Insperity Inc (NSP) 2014 Q1 法說會逐字稿

Good morning, ladies and gentlemen. My name is Ryan, and I will be your conference operator today. At this time, I would like to welcome to the Insperity first-quarter 2014 earnings 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 would like to turn the call over to Douglas Sharp. Mr. Sharp, please go ahead.

Thank you. We appreciate you joining us this morning.

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

Now, let me take a minute to outline our plan for this morning's call. First, I am going to discuss the details of our first-quarter 2014 financial results. Richard will discuss the Q1 gross profit results and our expectations for the remainder of the year.

Paul will then add his comments about the quarter and our plan for the remainder of 2014. I will return to provide our financial guidance for the second quarter and an update to our full-year 2014 guidance. We will then end the call with a question-and-answer session.

Let me begin today's call by discussing our first-quarter results. Today, we reported first-quarter earnings of $0.37 per share. These results were $0.03 per share above the midpoint of our forecasted range, as higher gross profit for worksite employees and lower operating expenses more than offset a slight shortfall in paid worksite employees.

As for our key metrics, paid worksite employees averaged 126,289 for the quarter, an increase of 2.3% over Q1 of 2013. However below the low end of our forecasted range of 127,000.

Gross profit per worksite employee per month averaged $280. This was near the high-end of our Q1 forecasted range of $274 to $281, and below the $292 reported in Q1 2013, due to the anticipated higher deficit in our benefit cost center. Operating expenses totaled $89.6 million, approximately $1.5 million below our Q1 budget, and just a 4% increase over Q1 of 2013.

We generated $24 million of adjusted EBITDA, and ended the quarter with $123 million of working capital. After repurchasing 469,000 shares at a cost of approximately $14 million.

Now, let's review the details of our first-quarter results. Revenues increased 4.1% over Q1 of 2013 to $637 million, on the 2.3% increase in average paid worksite employee.

As for the components of our worksite employee growth, client retention averaged approximately 87% for the quarter, which was in line with our budget. We experienced a low level of net hiring in our client base throughout the quarter, slightly below our forecast, and well below that experienced in Q1 of the prior year. Worksite employees pay from sales for the quarter were below budget, and Paul will update you on our recent sales results in a few minutes.

As you are probably aware, our key pricing metric is gross profit per worksite employee per month, which came in at $280, or $3 above the midpoint of our forecasted range. Favorable results were achieved in our payroll tax and workers compensation cost centers, partially offset by a slightly higher deficit in our benefit cost center. Gross profit results were below the $292 reported in Q1 of 2013, due primarily to an anticipated higher deficit in the benefit cost center.

Benefit costs increased 5.3% over Q1 of the prior-year, and included a combination of higher-than-expected runoff from 2013 claims, offset by lower first-quarter 2014 healthcare claim activity. Workers compensation costs totaled 0.65% of non-bonus payroll, below our forecasted Q1 cost of 0.68%. Payroll taxes as a percentage of total payroll were 8.8%, a decline from the 9.4% recorded in Q1 of 2013, due primarily to lower SUTA rates. Richard will provide further details behind our Q1 gross profit results, and expected trends over the remainder of the year, in a few minutes.

So now let's move on to Q1 operating expenses, which totaled $89.6 million. As I mentioned earlier, this was about $1.5 million below our Q1 budget, due primarily to savings in the G&A area. The increase in operating expenses over Q1 of 2013 was just 4%, even when considering the run rate associated with the significant investments made over the course of the prior year, including the ramp up in the number of Business Performance Advisors, implementation of our health care reform strategy, and investments in our technology.

Our effective income tax rate increased from 40% in Q1 of 2013 to the forecasted rate of 42% this year, and included the impact of Congress allowing the Road tax credit to expire at the end of 2013. As for our cash flow, adjusted EBITDA totaled approximately $24.3 million, cash outlays included the repurchase of the 469,000 shares, at a cost of $13.9 million, cash dividends of $4.4 million, and capital expenditures of $2.4 million. At this time, I would like to turn the call over to Richard.

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

Doug just reported that our gross profit per worksite employee per month in the first quarter was $280, which was $2 above the midpoint of our forecasted range. The gross profit consisted of $188 of average markup, $77 of direct cost surplus, and $15 from our adjacent businesses.

Now let me give you the details of each component. The $2 per worksite employee per month improvement in gross profit came from an increase in our direct cost center surplus. The $2 per worksite employee per month improvement in our surplus came from the combination of a $2 per worksite employee per month increase in the surplus in the payroll tax cost center, a $1 increase in the workers compensation cost center surplus, and a reduced by a $1 increase in the benefits cost centers deficit.

Better than expected surplus in the payroll tax cost center was a result of the 2014 state unemployment tax rates in several states coming in lower than originally forecast. The better than expected surplus in the workers compensation cost center was a result of slightly better than expected claims activity. As for the benefits cost center, the increased deficit was primarily driven by significantly higher than expected fourth-quarter healthcare claims, that were paid during the first quarter offset, by a lower than expected first-quarter year-over-year claim trend of 2.1% in the United Healthcare Plan. The gross profit contribution from our adjacent business services came in on budget at $15 per worksite employee per month, which is $2 per worksite employee per month better than Q1 of 2013, which further supports our long-term strategy of reducing gross profit volatility and enhancing our cross-selling opportunities.

In summary, we are pleased with the first-quarter gross profit results, and they give us some good insight into our gross profit outlook for the balance of the year, beginning with the mark up. Based on our first-quarter's mark up, which reflects the combination of year-end renewal pricing, the amount of new business sold, and the lower-price, lower-cost co-employment offering that only midmarket prospects and clients can choose, we believe it is prudent to forecast a $188 to $189 per worksite employee per month average markup for the balance of the year.

Now, let's discuss the surplus component of gross profit, beginning with the payroll tax cost center. The better than expected surplus in Q1, resulting from lower rates than originally budgeted, should continue to produce a slightly better than expected surplus for the balance of 2014, but with a shift in the timing between the quarters. The quarterly pattern of the payroll tax surplus decreases throughout the year as employees reach the limit on wages subject to payroll taxes, thus reducing our gross profit per worksite employee per month.

However when our unit growth accelerates from one quarter to the next, the payroll tax expense on those new worksite employees increases, but the allocations remain constant. This means we do not get the full benefit of the annual budgeted surplus on those specific employees, until the following year. Therefore, we should see our surplus in the payroll tax cost center, in the same range as originally forecasted.

Switching to the workers compensation cost center, we began our new policy year on October 1. Historically, we have forecasted a slightly higher cost trend in the recently-completed policy period. Then, as we see how the incident rate and severity rates change based on delivery of safety services and effective claims management, we refine those estimates each quarter.

As I mentioned last quarter, we increased our reserve slightly more than usual, because of a severe workers compensation claim. This reserve adjustment caused our first quarter of expense to be 0.65% of non-bonus payroll. Excluding that claim, our current incidence and severity rates improved from Q4 of last year. Assuming that future incidence and severity rates remain constant with Q1, we would expect our workers compensation costs to be in the range of 0.61 to 0.63% of non-bonus payroll for the remainder of the year.

As for the allocations side of this cost center, we are seeing slight increases for workers compensation insurance premiums in the marketplace. Therefore, we will continue to budget a nominal increase in our allocations for new and renewing business throughout the year. Now, let me tell you what we anticipate happening in the benefits cost center for the balance of 2014.

Obamacare is still creating massive disruption in the marketplace for employers with less than 50 employees. In fact, since the administration keeps changing the rules for insurers, employers, and employees, it makes it difficult to predict healthcare utilization in 2014 and beyond.

On the expense side of the cost center, we did see a favorable 2.1% claim trend in our United Healthcare plan during this quarter. Even when you add in the new 1.4% cost of Obamacare taxes and fees, the results compare very favorably to the small business marketplace.

You may recall from our last quarterly earnings call, we explained how much money a COBRA participant costs our plan. We also mentioned the launch of the communication plan designed to inform current COBRA participants and any new eligible COBRA participants that there were now lower-cost options for them to evaluate. I am pleased to report that this strategy has resulted in a 21% drop in the number of COBRA participants from Q4 of last year.

Additionally, we continue to see participants enrolled in lower cost, higher deductible plans, which also helps to lower our overall plan costs. However, our quarterly expense increases as participants' co-pays and deductibles are satisfied throughout the year.

Last quarter we forecasted a potential increase in total benefits expense ranging from 4.5% to 6% over 2013. So assuming that COBRA participation, plan utilization and large loss claims remain at their current levels, and with one quarter of actual results behind us, we can narrow the benefits expense range to 4.6% to 5.8% for the full year over 2013.

On the pricing side of the benefits cost center, and as previously predicted, we are beginning to see big increases for employers with young healthy employees in ACA-compliant plans. This should make our health plans look more favorable to prospects.

So from a pricing perspective, we plan to continue increasing our allocations at acceptable levels for both new and renewing business. When you combine all of the forecasted direct cost surpluses and the range of possible benefits expense outcomes, we should generate a net surplus of $48 to $50 per worksite employee per month for the year.

Our last contributor to gross profit, which comes from our adjacent businesses, some of which have a recurring revenue and gross profit stream. Our cross-selling opportunities are improving, and we are beginning to see success from our channel opportunities. Additionally, we continue to have a nice backlog in a few of these businesses. Therefore, we could see gross profit contribution of which is currently $15 per worksite employee per month growing to $18 per worksite employee per month by Q4 of this year.

To summarize our outlook for 2014, when you combine the service being marked up, the surplus, and the adjacent business education, our gross profit for worksite employee per month would be in the range of $253 to $257 for the full year, slightly better than our original budget. At this time I will turn the call over to Paul.

Thank you, Richard. Today, my comments will cover three important topics for Insperity shareholders. First, I will update our financial guidance for 2014, and corresponding changes to our operating plans since last quarter.

Second, I will provide a progress report on the key initiatives we expect to drive our growth and profitability for the balance of the year, and into 2015. Then I will finish my comments addressing our long-term strategy for the Company, and our view of where we are in the execution of our plan.

In our last conference call, we outlined a range of key metrics that implied a range of expectation for earnings per share of $0.96 to $1.31, with the midpoint of the range at $1.11. We also provided guidance for the first quarter in a similar fashion, with a midpoint of $0.34. Instead of building up from each metric to the expected guidance, I want to provide the bottom line first, and then explain how we got there. Doug will provide the specific metrics in a few minutes.

The bottom line is our key metrics now imply a tighter range for EPS of $0.98 to $1.18, with $1.08 is the midpoint. This is after the first quarter coming in ahead of expectations by $0.03, due in part to the timing of certain operating expenses. On the surface, this update may appear to be some tweaking and refining of the same growth and operating plan for the year, but in reality, our current forecast includes a worksite employee shortfall coming out of Q1, and a quick response by management to better align operating expenses with our projected growth over the balance of the year.

Our revised operating plan keeps us in the same ballpark for this year's EPS results, and positions us well for 2015 and beyond. The adjustments we made to our operating plan also demonstrate our commitment to react quickly and decisively to macro and marketplace changes as they occur, including a weaker than expected economy and labor market, and continual healthcare reform delays and changes.

Earlier this week, it was reported the first quarter of 2014 was the weakest in the past five years, and we saw this reflected in some of the hiring patterns we follow. In the first quarter of each of the last two years, the substantial percentage of the net change and existing clients flow in from a combination of newly enrolled clients from the fall campaign ramping up and the initiation of current client hiring plans for the new year. This year, this did occur.

We also had a pretty good backlog of accounts in Q4 orientation and enrollment to further support our expectations for growth during this period. However, we experienced a lower enrollment of each account than expected. So the weakness in hiring and the lower than expected enrollment from new accounts were contributing factors to our shortfall of about 2,500 worksite employees from our expected Q1 ending number, which of course, is the starting point for Q2.

Although April hiring was better, and hopefully points to a positive trend, this volume variance early in the year has a dramatic effect on the current year profitability, due to the recurring revenue nature of the business. This of course has been factored into the guidance.

You may also recall on the day of, and almost immediately following earnings release conference call in February, the administration announced a delay and substantial modifications in the employer mandate within the Affordable Care Act. On March 5, the administration pushed back the deadline by two years that requires health insurers to cancel plans that are not compliant with ACA mandates.

We have also included in our revised guidance for the year a change in the timing of our expectations for growth, driven by health care reform. The frequent and unpredictable changes to the implementation of the ACA have created a moving target. Although all of the provisions of the ACA are eventually supposed to be implemented, the incessant delays and modifications have caused some reduction in the sense of urgency, and a great deal of confusion.

The administration has provided last minute relief related to many issues, which have caused a wait and see attitude in some cases, to be sure applicable provisions of the law really go into effect. We're still seeing more opportunities to engage prospects due to healthcare reform, and we believe this will be more of a driver for growth each quarter over the next several years. However, it's prudent to adjust our near-term expectations related to the small business segment due to the recent ACA changes.

Our guidance we're providing today for 2014 is similar to that provided earlier in the year in EPS, but our operating plan to achieve this range is different. The paid worksite employee shortfall and healthcare reform delays shifts the growth plan by a full quarter, so we have taken action to align our operating expenses until the growth occurs to offset the 2014 EPS effect. This revised operating plan also puts us in better position as growth accelerates into 2015.

We will end the year with a lower operating cost structure, providing the leverage to increase earnings substantially in various scenarios, with a wider range of possible growth rates. In my view our outlook for growth and profitability in 2015 remain positive, as we see serious momentum in our key drivers for future growth. This includes a development of our core market Business Performance Advisors sales team, and our new midmarket offerings and sales process.

Sales in the first quarter were 112% of budget. However, the first quarter is a period in which we typically rebuild our pipeline, following the condition of our fall campaign. So at this point in the year, we need to look deeper into other metrics that lead to sales, as well, to see if we're on track.

In line with our strategy throughout last year, we increased the number of trained Business Performance Advisors, and in Q1 of this year we averaged 307 in total. This number is 33% higher than the 231 BPAs we averaged for the same period last year. The key metric to be watching for this year is not just the total trained BPAs, but the number of trained BPAs with 12-months experience.

This is because with 12 months experience in the field as a trained BPA, they typically reach a critical point of increased productivity, and generate workforce optimization sales. In the first quarter of this year, the number of BPAs with more than 12 months experience started to reflect the ramp-up of BPAs from early last year, and increased 5%.

We expect this metric to increase to a range of 18% to 22% in Q2, 20% to 24% in Q3, and 22% to 26% in Q4. As the number of BPAs with 12 months experience goes up, we expect sales results will follow.

Other sales activity that ramps up before actual sales includes the number of discovery calls, which are initial face-to-face visits with prospects, and business profiles, which represent the gathering of information within the account. In Q1, discovery calls were up 27%, tracking with the increase in Business Performance Advisors, and business profiles were up 13%, consistent with the expectations for the experience level of these new additions to the sales team.

Another indicator of increasing momentum is the activity of bundle-plus selling of other business performance solutions from our strategic business units. These offerings are easier to sell for the BPA, and easier to buy for the prospect, than a wholesale change to workforce optimization. As new BPAs ramp-up, we should see an increase in this activity as a leading indicator, before we see the results in workforce optimization.

In Q1, the new leads from BPAs for these business performance solutions increased 139%, and the number of demos for these solutions nearly tripled, with a 280% increase over the same period last year, and sales from BPAs for these business performance solutions are up 142% year-over-year. Our strategy for early success with these offerings was also intended to help reduce turnover of BPAs during the 12 to 18 month period for a BPA to reach optimal efficiency. So far, turnover is down 30%, which if maintained, will be very beneficial to our long-term growth plan for the core sales organization.

Our midmarket sales activity is also ramping up substantially, as a result of recent organizational and operational improvements. Since the first of the year, we have completed a combination of midmarket sales and service personnel from across the company into a new division. Very quickly, we have seen increased activity and momentum due to reorganizing the sales team, establishing new sales management, and providing a new level of senior management support.

The sales team for midmarket has been formed to mirror other successful midmarket sales organizations. This includes a relationship manager in the form of our business performance consultant, and a team of product and subject matter experts brought in as needed to meet the specific needs of the customer. The midmarket sales operation is now managed within the strategic business development part of the organization, which has been successful improving sales results in our other strategic business units.

We are applying the same sales process improvement methodology we applied in those businesses, in order to achieve more consistent predictable sales results. We have also formed a deal team of top-level executives to oversee the pipeline of prospects in the proposal phase of the sale, to accelerate decision-making, and provide support to close business faster.

In addition, our executive team has utilized a divide and conquer approach to these two major growth initiatives, to demonstrate senior management's support. Richard Rawson and Jay Mincks are leading the core market growth plan, and Steve Arizpe and I are leading the midmarket growth plan. I'm personally involved in the midmarket sales effort, and Steve is focused on the midmarket retention effort.

We have already begun to see results from these changes. The pipeline is strong and growing, and the new team is energized and focused. The number of bids with potential worksite employees from those bids are both up over 60% year over year in the first quarter. We are encouraged that our training of these new advisors, as well as the adoption of our Insperity Selling System by the entire team is demonstrated in this recent increase in activity and sales results.

This brings me to my last topic for the day, which is to look at our long-term strategy for Insperity, and comment on where we see ourselves in the execution of our plan. In 2011, we embarked on a dynamic business transformation of Insperity, from singularly focused company with one product sold to a perfect fit client, at just the right time, to a more dynamic company, with a wide range of business performance solutions that fit just about any company we call on at any time.

Although the Company was certainly successful in the first 25 years, this strategic plan was designed to leverage the many strengths of the Company into a much broader opportunity for long-term growth and profitability. This business transformation included six major elements and phases, including strategy and organization, adjacent business development, the Insperity brand, bundled-plus selling, refinement, and growth acceleration. The strategy phase included developing, organizing, and communicating strategy to obtain buy-in from all constituencies, for the amount and degree of change that would be required by this plan.

The adjacent business development phase included investing in 10 new businesses, including using a build by partner strategy to expand our offerings to add a wide array of business performance solutions. This would allow us to leverage our 300-person sales team and over 20,000 face-to-face visits made each year, in the small to medium size business community.

The brand phase included rebranding as Insperity to eliminate confusion among perspective clients from the old brand, and to establish a positive inspirational new identity with a broader appeal. The bundled-plus selling phase required completely rebuilding our sales motion in the marketplace, introducing the role of the Business Performance Advisor, and adding cross-selling to the Insperity selling system.

The refinements phase included validating each element of the strategy, and applying learnings from each iteration of execution of our plan. It also included completing all of the training necessary to replicate the model.

The final phase is growth acceleration, which is where we are today. This includes the ramping up of the number and efficiency of Business Performance Advisors, product and technology enhancements, improving execution in adjacent business units, and channel development.

I believe now more than ever before we're on a great path to strong results for a long period of time, based on our new business model. The strategy is working in the marketplace, where it really counts with the customer. We have tremendous receptivity by prospects to our powerful array of business performance solutions. Our brand has been well received, and eliminated the confusion we used to experience.

More and more, we are making a multi-product recommendation to prospects, and selling additional solutions, with workforce optimization. Year to date, 58% of our workforce optimization sales included one or more additional business performance solutions.

Our technology is leading the way with a significant increase in demos, as I mentioned earlier, validating our offerings, and establishing new customers into the Insperity family. Early positive experiences with our technology and strategic business performance solutions are casting a wider net to bring in customers to upsell to our core service at a later date.

Our original adjacent businesses were near cash flow breakeven last year, and are expected to add to EBITDA this year. Our capability to develop businesses and offerings to capitalize on market opportunities, as developed quickly and effectively. However, implementation of the far-reaching business transformation was not without considerable challenges, both internal and external.

Against the backdrop of a lackluster recovery and tepid labor market, and government policy creating an unfriendly and uncertain business environment, has taken longer than expected to reinvigorate the growth engine of the Company. Internally, it also took longer than expected to get cross-selling into our DNA and change the number of paradigms that were well entrenched in the minds and behaviors of our team.

The sales motion change proved to be the biggest challenge, and led to the need to go through several iterations to get it right, before replicating the selling system, and ramping up the number of Business Performance Advisors. Allowing the number of advisors to decline from 350 down to below 250 to retool the sales team before ramping back up pushed out the growth plan.

However we are on the other side of that issue now, and the reward for persistence with our long-term strategy is in view. I believe we are in a powerful competitive position today with all of the ingredients to achieve our long-term goals. We believe in our strategic plan, and expect to see the fruits of our labor, and the realization of our vision as the leading provider of business performance solutions to the small and midsized company marketplace. We also believe the value we provide to customers is the inherent value in our business, and will translate into tremendous value to shareholders in the years ahead. At this time, I'd like to pas the call back to Doug to provide the details behind our revised guidance for the year.

Thanks, Paul. Now before we open up the call for questions I would like to provide our financial guidance for the second quarter and an update to our full-year 2014 forecast.

As Paul mentioned, our updated guidance implies an EPS range of $0.98 to $1.18. In general, this updated 2014 guidance reflects our plan to hold down the growth in operating costs until we experience acceleration in unit growth, which is now expected to begin in the latter half of 2014, and continue throughout 2015. This operating plan, combined with the forecast of slightly higher gross profit per worksite employee, is expected to largely offset the impact of lower worksite employees on our 2014 earnings.

As for our quarterly earnings pattern, with the impact of Q1 sales and renewals on our client mix now behind us, we're now able to refine the seasonal pattern in gross profit over the balance of the year. This resulted in some tweaking of gross profit forecast between the quarters. So as for our key metrics guidance, we are forecasting average paid worksite employees in a range of 128,000 to 128,500 for Q2, and have updated our full-year guidance to a range of 131,000 to 133,000.

As Richard mentioned, we expect gross profit for worksite employee per month to be in the range of $254 to $257 for the full-year, which is slightly higher than our initial guidance. As for the second quarter, we expect gross profit per worksite employee per month to be in the range of $248 to $250. The expected step down from Q1 to Q2 and the seasonality over the remaining quarters largely reflects the impact of payroll wage basis on our payroll tax surplus, and increased participation in high deductible plans on our benefits claim costs.

We now expect a sequential increase of $7 per worksite employee per month from Q2 to Q3, followed by a decline of about $16 from Q3 to Q4. As for our operating expenses, we are now forecasting full-year 2014 to be in the range of $356.5 million to $358.5 million, or about a $7.5 million reduction from our initial budget.

This reduction largely impacts limiting our corporate headcount growth to Business Performance Advisors in our ACM initiative, lowering sales commissions in line with slower unit growth, reducing certain marketing costs, and lowering various G&A costs. Further cost reductions associated with incentive compensation would go into effect, if certain unit growth, operating expense savings, and operating income targets are not achieved, since our cash incentive plan adheres to a strict pay-for-performance standard.

Now as for the second quarter operating expenses are expected to be in a range of $90.25 million to $91.25 million. Taking into account some seasonality in our operating costs, we expect a sequential decline of approximately $2 million from Q2 to Q3, and a decline of approximately $800,000 from Q3 to Q4. As for interest income, we are forecasting $100,000 to $150,000 for the full year.

We are estimating an effective income tax rate of 42% and 25.5 million average outstanding shares for both Q2 and the full year. At this time, I would like to open up the call for questions.

(Operator Instructions)

Tobey Sommer, SunTrust.

Paul, I had a question for you about the iterative process that has taken a while to reinvigorate growth. When you look at your strategy alternatives -- where you have done that periodically over the last two or three years, have you found -- are you starting to choose slightly more radical choices? Maybe that is the wrong word, but maybe more aggressive choices? Or when you are confronted with two or three alternatives to implement your strategy, are you choosing the one that is in the middle? Thank you.

As I understand your question, the iterative process is a learning process of seeing what is working and what is not working, and what can we tweak. Most of it is really around getting the sales motion right for the sales team, and going out with a wide array of business performance solutions, having a more consultative approach and then offering a multi-product recommendation, and then bringing those to closure.

Once we got that where we felt like we had it right, which was of course the fall of 2012, that's when we ramped up the number of Business Performance Advisors, starting the recruiting process. And so now we are simply in the normal time frame that it takes to ramp up the sales team, bring them up to the right level of sales efficiency, and have the efficiency turn into sold and then paid worksite employees. And so we're on that track, and it is going well in that respect.

All of the signs that we look for in terms of ramping up the number of advisors with 12 months field experience, that is now just at a 5% positive number. So we're having good results against that growth in the size of the sales force. We are expecting that to ramp up dramatically now, just like the ramp up was last year, in the total number of hired Business Performance Advisors.

So as far as the type of changes that we made, and the decisions that we made, I would say they were -- we're not throwing stuff against the wall by any stretch of the imagination. It is a very systematic approach, and a very deliberate approach, because our goal is always to produce consistent protectable growth, not just to have a big bang that happens to work one time. I hope that answers your question.

That does. Thank you. As a follow-up, I was wondering if you could talk about the adjacent business units that are driving, maybe experiencing the best growth, and therefore contributing to the enhanced gross margin contribution that you described?

Our goal for this area was very clear, in the long-term strategy. This is key because it adds a third contributor to the gross profit line that Richard mentioned. Over the long haul, we hope for that to reduce some of the volatility in our gross profit per worksite employee, because there really is no limit to what that number can be.

Now that these businesses are in place, the selling systems are out there, now we can ramp up the sales team and those other organizations which are fed by the BPAs that are out in the marketplace, we can ramp that up, we believe, very successfully in the years ahead. What is key about that is because the whole idea was to cast a wider net, like I mentioned in my script, and to aggregate a much larger customer base into our Insperity culture, if you will. And then have those prospects available to upsell into products that we make additional margin on, et cetera.

And so it makes for a much larger opportunity. If you only have one product to sell to a single customer and you have nothing else to sell to them later on, that is a limited feature, even if you have a wide, a large greenfield opportunity for the one product. But if you can imagine the matrix now with many products that we have, and the different markets we're after, and our ability to bring the customer in at any products or at any time, and then have that large base of customers to continue to develop a relationship, that really builds on itself, and then we are able to have a nice third contributor to that gross profit line, and really keep our margins intact going forward. Even as the business maybe becomes more competitive in our core service.

So we think it gives us more options in the future, and we've had real good results at a variety of the businesses, our standalone recruiting business is doing exceptionally well, our time and attendance business is doing very well. All the way through the adjacent or strategic business units that we started pre-2012, that first portfolio of businesses that were launched together, they were near cash flow breakeven last year, they're going to contribute to the EBITDA line this year, and we expect those to come out of the water very nicely, as we go ahead.

Thank you, sir. Just to clarify, thank you for the color, that's helpful. The two you referenced are the time and attendance and recruiting, are those among the faster growing ones?

Yes I would say they are leading the pack right now, but they are still small enough that you have a good sales quarter by one unit, and it can really come up and start competing more favorably. We have good momentum in each of those businesses.

Thank you very much. I will get back in the queue.

Jim MacDonald, First Analysis.

Could you talk a little bit more about this worksite employee growth rate. Your sequential growth in Q2 of a couple thousand is below what I can remember, even when you had a significantly smaller sales force and weren't positioned -- normally, you would be growing 4,000 or 5,000 sequentially into Q2. This is just seems like a very, very low growth for that quarter.

Essentially you are starting with that much lower starting point of 2,500 employees, and takes it out of the plan going forward. It has pushed out the growth of the quarter, like I mentioned with my script. We are trying to be conservative at this point in that number, and we think that is the right thing to do, especially with the healthcare reform changes that have taken place.

A little bit of wait and see attitude we're seeing with those -- with that customer set in the small business division. We thought that was the appropriate avenue to take.

Thinking about other possible explanations, how about competitive pricing? Have your competitive losses or retention been as good as it normally been? Things like that, anything else impacting it?

Our retention was actually -- was good in the quarter. It was on what we expected it to be. Obviously over the last, I would say nine months or so, we certainly -- and I mentioned this last quarter, we certainly have had a new level of competitive pricing pressure. I think when you have a company going public out there that wants to really -- a growth at any cost approach, which is fine, if that's what folks want to do -- that is definitely a change in the competitive landscape, that I discussed last quarter.

Again, our growth rate is more driven by that number of BPAs, and as they ramp up in their experience, and they're closing those deals out there. I think we have responded well on the competitive side, especially through the first quarter. We had our sales convention, had an opportunity to hit that pretty heavy.

Our goal is to continue to be able to be competitive and sell these deals against the competition, but sell them at a higher price, and be the premium service provider and not see a diminishing effect in that gross profit area. That's our strategy.

And just another thing I noticed, and maybe it's just -- your average salary was actually down slightly year-over-year, although the bonus was up large. Is there some fundamental -- normally your average customer employee salary goes up pretty consistently. Is there any fundamental in mix or something that is happening?

Well of course every year there is a mix change at the beginning of the year, that resets a lot of those total book of business metrics. But no fundamental change in the type of customer, or anything like that.

Okay. Thanks a lot.

(Operator Instructions)

Mark Marcon, Robert W Baird.

As we look out -- would you anticipate that the rate of growth that we're seeing with regards to the worksite employees that is being projected for the balance of this year, it doesn't seem like the competitive environment is going to change, so would you anticipate that maintaining the pricing discipline, that this is the new range that we're in?

No. I would certainly think that we're going to see accelerating unit growth as the BPAs reach their level of sales proficiency, and the volume will continue on up. Now we are reacting to the pricing pressure, because we do certainly believe that we need to be within a range that you can sell the value to the customer, but we're also aggressively working the operating expense plan, so that we can make sure that we can maintain the operating margins we want to have as the business comes on.

We've got to look at the whole picture. We are definitely responding to be more competitive in the marketplace. The big change for us, even in the midmarket size business, is the offering of a variety of options, some that Richard mentioned, we have had quite a nice uptake on our lower cost and lower price, and a lower price to the customer and lower cost basis for us to match, in our co-employment offering.

We are taking steps to have more competitive offerings in that respect. We also, as you know from last quarter, we have got investment in our technology this year, that we expect will really tie all of these pieces together more effectively, and give a more cohesive experience to the prospect and the customer as they review our offerings, and see how they all fit together. I think that is another nice element, that as that comes together, also, we'll gain some real traction.

What specifically are you doing -- I know about the pricing changes and the service level changes that you made earlier this year, which would be reflected, and some of the reaction to that would be reflected in the WSE growth that we are currently seeing. What -- are you doing additional changes above and beyond what we have already discussed?

No. I think the only other thing I would say, as I mentioned the deal team that we have now for the midmarket customers to be more responsive during the pricing phase of these prospects. So we are able to look at each deal, and be more -- if we need to be more competitive, we can do -- almost some value engineering to see how we can help the customer to make some changes, that will make it more affordable for them, and continue to maintain a good margin for us in the long run. Those are the kinds of things that we're doing, to really be responsive to the customer need to maintain their cost structure going forward.

Is that for all clients segments or just midmarket?

We get into that more as you get into the larger customers. The midmarket customers, starting around 150. And certainly on occasion, the 150 isn't just an automatic line in the sand. If you have got 100 and growing, we obviously work with them in that manner, also.

And longer-term, beyond this year, are there opportunities to further enhance the efficiencies with regards to the operating expenses?

Yes. I definitely think we have worked an effective plan to align operating expenses to track more closely with the unit growth coming. But also, I think there is a good opportunity as we come out of this year with a lower cost structure. That growth, coming out of the water right behind, and you really get incredible leverage, as that comes about. We're very excited about our 2015 plan, as we're sitting here today. We see all that stuff lining up to be a very exciting year in 2015.

Great. Thank you.

We have no further questions in queue. I would now like to turn our call back to Mr. Sarvadi.

Thank you all very much for being with us today. We appreciate your support, and we're looking forward to continuing with our game plan going forward. We look forward to speaking with you next quarter. Thank you very much.

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