Insperity Inc (NSP) 2013 Q4 法說會逐字稿

Good morning. My name is Regina, and I will be your conference operator today. I would like to welcome everyone to the Insperity fourth-quarter 2013 earnings conference call. After the speaker's 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'd like to turn the call over to Douglas Sharp. Mr. Sharp, please go ahead.

Thank you. We appreciate your joining us this morning. Before I 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, contends, 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 plans for this morning's call. First, I'm going to discuss the details of our fourth-quarter and full-year 2013 financial results. Richard will discuss the gross profit results and our expectations for 2014. Paul will recap the 2013 year and then discuss the major initiatives of our 2014 operating plan. I will provide our financial guidance for the first quarter and full year 2014 and then we will end the call with a question-and-answer session.

Now, let me begin today's call by discussing our fourth-quarter results. Today we reported adjusted fourth-quarter earnings of $0.24 per share, which were just above the implied EPS from the midpoint of our forecasted key metric ranges. Adjusted Q4 earnings exclude two special items, including after-tax impairment charge of $0.11 per share associated with the 2010 acquisition, largely offset by the recognition of a tax credit totaling $0.08 per share.

As for our Q4 key metric results, paid worksite employees averaged 130,732 for the quarter, below the low end of our forecasted range of hundred 131,250 to 131,750. Gross profit per worksite employee per month averaged $229 for the quarter, which was just slightly below our expected range of $230 to $232. Operating expenses totaled $83 million; however, when excluding $3.3 million impairment charge, expenses were below our forecasted range of $81 million to $82 million.

During the quarter, we generated $18 million of adjusted EBITDA, and we ended the year with $129 million of working capital and no debt.

Now, as for some of the details behind our fourth-quarter results. Revenues increased 5% over Q4 of 2012 to $557 million on a 1% year-over-year increase in average paid worksite employees. As for the components of the worksite employee growth, client retention averaged just over 99% for the quarter. Hiring in our client base exceeded layoffs during the first two months of the quarter, however, turned slightly negative during December contributing to the shortfall in Q4 for paid worksite employees.

Sales for the quarter were strong; however, as you are probably aware, Q4 sales are generally converted to paid worksite employees in January the following year. Paul will update you on the results of our fall sales campaign and year-end client renewals in just a few minutes.

Moving to gross profit, our Q4 results which were slightly below our expectation due primarily to health care costs coming in above forecast. This was partially offset by favorable outcomes in the payroll tax and workers' compensation areas. Also gross profit contributions from our adjacent businesses came in $2 per worksite employee per month, above our forecast.

As for the comparison to Q4 of 2012, a $12 decline in gross profit per worksite employee per month was primarily the result of an increased deficit in our benefit costs area. During this same period, gross profit contribution from our adjacent businesses increase by 36%, or $4 per worksite employee. As for some of the details of our direct cost program, approximately 72% of worksite employees were covered under our health plans in Q4 at an average cost of $955 per covered employee per month.

As for our workers compensation program, costs totaled 0.58% of non-bonus payroll, below our forecast of 0.61%. And payroll tax costs would increase slightly from 5.5% of total payroll in Q4 2012 to 5.6%.

Richard will provide further details behind our Q4 results and discuss our 2014 outlook in a few minutes. So, now let's shift to operating expenses. We reported Q4 costs totaling $83 million including the $3.3 million impairment charge. This charge was associated with a write-down of goodwill and certain assets associated with the 2010 acquisition of our expense management business. We have recently restructured various aspects of this business, including the incorporation of a new spend card product into our expense management offering.

Excluding impairment charges, operating expenses increased 9% over Q4 $2012 to $80 million and included costs associated with a 27% increase in the Q4 average number of trained Business Performance Advisors and costs associated with our health care reform strategies.

Our Q4 reported income tax rate of 23% includes the impact of the tax treatment associated with the impairment charge and a $2 million tax credit associated with a recently completed study of the extent of credit allowed for our internal development of software products. Excluding the impact of these two items, our effective tax rate for Q4 was 39%.

Now, I would like to take a few minutes to review the full year 2013 in which we reported adjusted EPS of $1.39 after excluding impairment charges and a tax credit. Revenues increased by 4.5% over 2012 to $2.3 billion on a 1.5% unit growth. Sales were up slightly while net hiring in our client base was relatively flat and client retention slightly less than 2012.

Gross profit per worksite employee per month increased from $253 in 2012 to $257 in 2013 and was within the range of our expectations going into the year. As for a recap of our direct costs, benefit costs per covered employee per month increased by just 4.7% for the year from $864 in 2012 to $905 in 2013. This was only $2 over our 2013 budget, as lower claims activity in the first half of the year largely offset our utilization and large claim activity experienced in the latter part of the year.

Workers' compensation costs as a percentage of non-bonus payroll remained at a historically low level of 0.55%, up only slightly from 0.54% in 2012 and included a $9 million reduction in previously reported loss reserves in 2013 compared to $13 million in 2012.

And payroll taxes as a percentage of total payroll decreased slightly from 7.05% in 2012 to 7.04% in 2013. As for our operating expenses, excluding costs associated with the impairment charges we reported 7.5% increase over 2012 to $334 million. As mentioned earlier, this increase includes investments in future growth, including a 27% increase in the number of trained Business Performance Advisors and the investments in our health care reform strategy. We also experienced an increase in depreciation and amortization associated with investments in our adjacent businesses and workforce optimization solutions.

Net interest income declined by approximately $450,000 from 2012 to approximately $160,000 in 2013 on lower interest rates. And our effective full-year income tax rate, excluding the impact of impairment charges and tax credits, declined slightly from 41% in 2012 to 40% in 2013.

As for our balance sheet and cash flow, adjusted EBITDA totaled $92 million for the full year 2013. Cash outlays included cash dividends of $17 million, repurchases of approximately 597,000 shares at a cost of $17 million, and capital expenditures of $12 million.

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

Thank you, Doug. This morning I will comment briefly on the details of our fourth-quarter gross profit results, and then I will give you our gross profit outlook for 2014.

As Doug just reported, our gross profit for per worksite employee per month for the fourth quarter was $229, which was $2 below the midpoint of our range. Gross profit consisted of $191 of average markup, $23 of direct cost surplus, and $15 from our adjacent business.

Now, let me give you the details of each component. The $2 per worksite employee per month shortfall in gross profit came from a $4 shortfall in the surplus, offset by a $2 per worksite employee per month improvement in the contribution from our adjacent businesses. The additional $2 per worksite employee per month of adjacent business gross profit was the result of an 8% increase in revenue over forecast and an 11% increase in gross profit of the same forecast.

We continue to see increases in both cross-selling opportunities and our channel sales. The $4 per worksite employee per month decline in our surplus was a combination of the benefits cost center deficit at $12 per worksite employee per month higher than expected offset by the payroll tax, cost center surplus, and the workers' compensation surplus -- each $4 per worksite employee per month above forecast.

The benefits costs center deficit was due to higher-than-expected costs as we experienced a continuation of large loss claims similar to the third quarter. With two sequential quarters of higher-than-expected large loss claims, we believe it will be prudent to use a wider range for our benefits costs forecast for 2014.

So, let's shift our discussion the 2014's gross profit outlook beginning with our markup. Our starting point for the markup component is slightly lower than our average for last year. This reflects a combination of year-end renewal pricing, the amount of new business sold, and the lower cost/lower service co-employment offering that only midmarket prospects and clients can choose. In fact, we had several midmarket clients that renewed at year end into this lower-cost option, which reduces our markup slightly. Therefore, these mixed changes start us at about $2 per worksite employee per month lower than last year, and then gradually increases back to the $191 level by the end of the year. We should see less pricing pressure going forward due to increases in the marketplace as a result of healthcare reform.

Now, let us discuss the surplus component of gross profit beginning with payroll tax cost center. For 2014, we have received unemployment rate reductions in many of the states that we do business. Therefore, we are lowering our allocations to our clients to reflect this benefit, but maintaining our same spread on a per worksite employee per month basis. However, when our unit growth accelerates from one quarter to the next, our payroll tax expense of the new business increases, but the allocations remain constant. Therefore, we do not get the full benefit of the budgeted surplus until the following year. As a result, Q1 surplus should be several dollars per worksite employee per month better than last year. Then the surplus declines in each of the remaining quarters of 2014 as our unit growth accelerates, thus making our full-year surplus in this cost center within about $1 per worksite employee per month of our to the 2013 results.

Switching to the workers' compensation cost center, we began our new policy year on October 1. Historically, we have forecasted a slightly higher cost brand than the recently completed policy period. Then as we see how the incidents, rates, and severity rates change based on delivery of safety services and effective claims management, we refine those estimates each quarter. We were recently notified that a worksite employee suffered a very severe injury, and as a result, we need to increase our reserves this quarter, slightly more than usual. Therefore, we will increase our expensed forecasted to 0.67% to 0.69% of non-bonus payroll for Q1, and then our expense should return to the previously forecasted levels of 0.60% to 0.62% of non-bonus payroll, consistent with the levels that we have budgeted in recent years.

On the allocations side of this cost center, we are beginning to see workers' compensation insurance price increases in the marketplace. Therefore, we will budget a slight increase in our allocations for new and renewing business throughout the year. The net effect of these changes, including the large claim, should only reduce our surplus by a couple of dollars per worksite employee per month for the full year.

Now, let me tell you what we see happening in the benefits cost center for 2014. As we have previously said and you all are now hearing daily, Obamacare is creating massive disruption in the marketplace for employers with less than 50 employees. We have been told that as many as 60% of the employers renewed their health insurance before January 1, 2014, so that they could escape major cost increases for one more year. So, for the next few months, the 40% that did not renew early will get to see what their health insurance policy is going to cost them.

The biggest increases will be for employers with young, healthy employees. We are already hearing about 25% to 100% increases for employers with younger workforce. So from a pricing perspective, we should be able to continue increasing our allocations throughout 2014 at appropriate levels for both new and renewing business.

On the expense side of the benefits cost center, we have a number of factors that will affect our ultimate cost. Last quarter, I mentioned that we were concerned that uncertainty surrounding the cost and coverage of health insurance could cause an increase in utilization as people fear the loss of coverage or anxiety over significant health plan changes. While we are doing everything we can to reduce this anxiety for our clients, worksite employees, and their families, we believe it could affect our expense in 2014.

In addition, we are factoring in the potential continuation of larger than average large loss claims as well as the new health care reform taxes and fees. However, there are some mitigating factors that could help reduce our costs in 2014.

You recall from our last quarterly earnings call we explained how much a COBRA participant cost our plan. We also explained that the launch of state exchanges could create a potential lower cost insurance option for those people currently enrolled on COBRA. In December, we launched a communication plan to inform current COBRA participants and any new eligible COBRA participants about this new option for them to evaluate.

Remember, a COBRA participant costs Insperity about 2.3 times the cost of an active participant. However, we are only allowed to collect 2% above the rate charged to a regular participant, which covers about half of the actual expense to our plan.

So, reducing COBRA participation helps reduce our health care costs and the deficit. Therefore, if this plan is successful, we could see a significant offset to our benefits expense throughout 2014.

We also redesigned our packages of healthcare offerings for 2014 to encourage selection of lower-cost options by our clients. We did not eliminate the richer plans, but we set up packages of plans that make it easier for the client to consider offerings with less rich points. If we are successful, the migration savings should help reduce our costs in 2014 and beyond.

Finally, as I mentioned a few moments ago, employers with younger employees will be facing a significant increase in their health insurance premiums this year. They are going to be looking for new solutions to solve their healthcare needs, and our offerings will start to look a lot more attractive than ever before. This new opportunity to attract the right mix of prospects could result in lower plan costs for 2014 and beyond.

The factors that I have just outlined produce a wider range of healthcare expense outcomes. We could see a potential increase in the expenses as low as 4.5% in 2014 over 2013, and we could see scenarios that could raise our expense by as much as 6% over 2013.

When you combine all of the forecasted direct cost surpluses and the wide range of possible benefits expense, we should generate a net surplus of $43 to $53 per worksite employee per month for the year.

Our last contributor to gross profit comes from our adjacent business services. Part of the reason we developed this additional profit stream was to add a third contributor to gross profit that doesn't have insurance related volatility. We made significant progress in 2013 toward achieving that objective as the gross profit contribution grew from $13 per worksite employee per month in Q1 to $15 per worksite employee per month in Q4. Remember that a large portion of this gross profit contains a recurring revenue element which should continue to grow for a long time.

We continue to experience cross-selling opportunities. We are expanding our channel opportunities. And we have a nice backlog in a few of these businesses. Therefore, we will budget approximately a 20% revenue growth in 2014 over 2013. This translates to a gross profit contribution starting at $15 per worksite employee per month in Q1 and growing to $17 per worksite employee per month by Q4.

To summarize our outlook for 2014, when you combine the service fee markup, the surplus, and the adjacent business contribution, our gross profit per worksite employee per month would be in the range of $248 to $258 for the full year. At this time, I will turn the call over to Paul.

Thank you, Richard. My objective today is to provide an overview of our 2014 plan and key initiatives against the backdrop of the major drivers of our success over the next three years. On market opportunity over this period is unlike any we have seen as the complexity, compliance, and cost of being an employer are intensified by health care reform and the speed of execution in business is enabled by HR technology.

We started this enterprise in 1986 to improve the success equation for small and midsize companies. Our goal was to help improve both the likelihood and level of success for these businesses by reducing the complexity, compliance, and cost of employment and freeing up business leaders to focus on their profit opportunities. In addition, we provided tools and support and to improve productivity and execution, driving business performance.

This combination of relief from obstacles and new tools get the job done is a powerful value proposition in the marketplace. We believe that these two primary elements of our value proposition are center stage for our target market for the next several years, and we have built our 2014 plan to take advantage of this opportunity.

So with this increase in demand on our doorstep, we have three critical elements to our 2014 plan. First, continuing to grow and gain efficiencies in Business Performance Advisors in our core workforce optimization business. Secondly, making strategic identified investments in technology that drives success in our adjacent businesses and increase sales and retention of our largest accounts. And third, capitalizing on the opportunity presented by health care reform to grow faster and improve results in our health plan, increasing margins in the years ahead.

Let me begin with our outlook for growth in our core workforce optimization business. We expect growth acceleration to occur this year driven by the recent 27% increase in Business Performance Advisors building off a successful fall selling campaign just completed. In recent years, we have seen a shift in the pattern of client attrition which has increased the importance of our fall selling campaign.

For many years of our history, our client attrition was approximately 20% to 22% of our worksite employees each year. The pattern of this attrition was about 6% to 7% in January; 2% to 3% in February; and 1.3% to 1.5% each month thereafter, with the exception of December which was negligible.

More recently we have had greater attrition at year end -- 11% to 13% -- and less than 1% throughout the year after February. The total for the year is the same as past years, but the result has been greater attrition at year end to overcome with a strong fall sales campaign. In the 2012 to 2013 year-end transition, we had a severe decline in paid worksite employees due to the combination of this efficient pattern and a salesforce that that had been reduced in size to retrain and retool. In 2013, we grew the sales staff and had much better results.

Our fall campaign sales target was 17,500 worksite employees sold from mid-September through December. We achieved 98% of this target just under 17,200. Sales efficiency was a respectable 1.1 sales per BPA per month, which is pretty good for having so many new advisors. Our attrition for the year end, including December, January, and February was comparable on a year-over-year basis. Total attrition for the 2012/2013 year-end period was 16,900, or 13.2%, compared to this year which we expect will be approximately 17,100 worksite employees, or 13.1%, when February is completed.

Now, since client terms happen immediately and new sales come in as enrolled over the quarter, we still expect a sequential decline in Q1 2014 over Q4 2013 in average paid worksite employees. However, we expect year-over-year growth in Q1 to be approximately 3% over Q1 last year.

We also expect a successful fall campaign momentum, the maturing of our new BPA, and low attrition numbers for the balance of 2014 will lead to double-digit unit growth later this year. We expect worksite employee year-over-year growth acceleration each quarter of the year to over 10% in Q4, which averages around 7% for the full year. The timing of this growth acceleration to double-digit growth is following the increase in the number of Business Performance Advisors in the typical 12- to 18-month period we have experienced historically.

Our second key initiative for 2014 is to make strategic investments in our Human Capital Management solution. As a result of confirming the upside potential for our adjacent businesses and on midmarket segment, this investment is expected to drive further revenue and gross profit contribution in our adjacent businesses and improve sales and retention of our largest account.

Over the last half of 2013, we conducted a pilot program for our clients and prospects with greater than 150 and up to 2000 employees. This program included three new product bundles based on market research we conducted in Q1 of last year. In the fourth quarter, we had a large enough sample of new and renewing accounts to test the new offering and the selling process allowing customers to self select based upon their own preferences.

Clients can now select the service bundle based upon service levels, liability tolerance, flexibility, cost, and speed of execution. The level of acceptance and engagement when this pilot became a catalyst for realigning the resources to capitalize on this midmarket segment opportunity. This new approach resulted in 20 accounts with 4600 worksite employees in our workforce synchronization offering from renewals of 10 midmarket accounts, 8 emerging growth clients, and 2 new midmarket sales.

This is our co-employment solution which eliminated HR project work that is included in Workforce Optimization, so it has a lower ongoing cost structure for both the client and Insperity.

The presentation of multiple options also helps clients confirm their Workforce Optimization buying decision in many cases. 38 midmarket customers renewed in Workforce Optimization in Q4 representing over 10,000 worksite employees.

This pilot program helped to set a clear direction for sales, service, and product development for the long run and led to specific actions to improve results in this segment for 2014.

So, this year we are bringing sales, service, implementation, and development of midmarket products and services all into a single business unit. Our adjacent business development team will work directly with this new division to apply the processes we have used successfully to improve results within our other adjacent businesses. We expect better alignment with the needs of this customer segment will lead to greater sales and service success.

One other key outcome of the pilot program was the validation of the importance of our Human Capital Management solution as a key driver for growth in our adjacent businesses and in retention of these larger accounts. Our Human Capital Management system is the hub for our new traditional employment alternatives to co-employment, workforce administration, and workforce collaboration. It is also the platform for our standalone payroll business, and we have found substantial demand for this HCM offering, combined with our Time and Attendance solution and Payroll Services.

We have also found the demand for HCM solutions in the marketplace will require a more open opportunity for companies to use a competitive HCM solution, even if they are in one of our co-employment offerings.

We have accommodated several of these requests from clients as a one-off, but it is apparent we need a solution to bring your own HCM in co-employment. Solving this will also provide the opportunity to upsell our own HCM client into workforce synchronization or workforce optimization co-employment offerings. We have developed our HCM solution through to the purchase of the source code at the end of 2011.

In 2012, we launched our payroll service on this platform and 2013 we sold to our first four clients on the core workforce administration combination. In this process, we have identified the investment needed to optimize this solution to fit this target base and create a competitive advantage in the marketplace. We expect a cost of approximately $5.6 million, or $0.13 per share, to accomplish this objective.

We expect this investment to pay off in a number of ways in the near term. We are confident in our ability to sell new accounts, retain current customers, and sell a variety of other adjacent business offerings along with this HCM solution. We expect this will help considerably to improve our year-end retention of midmarket clients and, therefore, our growth rate in the years ahead.

Over the past several years, we have developed an impressive array of HR-technology-based business performance solutions that are gaining traction in the marketplace. In 2013, we were successful growing our original ABU's to a cash flow breakeven. The ABU's that started prior to 2012 include Expense Management, Time and Attendance, Performance Management, organization planning, recruiting, Employment Screening, and Retirement Services. These businesses as a portfolio lost $0.22 per share in 2012, and we budgeted a loss of $0.18 for 2013 at the start of last year.

Our outperformance in 2013 resulted in the loss of only $0.11 per share, which was breakeven on a cash flow basis after adding back non-cash items for those business units. This portfolio is ready for continued growth and is expected to contribute more at gross profit line and be cash flow positive for 2014.

The new businesses started since 2012, including payroll, HCM, and financial services, are in a period of investment as expected and represent a great opportunity going forward.

Now, the third critical element to our 2014 plan is to improve our capability to drive long-term growth and profitability by capitalizing on the disruption caused by healthcare reform. We have an amazing opportunity in front of us over the next three years as the ACA market reforms and the employer mandate reach the small and midsize business market.

In order to understand this opportunity and the foundation we laying for growth and profitability, we need to understand the roll out of healthcare reform by market segment. Think of healthcare reform hitting in waves -- reaching employers with less than 50 employees, then 50 to 150 employees, and 150 to 2000 employees.

Richard explained the first wave creating an immediate opportunity for accounts with less than 50 employees. The disruption from new policy requirements, network shrinkage, repricing, and other market reforms is already evident in the marketplace and causing prospects to look for new solutions. The opportunity presented to Insperity in this segment is very exciting because we can drive growth and reduce costs at the same time.

Driving the growth is very straightforward. We estimate over 50% of these accounts will face increases of more than 20% with coverage that may have higher out-of-pocket costs and more narrow networks. This will drive our prospects to seek an out-of-the-box solution, and the investment to implement our co-employment solution will be more economical than ever.

Our Workforce Optimization offering is an opportunity for these firms to get a much bigger bang for their buck than just renewing an insurance plan. In many cases, the increase from market reforms will be on par with the cost for Insperity Workforce Optimization, making our value proposition better than ever. So for the same cost of their insurance renewal, they can address the broader problem of complexity, compliance, and cost of being an employer, and have full infrastructure of a large HR company -- a large company HR department.

As Richard also mentioned, the prospects getting the highest health insurance price increases in the marketplace also have the best demographics for reducing claim costs in our benefit plan. So the focus on this small business segment pays off in growth and profitability.

The next wave from healthcare reform comes as the employer mandate kicks in on January 1, 2015, affecting all employers with more than 50 employees. This is where HR technology and health reform converge. The reporting requirements in the health reform require information residing in multiple systems for most employers and for some the information is not currently collected at all. Employers will need a payroll, benefits, and time and attendance system that is ACA compliant, and we will be ready with those solutions.

Our midmarket prospects and clients will be solving these reporting issues and exploring new health plan approaches over the next few years. The investment we have made and are making this year in our insurance agency and HR technology will position us well to meet their needs.

Our introduction of traditional employment solutions for this segment will also allow us to accommodate movement toward either self-funded or defined contribution plans through private exchanges. For the employers with 50 to 150 employees, these two waves were hit in succession. They will be subject to the employer mandate and the associated reporting requirement on January 1, 2015; then they will get the full effect on network and repricing -- smaller networks and repricing as interest market reforms are extended to employers with 50 to 100 employees, which occurs in January 1, 2016.

So, we have evaluated the needs of each of the segments. And we are preparing appropriate messaging and education for our Business Performance Advisors to capitalize on this market disruption. We are also exploring channels and other go-to-market strategies due to the urgency these changes will bring to the marketplace. In any business when your prospects have a sense of urgency from outside factors, that is good problem.

In summary, we could not be more excited about our outlook for the next few years as we capitalize on healthcare reform and the role HR technology and services will play meeting the needs of our clients across all three of our segments.

From our vantage point this year finishes off the foundation for dramatic growth and profitability in 2015 and beyond. We look forward to returning to double-digit growth unit growth later this year and the profitability that comes out of these higher growth rates in the years ahead. At this point, I will turn the call back over to Doug to provide our initial guidance for 2014.

Thanks, Paul. Now, before we open the call for questions, I would like to provide our financial guidance for the first quarter and full year 2014. As for our key metrics guidance based largely upon the results of our 2013 year-end selling and renewal season, we are forecasting average paid work worksite employee in a range of 127,000 to 128,000 for the first quarter, or roughly 3% over Q1 of 2013. Thereafter, we expect acceleration in year-over-year unit growth to 10% by the fourth quarter with an improvement in sales efficiency coming off of last year's significant BPA hires and as the impact of healthcare reform has an even greater impact within the small business community.

We also expect client retention to remain at 2013 levels over the course of the year and are conservatively budgeting for some nominal net hiring by our client base. This equates to average paid worksite employees in a forecasted range of 136,000 to 137,000 for the full year 2014, or unit growth of approximately 6.5% to 7.5% over 2013.

As for gross profit per worksite employee per month, based on Richard's earlier comment, we expect to be in a range of $274 to $281 for first quarter and $248 to $258 for the full year.

The quarterly pattern for the year is expected to be similar to 2013. We expect gross profit to be higher in Q1 because of the surplus we generate on a higher level of payroll taxes prior to worksite employees reaching certain wage limits. Additionally with the growth and high deductible health plans, healthcare costs are lower in Q1 and then step up in Q2 through Q4 as deductibles are met. So considering the seasonal impact of these factors, we expect sequential declines of about $26 in Q2, $6 in Q3, and about $7 dollars in Q4.

As for operating expenses, we are forecasting a range of $362.5 million to $367.5 million for the full year. Our 2014 budget includes the full-year impact of certain initiatives begun in 2013, including the ramp up in the number of Business Performance Advisors and the implementation of the initial stages of our healthcare reform strategy.

Additionally, we have budgeted for several items which are incremental to 2013, including approximately $5.6 million of expenses associated with an investment in our ACM technology, approximately $3 million of incremental expense associated with budgeting incentive compensation back to typical levels which were not achieved in 2013, and an incremental $1.5 million related to our healthcare reform strategy.

As for some of the details behind our full-year 2014 operating expenses, we expect salaries and wages to increase by about 10% over 2013. This is driven off of costs associated with the full year's impact of the prior year's ramp up in the number of BPA's and an additional 20 BPA's to be hired in 2014. Budgeted increase also includes additional technology personnel associated with the HCM technology investment. And also, as I mentioned earlier, we are budgeting incremental incentive compensation over 2013 to return to our typical level.

As for stock-based compensation, we expect a 2014 restricted share grant to be at similar level as that granted in 2013. However, with a three-year vesting period, we have a lower price grant being replaced by grants at higher price levels. This is expected to result in a 6% increase in 2014 expense over 2013.

Commissions are expected to increase by about 9%, which is consistent with our projected workforce optimization unit growth and revenue growth in our adjacent businesses. Advertising costs are expected to remain relatively flat. G&A costs are expected to increase by about 11%, however, include approximately $4.5 million in contract labor and IT costs primarily associated with the ACM technology investment. Excluding these costs, G&A is expected to increase by approximately 5% over 2013.

Depreciation and amortization is expected to be up by approximately $1.5 million over 2013. Now, similar to prior year's, the high end of our full-year operating expense guidance is tied to additional incentive compensation which will be accrued only upon achieving higher operating results.

Now, as for the quarterly spend, Q1 operating expenses are expected be in a range of $90.5 million to $91.5 million and include the usual expenses associated with the restart of payroll taxes on our corporate employees, our annual sales convention, and sales incentive trip. We expect a step up in operating expenses of approximately $3 million from Q1 to Q2 and then sequential declines of about $3.5 million from Q2 to Q3 and $1 million from Q3 to Q4. We are estimating an effective income tax between 41% and 42% for both the first quarter and the full year.

As for average outstanding shares, we are forecasting 25.6 million for Q1 and the full year, excluding the impact of any further share repurchases.

We are budgeting 2014 capital expenditures of approximately $25 million. This is above our historical CapEx spending in the $15 million to $20 million range, as we are coming off of a lower spend in 2013 of $12 million and plan to invest approximately $8 million in office space related primarily to our growth in the technology area. A large part of this incremental spend is not expected to be placed into service until Q4 and, therefore, would have little impact on 2014 depreciation expense.

So, to summarize our 2014 outlook, let's look at the impact of the key metrics guidance to our bottom-line results. As we reported today, our 2013 non-GAAP earnings per share were $1.39. In order to bridge from these earnings to our implied 2014 EPS, it is helpful to take it in pieces. Our projected 6.5% to 7.5% unit growth and associated operating leverage would add between $0.10 and $0.17 per share to 2013's earnings.

We begin the year forecasting gross profit year per worksite employee ranging from a decline of $9 to an increase of $1 compared to 2013. This would result in a reduction to EPS of $0.33 per share on the downside and an increase in $0.04 per share on the high side of our forecast. Now if we stop here, we are looking at a 2014 EPS range of $1.16 to $1.60.

However, as I mentioned earlier, we are budgeting for a few operating expense items which are incremental to 2013. First, costs associated with the HCM technology investment are estimated at $0.13 per share. Secondly, costs associated with an incremental investment in healthcare reform are expected to total $0.03 per share. And thirdly, budgeting our cash incentive compensation plan back to typical level results in a range of no incremental cost on the low end of our forecast in operating results to a cost of $0.11 per share on the high end.

Finally, we are forecasting in increase in our effective tax rate from 40% in 2013 to a range of 41% to 42% in 2014. This impacts earnings by $0.04 per share on the low end of our guidance and $0.02 on the high end.

So when considering the impact of each of these items, our 2014 implied earnings range is $0.96 per share to $1.31 per share. As for the quarterly pattern of our earnings, our guidance implies a Q1 EPS range of $0.29 to $0.40 per share with a sequential decline of about $0.20 from Q1 to Q2, an increase of $0.14 per share from Q2 to Q3, and an increase of about $0.06 from Q3 to Q4.

As for our cash flow, our full-year guidance implies adjusted EBITDA of approximately $83 million with our expectation of continued strong cash flow. And the fact that we are beginning the year with $129 million of working capital and no debt, we are in a good position to invest in our initiatives and continue our ongoing dividend program and share repurchases. At this time, I would like to open up the call for questions.

(Operator Instructions). Tobey Sommer, SunTrust.

I am curious just in general -- maybe this is for Paul. How do you feel your ability at the firm to predict the moving parts within the business in and the financials is versus a couple of years ago? Thanks.

Well, actually I feel good about that. Relative to -- a couple of the things that are happening in the core business have kind of always been around, and that is the fluctuation in the direct cost that comes time to time relative to the benefit programs, workers' compensation, et cetera. But those are -- they are more predictable on the long-term, but they do have some volatility from time to time, quarter to quarter.

But in the bigger picture the way the overall strategy is work is really starting to be exciting. We are seeing adjacent businesses that we've brought to cash flow breakeven that on their way down toward profitability. We see how the synergy of those products working together with our core business and the cross-selling that is happening. We are excited that I believe we have new levers and new ways to manage growth and profitability going forward.

Paul, could you share with us any kind of insights that you can gain from your customers' payroll about their hiring patterns and maybe need to add headcount?

Yes, I sure can. In the recent period, we did see the same kind of soft spot I think we have heard in the overall marketplace as you got toward year and. I know people talking about whether it had to do with weather or whatever. But certainly, we saw softening in the labor market, and it is continuing just to kind of bounce along the bottom. We did see over time as a percentage of base pay reach the 10% level which is kind of our trigger, meaning they are pretty much at capacity. You can still continue to use over time, but generally speaking, you are better off -- if you think your prospects for new business are good, then you are better off hiring somebody than loading up on overtime, over 10%.

We saw that pipeline for new business, which we look at the sales of our customer base through the commissions that we pay for their sales staff, and it was up at a reasonable level, but not enough to be supercharged and driving growth forward. But I think if there is any uptick at all, it looks to me like the decisions would be made to start hiring again. We haven't factored that in a lot to our going-forward model. We have factored in just a very slight level of adds within the client base. But if that happens more aggressively, obviously that would be upside for us.

Thank you. My last question: can you elaborate a little bit on the direction of the investment in HCM? Is there an aspect of the adjacent business units that requires some further investment, or is it something additional?

Really it is the combination of two major things. One is the integration. What we have found is that people like this array of offerings that we have, and you would like them to work together better. Fortunately, you have the onset of what is called HR-XML, which is kind of a standardization of HR technology offerings so that all different types of HR technologies can talk to each other and play better together. So part of this is bringing all of our products up to that standard so that it will work better together, and we can work in the world for somebody has this expense management product and our Time and Attendance, or any other kind of combination. So, that is part of it. I think that is going to be very helpful in a lot of ways.

And then beyond that, the core product, the core HCM product, it is time to kind of give it a fresher look and feel and make it look and feel more in common with the other offering. We were able to do some very effective in-the-field market testing with customers and our functionality is great. Look and feel improvement I think would make us compete even better.

So, we are feeling like that is an important investment to make because it is key to adding midmarket accounts and sales, and retaining those accounts is the key to our traditional employment offering bundles that have just been introduced into the marketplace. We were really able to validate through this pilot testing that these investments will have a nice payoff in the not-so-distant future.

Jim Macdonald, First Analysis.

You have spent a lot of time retooling the business and things. When do you think we will see the profit leverage out of all of these exercises?

2015.

Can you talk a little bit about how much profit leverage there could be once you get to that point?

At this point, you look at about 50% of our costs we had fixed and 50% variable, so you can pretty readily run the numbers out. As you get to the latter part of this year and you are back up into double-digit growth and your salesforce is right sized and more efficient and your market opportunity is stronger than ever and has a sense of urgency driven by outside factors -- we are not in this for the short-term. We are in this for the long-term, and we felt like this year's investments would put us in a position to be well into the double-digit unit growth next year, which would drive significant profitability to the bottom line in 2015.

Going back to the fall selling season, with all these employers renewing early, as you mentioned, how did that impact your fall selling season?

That was definitely a factor because when the insurance companies and agents, et cetera, went out into the market place early with the fear message, got them to renew early. That kind of took them out of the market for us because they just renewed their benefit plan. Benefits is a significant part of what we do in our core market. And so, that kind of put them aside for a year. That's the bad news. The good news is we still made our numbers for the campaign, which is a real credit to our sales organization. But it also positions us for an unbelievable fall campaign next year because they compressed all those renewals into a couple of months time period.

As we ramp up this year, selling into -- selecting those right accounts that are experiencing the impacts of the healthcare reform, we are going to be able to really capitalize on that in the fall selling season next year.

So if people's healthcare -- if they renewed on December 1, how is that going to look in the fourth quarter? Will you have a potentially unusual amount of people joining you December 1, or they join you early and just cancel their health program in October or some earlier date? How is that going to look?

That is going to be really interesting to see because I don't know what flexibility carriers are going to have, whether they can -- in theory, as we sit here today they can't renew those plans again the way they are. They may have to come off in October and November or December, which is when that renewal takes place. We are going to be out there presenting our option as they see their increases, which we expect in the cases on the accounts we want to go after. The increase in healthcare pricing is enough to offset the investment they make for our service. It really is making lemonade out of the lemon that is served up by health reform.

I kind of like the way this works because early in this year we are going to be able to work through all the selling motion that it takes to bring all this to the surface and help customers make these decisions while we are working on the 40% of the customers that didn't renew early, that are renewing month and month. And then we get to the big slug -- 60% as we get into our fall campaign that is right in a wheel house.

Just one numerical question. What was your number of trained BPAs in the fourth quarter?

I think it was like 303 or 307 or something. I will get that number for you here in just a second.

Okay. Thanks a lot.

Michael Baker, Raymond James.

Since healthcare is still kind of local or state driven, I was wondering, given the dynamics that you see out there, which states are presenting bigger opportunities to you?

Well, we are looking, as I mentioned in the script, our opportunity really by segment and by demographics, if you will, of the customer base. And there is a geographic component to that as well, but in our case since we are after the small to midsize decision, enough of those in just about any market to make us pretty excited everywhere we are. And so, we are not looking at that as much as a state-by-state issue, although there are states where the market reforms are going into place faster or more effectively, and that does drive business our way.

Okay. And then kind of pointed towards the latter part of your prepared remarks to channel options that you are considering. I was wondering, what are some of the triggers that may have you move in that direction?

Well, we are actually testing some things out in the marketplace right now. We've had a strong, very strong relationship with our carriers and other partners in the marketplace. We think there is opportunity there, and we are exploring it.

Okay. Finally, in terms of your COBRA marketing approach, how is that developing in light of the public marketplace maybe not developing as expected?

Michael, I will tell you that we have spoken to a lot of the COBRA participants at the end of last year and the beginning of this year. It's too early to see what kind of final decisions these people are going to make because they have -- first of all, they have 30 days to decide, and then they have 45 days to make their payments before they get dropped off the rolls. So, we will know something in the latter part of March about kind of where we are.

I appreciate the update, guys.

Mark Marcon, Robert W. Baird.

Can you talk a little bit more about the turnover that you saw earlier in the year this year, just the January/February? And where exactly you saw it?

Are you talking about year-end transition year in new business versus --?

Yes.

Yes, sure. Like I said, you kind of have a shift over the last few years more towards year-end transition. Some of that is due to larger accounts wanting to move at year-end and that kind of thing. At year-end this year, we had a strong selling campaign. And those are transitioning in, and we are enrolling and paying them now over this first quarter. Our renewals went well, but we did have, as I mentioned, 4600 employees renewed into our new workforce synchronization solution. Actually, a portion of those renewed into it and a portion of those were sold as new accounts. So, that was some nice uptake on that.

And the other thing we haven't been able to factor in going forward this year is those folks who select workforce synchronization have the opportunity to buy HR services on an as needed basis; so we've got folks available to do that and to sell those services on an ongoing basis with those clients. We don't know how much uptake is going to be of those services on an ongoing basis. In many cases, we think we are going to actually make more money on that client this year than we did last. But that kind of remains to be seen and were not really able to budget that in.

Those are not included in the worksite employees, right?

That's correct.

In terms of if we strip those out, what was the retention rate?

(multiple speakers) The retention rate was 13%.

Michael, the 4600, if that is what you are talking about, they are -- because they in the co-employment model, they are considered in the total.

Yes.

Oh, they are in the total. Okay.

Yes, we thought you were talking about the adjacent business offerings.

No. So of the ones that did not renew in any way, shape, or form -- the 13% -- were they primarily in the midmarket, or were they smaller?

It was a similar mix to last year, which was -- I don't remember exactly the numbers. I have to look those up on the segment basis. But it was very similar to last year.

Would it be similar reasons, you think?

Yes, it was. We are doing this same full analysis we did last year. The good news is that we were able to test these new offerings out. And it made a big difference in terms of giving us the feedback we need to -- this year we will be able to start much earlier with customers. We developed our new offerings last year, throughout the year. Got them into the marketplace about September or so, and for a lot of midmarket customers, they are kind of already past the decision point. Our plan for this year, we feel real strong about how we are able to take what we developed last year into the market for the full year this year and see our results get even better at year end.

And then on the ABU's, you are making really good progress there. What was the ABU that had or the two ABU's that had the biggest take out?

I would say it was our time and attendance business, which is growing substantially. Also our performance and organizational planning business had quite a year as well. We are making progress on all the units. We have learned to apply certain disciplines from operating discipline to sales discipline. It's really starting to pay off, and that is the same process that we are going to use on our midmarket, going forward. That is why we brought them all together into one operating unit, so we can apply these same disciplines that business.

And we are still giving a nice number of leads every month from our Business Performance Advisors for these other services. That hasn't let up at all.

No, I think that will actually increase as people get more comfortable with cross sell.

So, would you -- if I recall, you mentioned earlier that you had just hit -- you hit breakeven last year. So, we should have a pretty nice swing factor on the ABU's from here on out.

Yes, I think we've got -- if you look at the ones we started prior to 2012 -- our original businesses, adjacent businesses -- that group, they were cash flow breakeven. We expect them marching toward profitability. We have not budgeted of them to be accreting this year, but we expect them to be cash flow positive -- really on the way to being accretive shortly thereafter.

Jeff Martin, ROTH Capital Partners.

It looks like the business is well-prepared for growth but 2014 is just going to be what it is in terms of the investments that you are making. My question centers around healthcare reform and how you think that is contributing to the sales process at this point. It would appear to me that the significant investments that you are making really aren't bearing fruit. Is that the right way to look at it? More of a 2014, 2015 impact? Have you seen much impact to date for those efforts?

Yes, I think there is two things going on. First of all, the investment to accommodate health reform -- we made a significant investment last year. And then, so many things changed, including the extension of the employer mandate, constant changes. It actually has increased the amount of investment we have had to make to accommodate healthcare reform. That's why you get another $1.5 million on top of the $2 million or 3 million we spent last year on health reform. So you have some of the -- we always knew the cost would be on the front end, and then the return would be as the marketplace experienced the changes that we had to prepare for.

So that has happened, but now it is happening stretched out over another year. And so, we've got some added costs this year while we are now seeing the benefit of it, which is the marketplace realizing how healthcare reform is going to affect them. And it does give us more at-bats, more opportunities to talk to prospects who are thinking about more out-of-the-box solutions. And, boy, this next few years between the market reforms on the small business and then they -- those reforms get extended to the 50 to 100 employees, the employer mandate. This is a great opportunity for us.

It just seems to me as though they are not being forced to make that decision just yet. I mean, the anxiety levels are high. That helps you get in the door, but in terms of actually converting those into sales, it seems like they are not being forced to make that decision just yet.

That is a good way to look at it. Let's talk about the ones that are being forced right now. Every month you have less-than-50 employer employee groups that are seeing the full effect of market reform. Those are the ones that did not renew in November/December. And we estimate that to be about 40% of the customers at large. That 40%, between February 1 and September 30, there's a portion of that 40% every month getting their renewals. And there's about 55% of that 40% that are getting an increase of more than 20%. So for that part, it's right now. It's happening right now.

And we have a plan for go-to-market strategy to be out in front of those customers, let them see another alternative. As opposed to just renewing with a 40% increase to get an inferior plan with a smaller network at the higher price, they can come on our service. That is right now.

But right behind that in the fall, you have people making decisions to accommodate the employer mandate. You have the 60% of the small, less-than-50 employers that will have to make the new decision beyond the band-aid approach that they took last fall. So, this year is going to be big on the selling side, but as you sell those and enroll them, that turns into significant profitability in 2015.

Okay. Great. And then one more question, if I could. On your stock repurchase, how much is remaining authorization and automatically be constructive this year in repurchasing stock?

We have about 1.2 million shares or so remaining under authorization. So that would be net of some -- we put a plan in place at the end of each quarter, and that is really through today. And then we will have a fourth meeting next week where typically make decisions with what to do with respect to how aggressive or conservative on the share repurchase side going forward. But as you saw, we have plenty of working capital still. With the 2014 guidance, $82 million or so of cash flow. So, it puts us in a good position to continue the share repurchase program.

Okay, great. And then finally, I wanted to pass on my congratulations to your boy, Jimmy Walker.

Thanks. It has been pretty exciting for us, and we are giving a lot of nice advertising [capital] with that.

Yes, absolutely.

It was fun to watch.

I also don't have to have a stress test at the doctor anymore after yesterday. I passed (laughter).

There are no further questions at this time. I will now turn the conference back over to Mr. Sarvadi for any closing remarks.

Thank you all very much for your participation, and we look forward to continuing to implement our strategies throughout the year. And we will see you out on the road. Thank you very much.

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