Insperity Inc (NSP) 2014 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. My name is Ryan. I will be your conference operator today. I would like to welcome everyone to the Insperity fourth-quarter 2014 earnings conference call.

(Operator Instructions)

At this time I would like to introduce today's speakers. Joining us are Paul Sarvadi, Chairman of the Board and Chief Executive Officer; Richard Rawson, President; and Douglas Sharp, Senior Vice President of Finance, Chief Financial Officer, and Treasurer. At this time I would like to turn our 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 and detailed in the Company's filings with the SEC. These risks and uncertainties may cause the actual results to differ materially from those stated in such forward-looking statements. In addition, non-GAAP reconciliations are available in today's press release.

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 fourth-quarter and full year 2014 financial results. Paul will then recap the 2014 year, and discuss the major initiatives of our 2015 plan. I will return to provide our financial guidance for the first quarter and full year of 2015. We will then end the call with a question-and-answer session where Paul, Richard, and I will be available.

Let me begin today's call by discussing our strong fourth quarter results. In general, we experienced a continued acceleration in the growth of worksite employees and favorable gross profit and operating results. These results combined with our year-end sales and client retention results point towards a stronger 2015. For the fourth quarter, we reported adjusted EBITDA of $22.6 million which was an increase of 22% over Q4 of 2013 and 15% above the midpoint of our forecasted range. We reported adjusted earnings per share of $0.35, an increase of 46% over Q4 of 2013 and 35% over our forecast.

Adjusted Q4 2014 earnings excluded two special items, an after-tax impairment charge of $0.03 per share and $0.05 per share related to the accounting treatment associated with the $2 per share special dividend. Revenue increased 7% over Q4 of 2013 to $596 million on a 5% year-over-year increase in average paid worksite employees. Q4, average paid worksite employees increased 4% sequentially over Q3 to 136,764 for the quarter, which was above the high end of our forecasted range of 136,250.

As for the components of our worksite employee growth, we exceeded our Q4 forecast for all three drivers, including worksite employees paid from new sales, net hiring and our client base, and client retention, which averaged over 99% for the quarter. These positive trends continued throughout our all-important fall selling season and year-end renewal period, which Paul will comment on in a few minutes. Gross profit increased by 13% over Q4 of 2013 on the 7% revenue growth. These results significantly exceeded our expectations as we experienced favorable results in each of our direct cost areas, with significant upside in the benefits area due to continued favorable healthcare cost trends.

The increase in the adjusted EBITDA of 22% on the 13% gross profit growth demonstrates our continued management of operating expenses, which included a 12% reduction in advertising costs and a 3% reduction in G&A costs from Q4 the prior year. Our effective income tax rate for Q4 was 37.5%, below our forecasted rate of 42%, due primarily to the recently passed R&D tax credit, lower than expected full-year nondeductible costs, and higher than estimated Captive insurance company, which lowers our effective state tax rate. These items, which flowed through Q4, resulted in a full-year 2014 effective tax rate of 41%, slightly less than our initial forecasted rate of 42%.

As for the full year 2014, we earned $84 million in adjusted EBITDA and $1.19 of adjusted EPS exceeding our initial budget. Full-year revenues increased by 4.5% over 2013 to $2.4 billion. Improvement in sales, and net hiring our client base, and stable client retention, resulted in accelerating quarterly sequential growth throughout the year from 1.6% in Q2 to 2.6% in Q3 to 4% in Q4. Even though we experienced weak unit growth early in the year, we effectively managed direct cost and operating expenses to produce better than expected bottom line results for the year.

We managed our operating costs to $12 million below our initial budget, with savings achieved in corporate headcount, marketing costs, and G&A cost. This is reflected in the 7% reduction in advertising costs, stock-based compensation remaining relatively flat, and G&A and depreciation costs up only about 1% over 2013.

As for our balance sheet and cash flow, we generated $65 million of free cash flow after $19 million of capital expenditures. Over $90 million was returned to shareholders in the form of dividends and share repurchases. Cash dividends included both our regular quarterly dividend, which was increased to $0.19 per share in May of 2014, and a $2 per share special dividend in December, those totaling $69.5 million. We repurchased 693,000 shares during the year at a cost of $21 million.

We ended the year with approximately $73 million of working capital, which is the appropriate way to evaluate our net cash available for corporate use. Also, we just recently renewed our line of credit for an additional five years and increased the availability to $125 million, providing further resources to invest in the growth of our business.

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

Thank you, Doug. Today I will cover three significant topics for Insperity investors. First, I will provide some color around the activities that drove our recent growth acceleration and our excellent results. Secondly, I will explain how these results validate our long-term strategic plan and set the stage for a very strong 2015. Finally, I will discuss how we expect to capitalize on the growing demand and our expanded target market for our services, as a result of the broader platform for growth which is now in place at Insperity.

Our recent results are driven by several elements of our sales system kicking into high gear. As I've stated before, the critical factors to grow this business include the number of trained business performance advisors and their sales efficiency, midmarket sales effectiveness, client retention, and the growth of our strategic business unit. All of these factors were strong in the last half of 2014 and contributed to our solid results. On our last conference call, I explained the significance in our business model of a successful year end transition in sales and client retention on our annual unit growth rate.

In each of the last two periods, 2012 to 2013 and 2013 to 2014, the size of the sales force and their sales efficiency were not enough to offset year-end client attrition. This lead to low single digit annual unit growth in the following year, in spite of solid growth from March through December of each year. This year-end transition is quite a different story, and the effect on our business model is evident. Since the beginning of the fourth quarter, through January, we experienced a 36% increase in paid worksite employees from sales, and a 17% improvement in client retention over the same period a year ago.

As expected, this combination has created a step up in worksite employees from our Q4 average, as opposed to the losses we experienced the last two years, which sets us up for double digit unit growth this year. The most important progress we made in Q4 was validating the sales motion of our broader platform for growth. We averaged 305 trained business performance advisors in the fourth quarter, and their sales efficiency was 1.11 sales per salesperson per month. Our sales organization was approximately the same size as last year, but with a year of seasoning and training under their belt, they produced a 47% increase in discovery calls, a 57% increase in business profiles, and a 30% increase in new clients.

In addition, we have seen a significant reduction in sales force turnover to a record low of 26%, which was another major objective of the new selling system. This improvement certainly validates we have the sales model ready to expand. We expect to increase the number of business performance advisors in 2015 at a steady pace, and we will open five new sales offices this year including one in Philadelphia and one in Seattle, both of which are new markets for the Company.

Midmarket sales effectiveness was also a positive part of the story last year, as we achieved 146% of budget which was an increase of 85% in sales over the prior year. This sales increase was particularly helpful this year to offset client terminations from what we call our success penalty, when we lose a client due to the sale of their company to a larger firm. In spite of this success penalty from a high level of M&A activity last year, our total client retention results were excellent. Historically, 10% to 12% of the worksite employee base terminate their contracts in the December to February year-end period. In the last two years we were close to 12%, and this year we expect to end up at 10% or better.

Another element of our growth strategy performing well is our strategic business units and the synergy from the complimentary business performance solutions we now offer. In addition to helping to sell more of our premium co-employment solutions throughout the year, we experienced 19% growth in the gross profit contribution from this portfolio in 2014. We are continuing to gain traction from this strategy, as evidenced by our attachment rates of additional business performance solutions to new workforce optimization customers. 40% of new workforce optimization clients sold in 2014, purchased one or more of our strategic business unit offerings at the time of their initial purchase.

Our current base of workforce optimization clients are also buying additional services from our expanded offerings, as the attachment rate on all workforce optimization clients served in 2014 exceeded 50% for the first time. In addition, last year we more than doubled the number of total customers brought into our ecosystem by selling other business performance solutions to customers that were not quite ready for a full co-employment solution. This accomplished another one of our goals of the strategy, leveraging more than 20,000 face-to-face meetings with business owners each year into a higher percentage of paying customers than may be upsold over time.

All of these growth initiatives combined to reestablish momentum at a solid pace. The one area of emphasis played a critical role in recent results and deserves some discussion. Last year we prioritized and incented a Company-wide effort to reduce operating expenses to right size the cost infrastructure and position the Company for better operating leverage going forward. As Doug mentioned, over the course of the year, we were successful in taking costs out of a variety of areas, and holding staffing levels below the Q4 unit growth rate. The combination of these lower costs and the growth acceleration, resulted in a return to EBITDA growth rates in Q4 that the business model is designed to produce.

So, starting the new year with a lower cost base and with a successful year-end transition behind us, the table is set for a very strong 2015. Based on our starting number of paid worksite employees in January, we expect our unit growth to be about 10% in the first quarter and 10% to 12% for the full year. At these unit growth rates, our business model has historically produced strong rates of growth in EBITDA and EPS. We are confident in our outlook for 2015 but even more importantly, we are encouraged about what these recent results mean for our long-term strategic plan.

We completed a dynamic transformation of our business from providing one product to a perfect fit customer at just the right time, to providing a wide array of business performance solutions to meet the needs of just about anyone we call on, whenever we call on them. This shift required an entirely new selling motion, integrating cross-selling and taking a different approach with our prospect. Making this change took more time and more iterations than we expected, but our recent results validate we have completed this transition and it's onto the basic blocking and tackling, and simply growing the sales force to drive results.

This new platform for growth is much larger and more diverse, and has much greater potential for the future. This platform includes multiple unique solutions for companies with over 100 employees, which essentially doubles our target market for potential worksite employees. This new platform includes a wide array of services that allows for our Customer for Life strategy, to meet customers where they are, and grow with them throughout the life cycle of their business. This new platform and sales system casts a much wider net to reach far more customers with multiple products and serve them for a much longer period of time.

Overall, our strategy was not a plan for incremental growth, but to establish a platform to become a much larger business in the future. This platform incorporates products, channels, and market segments we can continue to develop and penetrate for long-term, sustainable growth for many years to come. Our recent results validate the merits of this strategic plan. The model is now placed to add business performance advisors at a low double digit rate year after year and achieve consistent, predictable growth in units, EBITDA, and EPS.

The difference in this new model from the old is the unit growth rate premium we can achieve from midmarket sales and the additional EBITDA premium we expect from our strategic business units as they grow. The demand for our wide array of services is strong and building. The value of our premium co-employment service is evident. The breadth, depth, and level of customer care of our offerings continues to produce the highest gross profit for employee in the marketplace, which validates our premium service offerings.

As we look ahead, we also hope to benefit from some nice tailwinds we expect from the economy, health reform, and the Small Business Efficiency Act, which passed through Congress and was signed by the President near year end. Recent survey results show a decent level of optimism in the small to medium-sized business community, and the developing need for new employees. Overtime pay as a percentage of base pay was nearly 12%, which is historically high enough to encourage hiring of new employees.

The effective healthcare reform on businesses will be cascading down state by state and company by company over the next several years. At this point, the bubble of additional operating expense as a result of healthcare reform is behind us, and the opportunity to help businesses deal with this change is in front of us. We believe healthcare reform will continue to be a reason for customers to seek out Insperity, which will support our growth.

We also had a very welcome surprise in December as the Small Business Efficiency Act, which we have been trying to pass since 1994, finally became the law of the land. This law provides federal recognition of the PEO industry, and the co-employment relationship we helped to create in 1986. This bill also eliminates a double payment of taxes which occurs on any new clients coming into a PEO relationship at any time of the year other than January 1. We believe the passage of this bill will be significant with prospective clients and their advisors, and allow us to save tax expense, which translates into better pricing or margin.

In any event, the bill validates our industry and may lead to greater acceptance in the marketplace. In summary, we are excited about our recent results and what the underlying trend suggests for 2015 and the years ahead. We are executing well against our strategic plan, and our broad platform for growth and profitability is in place.

At this point, I would like to pass the call back to Doug to go over our guidance for 2015.

Thanks, Paul. In providing our 2015 guidance, now that our expanded business model is fully functioning and gaining momentum, we believe it's important for our investors to focus on the key metrics that reflect this new model. Therefore, we will focus our guidance on three annual metrics: average paid worksite employees, adjusted EBITDA, and adjusted EPS.

Beginning with the full year, as Paul just mentioned, we are forecasting a 10% to 12% increase in average paid worksite employees over 2014 resulting in a range of 144,000 to 146,400 average paid worksite employees for 2015. When combined with our expected client mix, pricing, direct cost trends, and operating expense leverage, we are forecasting an increase in adjusted EBITDA from $84 million in 2014 to a range of $101 million to $105 million, or a 20% to 25% increase over 2014. We define adjusted EBITDA by adding back stock-based compensation, any noncash impairment charges, and interest income.

We are forecasting 2015 adjusted EPS, which we define by adding back stock-based compensation and any noncash impairment charges, of a $1.82 to $1.92. This is an expected increase of 26% to 32% over 2014 adjusted EPS of $1.45 when adding back the $0.26 per share associated with the 2014 stock-based compensation. Previously, we have not presented adjusted EPS, including the add back for stock-based compensation, however, we plan to do so going forward given that this treatment is in line with how our peers present adjusted EPS, and we believe it is the appropriate metric for our business.

As for the first quarter, based largely upon the positive impact seen in January and early February from our successful year-end selling and renewal season, we are forecasting a 9.5% to 10% increase in average paid worksite employees over Q1 of 2014, resulting in a range of 138,300 to 138,900. We are forecasting a range of adjusted EBITDA of $33.5 million to $35 million for Q1, or a 37% to 44% increase over the first quarter of 2014. The Q1 adjusted EPS is projected in a range of $0.65 to $0.68. As some of you are aware, our Q1 results are typically higher than subsequent quarters, due to the seasonality in our gross profit, and in particular, our payroll tax and benefit areas. Recent favorable trends in these areas are contributing to our expectations of a 51% to 59% adjusted EPS growth over Q1 of 2014.

In conclusion, we are very encouraged by our recent results in our 2015 plan, and we look forward to updating you on our progress throughout the year. Now, at this time, I would like to open up the call for questions.

(Operator Instructions)

Our first question comes from the line of Tobey Sommer from SunTrust. Your line is open.

Thank you. I'm curious about the expandable -- more expanded addressable market that you have as a result of getting momentum across the traditional bundles and the new services. Are you going to be able to widen and amplify the target market into the blue and gray collar, or is this going to be a white collar focused portfolio of services?

Our target, Tobey, thanks for the question, will continue to be customers that have more successful businesses that have lower risks, which has always been the essence of our target market, companies that have a definitive getting better agenda and understand the role people play in the success of their business. But our expanded target really comes from solving the midmarket puzzle.

You know, as we've had in our history -- our original focus was the 100 employees and less when there is about, you know, 29 million employees that work in those businesses that range from, you know, basically 5 to 100 employees. When you get to that next group where we automatically have people grow into midmarket, now that we have a wide, you know, set of solutions for midmarket companies, both coemployment and traditional employment, it opens up that next group of 100 to 2500, maybe 5,000 employee groups, and there is another 30 million or so employees that work there.

So, we have literally doubled the size of our target market by solving for midmarket. And, you know, we are now in a situation where we have, I believe, the most well developed midmarket sales and service model for our services in the marketplace, way ahead on that. I think that's going to be quite a competitive advantage going forward.

Thanks, Paul. Can I ask you a question about the Small Business Efficiency Act? Does this specifically open up new states, that maybe you didn't like their state-specific rules prior and therefore were uncomfortable and maybe didn't think it was worth entering? And then maybe if you could comment about what it could mean for sequential growth in your quarters within the year and maybe eventually moderating the importance of the fourth quarter selling season. Thanks.

Thank you. Very good question. I do believe that just the stamp of approval and the clarity that comes out from having, you know, the Small Business Efficiency Act allow for PEOs to be certified, really plays a big role in prospects, potential clients, their advisors. I do think it extends to state regulators, et cetera. I don't expect that to automatically open up a market for us, but in the long term, this will be much better in continuing to develop the legal and regulatory infrastructure for our Company and our industry.

To your question about how it might affect growth going forward, the elimination of this -- of the tax-related double payment that applies to new customers that come on at any time of year other than January 1, I believe can play a factor over time in evening out our sales effort without quite as much focus on the year end. I think that is good for the model as well.

So, it's always been kind of a hurdle, especially as you get into the middle of the year when people recognize there was going to be a double payment of tax. Even though we absorb most of it, customers absorb part of it and a lot of customers would defer out to the year end. The rules and regs will go into place this summer for a January 1, 2016 start, and I do believe over time we'll benefit from a higher level of sales because of the validation, more even out sales throughout the year because of the elimination of the double tax and, like I mentioned in my script, either better margins or lower price for the customer because of the savings from the tax element.

Thank you very much.

Your next question comes from the line of Jim Macdonald, First Analysis. Your line is open.

Good morning, guys.

Good morning, Jim.

Good morning, Jim.

Yes, I got cut off a little bit. I might have missed this. Did you talk about what your ABU contribution was in the quarter and what your loss expectations are for the ABU for 2015?

We didn't go to that level of detail other than we talked about -- we had essentially a 19% growth in gross profit contributions from the portfolio over the course of last year. We do expect as part of the 2015 plan, to have a nice contribution really all the way up the EBITDA line from that portfolio growing, again, in that range and the fact that now there is leverage in those businesses as well.

So, that was kind of part of the game plan we've talked about for years, that there's a point at which it comes out of the water and you have, certainly, the recurring SBUs really starting to contribute at the EBITDA line, and even the more recently established SBUs starting to trend positively. So, that is definitely a part of the game plan and working as expected.

I presume there will still be some ABU loss but it shouldn't be much less than 2014, right?

Yes, exactly. Like I say, you got kind of two groups of companies that we look at, the recurring and the new. The new, where we experience the bulk of the loss, especially with investment in HCM, et cetera, those are turning the corner now. We will lose less, but the recurring SBUs are starting to gen. Five out of seven are making money already, and will do much better this coming year.

We're really not going to provide specifics on that because it's really the whole -- this new platform has a lot of different moving parts and, you know, our game plan is to manage -- with the right growth rate, manage to the right level of adjusted EBITDA, weighing all the factors in from our historical direct costs, and managing pricing, and the SBU portfolio and, of course, managing the operating expenses to get to the right adjusted EBITDA numbers.

Okay. And once again, I may have missed it, did you give kind of how you did on health cost side in this quarter and, you know, maybe also impact of the ACA on your sales in the quarter?

Yes. I mentioned a little bit -- I will pass it to Richard just to talk a little bit about the trends, et cetera, on direct cost but -- yes, we expect to have a tailwind from the ACA. What is really changed in that front, as you all know, at one point health reform was going to land on the marketplace almost all on one date, January 1, 2015.

But with all the changes that took place and the delays, it's now -- really healthcare reform is cascading down state-by-state, and literally company-by-company based on when their renewal dates are, et cetera. That is actually much better for us, because we couldn't get to the whole marketplace on one given date. We have seen where the ACA and its impact on individual companies is certainly another part of the discussion. It can be a door opener. We have made the significant investment, historically, to be ready to do everything that is required. And that investment is behind us.

So, the benefit of the investment, in terms of growth, adding new customers, is right in front of us. So, we believe it's part of the tailwind that will help us benefit from our new platform that is in place.

Yes, and Jim, we didn't specifically go into the details about benefits costs and all that stuff for the fourth quarter, and even in the going forward scenario, but the fact of the matter is that we actually had -- we had a negative trend in the fourth quarter, you know. All the things that we have been doing throughout 2014 to put us into a position as it relates to the changes that we made with our COBRA program, also our client renewals and certain targeting of customers that didn't seem to fit our profile anymore, all of those have been very successful in 2014.

And, so, as we go into 2015, we are seeing very nominal trends or increases in our healthcare costs, offset by a little bit of higher than normal workers compensation, and better than expected results because of unemployment taxes are going down in 2015 compared to 2014. So, it gives us a nice platform to help contribute to that adjusted EBITDA number that we are targeting.

Okay. Let me sneak one more in and I will get back in queue. Paul, you commented on your strength in the midmarket. Can you give us any more details how the midmarket did at year end and going into 2015?

Yes, we had a great year last year. I mentioned we had 85% increase year-over-year at midmarket sales, and we also did a really nice job on the retention side. The opportunity to offer multiple solutions to both current and new accounts, where customers self-select into whatever model they feel their need is at the time, that whole process is really, really gaining some traction.

And we are ready to expand our selling operation to where we can, you know, try to move that up this year. So, it was very good. And we already kind of had a full debrief on that and worked through our plan for improvements in that area for 2015 and we are very excited about where that segment is going.

Great, thanks very much.

Your next question comes from the line of Mark Marcon from R.W. Baird. Your line is open.

Good morning.

Morning.

I was wondering if you could talk about the gross profit for worksite employee trends that you expect for 2015, and also that was the big area of outperformance relative to the expectations for this past quarter. So, just wondered if you could also give some detail in terms of the key areas that ended up outperforming there relative to your prior expectations?

Yes. Yes, Mark, we, as I mentioned in -- on the last set of questions, you know, our expectations for gross profit in 2015 are going to be driven primarily by the positive outcome that we had in 2014 in our healthcare cost trends, which are the result of the COBRA administration changes that we made at the beginning of 2014 and some other pricing adjustments that we made.

We also expect to see some upside from our payroll tax cost center, and that will be offset primarily by small increase in our workers compensation costs for 2015. So, you know, when we think about gross profit, obviously, from one period to the next, we have the cyclicality that we've always experienced and that will be in there as usual, but in total it should be very comparable to prior years.

So, I'm sorry. Is the gross profit per worksite employee supposed to -- it's going to be up for this coming year, is it not?

I would say that with all the factors that we have at this stage of the ball game, you know, if it ends up being better than it was for 2014, it will be because of the upside that comes from better than expected experience throughout the year. But from one year to the next, we don't -- we never target much of a change from the end of one year to the beginning of the next year, unless we know that there' things that are going to be driving it like we did last year going into 2014.

So, the EBITDA guidance is -- that you gave, is not predicated on an improvement on gross profit for worksite employee?

Mark, historically, as you know, when we start a new year, we make fairly conservative assumptions around some of those insurance-based cost areas, and allow for claims activity to develop over the year and hopefully present us with some upside. But the model and the way it produces at the EBITDA line is driven by the growth and operating expense leverage. No, we are not incorporating into this plan some additional benefit to be better off at the gross profit line.

With regards to the past quarter, with the gross profit coming in better, the top two drivers were--?

Well, the gross profit coming in better, as Richard has mentioned, we had a better trend in the benefits area, similar to what he just said about 2015, better in the benefits area.

Payroll tax.

A little worse on the workers comp side because, you know, he has been talking about all year that that's been trending a little bit negatively. And then the payroll tax component and then, of course, there is a lot more contributors to the gross profit line now with the SBU portfolio and that continues to be a nice third contributor to the gross profit, and we expect that to continue.

How were the service fees?

Service fees were solid, just like we had forecasted.

Okay, great. Then with regards to the EBITDA guidance and the significant leverage there, what are the operating expense lines that we would expect to see decline over the coming year?

I think generally speaking, Mark, when we're looking at 10% to 12% unit growth, if you look at it historically, that's where we get the leverage on the operating side. We talked, I think before previously, about how our operating costs are structured, the variable versus the fixed, the variable being the growth in the BPAs, which Paul talked about, continuing to grow the BPAs going forward. Service personnel will have to grow somewhat in conjunction with the worksite employee growth, though we hope to get some leverage in that area, also.

The leverage is going to be on the G&A side, and I think that on the advertising side -- we are targeting more on the advertising side, moving away a little bit from the branding that we have done in the previous year, since that has been established at this point. So, a little bit of savings in that area. Overall, it's all about getting the leverage on those fixed costs, and we had that incorporated in the 2015 budget, as we would in the previous years when we were growing in these double digit unit growth ranges.

I would add to that, Mark, we had -- over the course of last year, we had quite an effort to trim costs out and get the starting point into a better relative position, you know, we kept our corporate staff growth down below what ultimately turned into about a 5% unit growth rate at the last quarter. You have already seen leverage in the quarter that becomes a starting point for the year. We expect to continue that emphasis as the year goes on, and this is how the model is supposed to work. I think this really portends some great things for us in the years to come.

Great. Thank you.

Your next question comes from the line of Michael Baker from Raymond James. Your line is open.

Thanks a lot. Richard, I was wondering if you could give us where cost trends ended up for 2014 and what you are looking for for 2015?

Yes, the cost trends were, let's see, they were about 2.5%, is what my recollection was, for the full year. And we actually don't see much difference going into 2014.

Okay. Then for Paul, the question that I had was, at one point you were considering whether or not you needed any spend to kind of -- depending upon how the public exchange or these exchange options to smaller employers around healthcare evolved. Now, you are indicating that that is behind you. I'm just trying to understand a little bit better where healthcare plays in the overall selection, and kind of why the change in stance at this point?

Really hasn't been a change in stance on that. We did invest on an infrastructure to support the insurance element for customers that may not want to be a part of our coemployment structure. We have a division. We have invested in it already. It's now baked in to handle, you know, other options that customers may want to consider.

Well, plus all the reporting. There is a whole slew of reporting that began January 1 of 2015, and we built the infrastructure and the technology in 2014 to be able to accommodate all of that reporting for our customers as they go into 2015 and beyond.

As a matter of fact, some of the reporting is on a pro-forma basis so we can give customers a heads up about some potential issues that they might be experiencing because of the size of their employee base. So, what we are referring to is that is all now baked into our cost structure going forward.

I think the other question that you had in there was about, you know, the potential of private exchanges, et cetera, as an avenue for customers and, of course, in the large business community, there has been good movement that direction. We haven't seen that kind of move down into our target very much. But we are prepared if it does.

I think the cost to integrate those type of solutions has come down as there are platforms out there to kind of rent, if you would. So, we are in good position. I think health reform is on people's minds. It gives us an opportunity to have a good fruitful discussion about the whole HR infrastructure that a company has in place, and should be a driver for us going forward.

And then in terms of -- do you see any potential opportunity this year given the dynamics of change that you have already spoken about, in terms of if the Supreme Court strikes down the federal subsidies and creates some uncertainty?

Well, our whole business is predicated on, you know, the growth in government regulation and legislation, and companies having to try to deal with things as they change, and so we always have mixed emotions when they get in the middle of it and make changes, but we are prepared. We got a group of people that deal with that every day and make sure we are ready to handle such things. Any kind of disruptive event in the marketplace like that presents an opportunity and we will be ready for it.

Okay. In terms of your new sales on the PEO side this year compared to last year, can you give us a sense of the average change in size of those businesses if you have seen any growing of the size, so to speak?

Yes, our average account size has been trending larger and I think that also is serendipitous result of providing a wide array of business performance solutions that meet customers where they are and can be bundled together with our coemployment solution. So, the whole array of services is more attractive to larger customers and -- so, we have seen some move up on that front. We expect that to continue.

Then just finally, if you could give us a sense -- because there have been some questions, and I understand you may not have what we'll call a first derivative link to it, but obviously, given exposure in Texas, any color on what you are seeing ground level there would be helpful.

Well, are you referring to the --

Oil and gas.

Oil prices, et cetera?

Yes.

No. If you recall, our target market is in customers that have a lower employment risk profile. So far, most of the effect from lower oil prices is affecting what I call over the whole, rigs shutting down, scaling back. Those are oil field service companies, not a target for us. We haven't seen any effect from that as a result.

All right. Thank you very much.

Your next question comes from the line of Jeff Martin, ROTH Capital, your line is open.

Thanks, hi guys, congratulations on a successful transition this year. It's good to see.

Thank you.

Thanks.

This question is for Doug. I noticed on the balance sheet there was a shift in workers compensation accruals from short-term liabilities to long-term liabilities. I was hoping to get some insight into the mechanics of that and if there I is any P&L impact.

No P&L impact at all. It's just an estimate of those claims that are expected to be paid within one year and those beyond one year. So, it's a balance sheet reclass only.

You look at the restricted shares -- I mean restricted cash, up in the assets versus the short-term liability, pretty much offset, and then workers comp deposits are the long-term asset, which offset, to a large extent, the workers comp long-term liability. Purely a balance sheet reclass.

Does the shift from short term to long term imply that you are expecting a longer duration, on average, for a claim?

I wouldn't say there is any expected, significant shift. Just an estimate, true enough of an estimate from year-to-year on short term versus long term. Hasn't been any material shift in the program itself or -- the program is still operating effectively, and the balance sheet shows that. Our funding levels are more than sufficient and conservative relative to the liabilities on the balance sheet.

Okay. Paul, you mentioned hiring more business performance advisors. You hired a significant percentage increase about two years ago. What kind of ramp are you expecting to add and is it going to be of similar size?

What we expect to do this year is ramp up to about 400 hired business performance advisors by year end. Pretty even over the course of the year. The exciting news on that front is our turnover rate going down to 26%, which we were hopeful that having a wider ray of solutions and selling more things more often would be a more positive environment, and we would be able to retain business performance advisors more effectively. So far, that's -- nice early returns on that front.

I think what will be the biggest difference this year in growing the base of advisors is the ramp up in their effectiveness, because we've learned so much in this last iteration. We are really excited about being able now to ramp them up on a pace that, you know, makes them contribute quite a bit earlier than maybe this last group that you were referring to, when we ramped it up quite a bit a couple years ago. So again, improved that training and direct district manager training, which affects the management of those new and learning business performance advisors, so we believe we have got that in shape now to where it becomes the point of the shift for our growth over the long term.

Great. Doug, I missed the Q1 guidance that you gave. Could you provide that again real quick?

Yes. So, on the units we're forecasting 9.5% to 10% growth over Q1 of 2014, which gets you to a range of 138,300 to 138,900. Adjusted EBITDA between $33.5 million to $35 million or 37% to 44% increase over Q1 of 2014. And Q1 adjusted EPS in the range of $0.65 to $0.68. And we compared apples and apples to the adjusted EPS in Q1 of the prior year, that's about a 51% to 59% increase.

Great. What kind of tax rate should we assume for the full year?

I think similar. Going into the year, similar to 2014.

Okay. Great. I will see you guys in March.

Sounds good.

Looking forward to it.

That is all the time we have for today. I would now like to turn our call back over to Mr. Sarvadi for closing remarks.

Once again, thank you all for your interest and we look forward to -- we are going to be out on the road quite a bit this spring to talk with investors. We hope to see you, and look forward to updating our results as we go throughout the year. Thanks again for participating today.

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