

Thank you all very much for being with us today. We appreciate your interest and look forward to speaking with you again next quarter.

Ladies and gentlemen, this does conclude the Insperity Second Quarter 2013 Earnings Conference Call. You may now disconnect.