Insperity Inc (NSP) 2015 Q3 法說會逐字稿

Good morning. My name is Carol and I will be your conference operator today. I would like to welcome everyone to the Insperity third-quarter 2015 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 the call over to Douglas Sharp. Mr. Sharp, please go ahead.

Thank you. We appreciate you joining us this morning. Let me begin by outlining our plan for this morning's call. First, I'm going to discuss the details of our third-quarter financial results. Paul will then comment on our third-quarter achievements and our plans for the remainder of the year. I will return to provide our financial guidance for the fourth quarter. We will then end the call with a question-and-answer session, where Paul, Richard, and I will be available.

Before we begin, I would like to remind you that Mr. Sarvadi, Mr. Rawson, or myself may make forward-looking statements during today's call, which are subject to risks, uncertainties, and assumptions. In addition, some of our discussion may include non-GAAP financial measures. For a more detailed discussion of the risks and uncertainties that could cause actual results to differ materially from any forward-looking statements, and reconciliations of non-GAAP financial measures, please see the Company's public filings, including the Form 8-K filed today, which are available on our website.

Let me begin today's call by discussing our third-quarter results, which, similar to recent quarters, included an acceleration in worksite employee growth, and the effective management of our direct cost programs and operating costs to generate significant bottom-line growth. As for our bottom-line growth, adjusted EPS increased 46% over Q3 of 2014 to $0.57 per share, while adjusted EBITDA increased 25% to $28.3 million.

Revenue increased 12% over Q3 of 2014 to $626 million on a continued acceleration in paid worksite employees. Average paid worksite employees increased 13.3% in Q3, off of the 9% and 12% year-over-year growth generated in the previous two quarters. Client retention remains strong, again averaging over 99% for the quarter.

Net hiring in our client base was slightly positive and included the typical seasonality associated with education-related clients and part-time summer help. And sales production and activity continue to track well as we entered the fall selling season. Another driver to our improved operating results is the continued effective management of our direct cost programs.

Benefit costs per covered employee were managed to our expected level, at just a 1.9% increase over Q3 of 2014, while workers' compensation costs and payroll taxes were favorable. Benefit costs in Q3 of the prior year included a $6.4 million credit related to the favorable run-off of healthcare claims, and therefore impacted the year-over-year gross profit comparison. Excluding this credit, gross profit increased 13%, in line with the Q3 growth in worksite employees.

A reported increase in gross profit of 6%, combined with our continued focus on operating expense management, and it resulted in the Q3 increase in adjusted EBITDA of 25%. Adjusted operating expenses increased by less than 1% over Q3 of 2014 due to savings in various areas, including corporate headcount, marketing costs, and G&A costs. While we grew our sales force by 14% coming into this year's fall selling season, other corporate headcount remained flat, demonstrating the leverage in our service and support areas.

Marketing costs declined by 27%, as we continue to refine the spend and timing of our lead generation efforts. A continued focus on G&A costs throughout the Company resulted in a decrease of almost 5%. The effectiveness of our operating expense management is further demonstrated by a decline in operating expense per employee per month, from $218 in Q3 of 2014, to $194 in Q3 of this year.

As for our balance sheet and cash flow, we generated approximately $24 million of free cash flow during the quarter, defined as adjusted EBITDA of $28 million, less $4 million of capital expenditures. Q3 cash outlays included the repurchase of 535,000 shares of stock at a cost of $26 million, and cash dividends totalling $5 million. We have now repurchased 1.2 million shares since the beginning of the year, and when combined with cash dividends, have returned $75 million to shareholders. While we have recently been more aggressive in our share buybacks, our strong cash flow has resulted in an increase in working capital of $3 million since December 31, 2014 to $76 million.

So recapping our year-to-date operating results, gross profit has increased 13% on an 11% increase in average paid worksite employees. Effectively managing adjusted operating expenses to just a 3% increase has generated adjusted EBITDA of $93 million, a 52% increase over the 2014 period, and 15% above our initial 2015 guidance. Adjusted earnings per share have totaled $1.86 for the nine months, an 81% increase over 2014, and 25% above our initial guidance. On this positive note, I would like to turn the call over to Paul.

Thank you, Doug. Today my comments will focus on three important areas for investors. First, I'll address recent results and the stage that's set for our fall selling and retention season; second, I'll discuss our competitive position and our outlook for the year-end transition ahead; and lastly, I'll explain the factors driving our confidence we have in our long-term strategy for growth and profitability.

Our strong recent results reflect solid execution of our plan to accelerate growth throughout 2015, while holding the line on operating cost. The resulting operating leverage is evident in our year-to-date adjusted EBITDA and EPS growth of 52% and 81%, respectively. We believe that our dynamic business model, which is built on a wide platform of business performance solutions, targeting an expanded addressable market, puts Insperity in a position to grow profitably for many years to come.

The drivers of this growth in profitability are clear in the Q3 results we are reporting today. Our sales and marketing engine is revving up and performing well. Core Workforce Optimization sales to accounts with less than 150 worksite employees increased 18% over Q3 of last year on a 14% increase in trained Business Performance Advisors.

Year-to-date, core Workforce Optimization sales were 102% of budget, up 28% over 2014, driven by a 20% improvement in sales efficiency, reflecting a successful ramp-up in the sales force from 287 trained BPAs to 328 in Q3. Total BPAs hired reached 388 by the end of Q3, and we are on track for our goal of 400 by year-end. This will put us in a position for a nice step-up in trained BPAs in the first and second quarter next year to drive future growth.

Core sales activity has ramped up on plan in September, as we launched the fall campaign. Discovery calls, which are face-to-face meetings with qualified prospects, and business profiles, which are opportunities to bid our flagship Workforce Optimization solution, have increased accordingly. MidMarket sales, which refer to accounts above 150 employees, are also on track for the year at 114% of budget, including the sale of an account with more than 2,000 employees, which was sold in Q2 and is scheduled to roll into the paid worksite employee count in December.

This large client, while adding to the worksite employee count, will also drag on gross profit in the payroll tax area in Q4 due to the double taxation which occurs on new accounts. As previously discussed, the Small Business Efficiency Act was passed last year to address this issue, among others, however, this new law is not yet in effect. More importantly, the timing of the enrollment of this new client before year-end has a substantial impact on the likelihood of a successful year-end transition, and therefore, next year's starting point in paid worksite employees, which is a key driver to our 2016 growth rate.

The recent quarter also included strong client retention results, continuing the pattern we have seen over the last several quarters. Year-to-date attrition rate of worksite employees from terminating accounts is 22% lower than at this point in 2014. The combination of a growing core sales force with improving sales efficiency, increased sales activity, and historically high retention rates provided a strong start to our fall selling and retention campaign.

Normally, this time of year, we address the risk associated with the churn of business on January 1 caused by the high number of client renewals due at that time and the volume of new accounts sold to replace any terminating clients. Last year, we executed extremely well over this period in sales and retention, and essentially sold enough new accounts to replace the terminating accounts. This allowed us to start 2015 with double-digit unit growth well in hand, setting up a very strong year.

This year, we are seeing several factors indicating our growth risk over the year-end transition is substantially lower than in previous years. While we are still expecting a level of churn, which can affect both growth and pricing, our confidence level is high and for good reasons. One factor pointing toward a successful year-end transition is the strong demand for our services as the implementation of the Affordable Care Act continues to cascade down state-by-state and carrier-by-carrier to the small business community. Compliance issues and complicated reporting requirements are taking center stage, causing some justifiable consternation among business owners, CEOs, and CFOs. Our investment in supporting our clients in this area allows us to bring a robust solution to help meet their needs and some peace of mind to go with it.

Second, our competitive position is very strong in terms of products and services available, our ability to customize the solution for each client company, and the stability of our direct cost structure. Our Business Performance Advisors are continuing to attach other business performance solutions to Workforce Optimization sales and sell them on a standalone basis. Year-to-date sales of these additional offerings have increased 40% over last year. Perhaps one of the most important competitive advantages we have is the stability that we have experienced in our direct costs, including payroll taxes, workers' compensation, and healthcare benefits.

Our long-term commitment and investment in the infrastructure to effectively manage these costs have contributed to favorable trends and a stable cost structure. This has been a positive for recent sales and retention results and should continue to support our sales and retention efforts during this fall campaign. In fact, one of the most significant drivers to our confidence level surrounding this year-end is the pipeline of accounts already sold and in line to be enrolled and paid. Compared to last year at this early stage in the process, we have more than doubled the worksite employees in this pipeline, without including the large account I referred to earlier. The additional 2,000 employees expected to be paid in December from this one client adds considerable confidence in our growth rate for 2016.

At this point, the likelihood of continuing double-digit unit growth into next year is relatively high compared to previous years. Our outlook for growth gross profit in 2016 is still dependent on the pricing and direct cost trends which will be more apparent in February. However, we've also clearly demonstrated the operating leverage in our business model at these growth rates, which provides additional confidence looking ahead to next year. We have been in a continuous improvement process to optimize our cost structure to ensure this strong operating leverage continues.

So, we believe that our long-term strategy for growth and profitability is in place and that we are in a strong position to drive this strategy forward. Our confidence in this plan is based on our proven capabilities and the success we've had in reducing an otherwise complex business model into three clearly defined drivers. We have effective strategies, defined plans, and specific tactics in place to drive double-digit unit growth, optimize gross profit, and generate operating leverage into the future.

Confidence in our long-term growth plan comes from our ability to continue to drive unit growth in our core Workforce Optimization business by growing the number of BPAs and ramping up their sales efficiency just like we have done this year. We also have the potential to further accelerate our growth rate through our unique MidMarket co-employment and traditional employment offerings that are gaining traction in the marketplace and have greatly expanded our addressable market. We plan to continue to rely on our proven capability to manage pricing and costs of payroll taxes, workers' compensation, and benefits critical to our co-employment offerings, which provides a substantial competitive advantage.

Another factor driving our confidence in our ability to optimize gross profit is the steady increase in gross profit contribution we have seen from the wide array of business performance solutions from our strategic business units. The addition of value-added solutions attached to Workforce Optimization or on a stand-alone basis, provides a powerful customization capability and a strategic third contributor to gross profit.

The third element of our long-term strategic plan is to generate sustainable operating leverage, while balancing the necessary investments in growth and competitiveness. Once again, this year's results to date demonstrate our capability to meet these objectives. Our corporate culture and the continuous improvement mindset of our highly qualified dedicated staff gives Insperity an impressive execution capability to meet specific operational goals.

So, through a very systematic and strategic approach, we have reduced an otherwise complex risk-based business model into three clearly defined drivers of long-term success. We believe this has resulted in an improved capability and a unique opportunity to drive long-term shareholder value for many years to come. At this point, I would like to pass the call back to Doug.

Thanks, Paul. Before we open up the call for questions, I would like to provide our financial guidance for the fourth quarter. This guidance incorporates our recent success in returning to double-digit unit growth, effectively managing our direct cost programs, executing on our operating cost control measures, and aligning our operating structure to leverage off of future growth.

As for worksite employee growth, we are encouraged by the improvement in sales and client retention metrics in the early stages of the fall sales campaign. However, such activity typically impacts our January starting point of paid worksite employees rather than Q4. Therefore, we are forecasting a sequential increase in average paid worksite employees in Q4 over Q3 of approximately 3%, or a year-over-year average range of 12% to 12.5%.

Our Q4 guidance would result in approximately 12% growth in worksite employees for the full year, which is consistent with our previous guidance and at the high end of our initial 2015 range. We are forecasting Q4 adjusted EBITDA of $21 million to $22 million, which is down sequentially from Q3 due to the typical seasonality surrounding high deductible health plans and their impact on our gross profit.

This Q4 guidance combined with the $93 million generated through the third quarter would result in full-year EBITDA of $114 million to $115 million. This is within our previous guidance and a significant improvement over our initial 2015 guidance of $101 million to $105 million, and 2014 adjusted EBITDA of $84 million.

Fourth-quarter adjusted EPS is projected in a range of $0.40 to $0.42. When combined with our year-to-date results, 2015 full-year adjusted EPS is projected in a range of $2.26 to $2.28. This is also consistent with our previous guidance and an increase of 57% to 58% over 2014.

As Paul mentioned, we are now focused on closing out a successful fall sales campaign and year-end renewal period, such that an improvement in our starting point for unit growth combined with lower operating expense levels exiting 2015 will point to strong operating results in 2016. We will be providing detailed 2016 guidance in our next earnings call and look forward to talking to you then.

Now at this time, I would like to open up the call for questions.

(Operator Instructions)

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

(Technical difficulty) -- in for Tobey. What was the growth in mark-ups among existing customers and new customers? Thank you.

I'm sorry. What was your question, please? It was garbled. We couldn't quite hear it.

Sorry. What was the growth in mark-ups among existing customers and new customers?

I'm sorry. I still didn't get. The growth --

The growth in mark-ups among existing customers and new customers?

Well, we usually don't report any growth of mark-up, by any breakdown beneath that, but our pricing was relatively in line with what our expectations were, and as growth, as we described, has been accelerating throughout the year, and so things are on track in that front.

Okay. And what was job growth among existing customers and did it contribute much to the worksite employees growth?

What we saw in the customer base during this quarter was somewhat consistent with what you've probably heard in the marketplace in general. Things weakened as the quarter progressed, and in total, it was a slight tailwind, not quite as much as we had expected when the quarter started, but we're always happy when it's a -- even if it's just a slight tailwind or breakeven. So that's what we saw during the quarter and what we've baked in for the balance of the year.

Okay. And with all that you have learned over the last few years, do you have any new thinking about the liability of managing a blue or gray-color brand side-by-side to business focused on white collar workers?

In our particular model, the actual customer target, we've doubled the addressable market within the last couple years by expanding our MidMarket offerings. So we felt like that was a much stronger way to expand the addressable market than it would be to go into other types of customers where the risk is much higher.

Okay. Thank you very much.

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

Good morning, guys.

Good morning, Jim.

Thanks for the commentary on the gross profit related to the health difference last year. Any other big changes there? Perhaps the impact of more MidMarket clients?

Yes, Jim. As far as what you can see going forward, from the MidMarket perspective, we're seeing their pricing hold in terms of how we price the MidMarket customers. Our mix of business going from Workforce Optimization to Workforce Synchronization, we have about the same level as we had last quarter. So you see obviously a little bit of dampening of our allocations for that group.

But the big thing that you will see in the fourth quarter is similar to what we experienced in the third quarter, and that is the last two quarters of 2014, we had a significantly lower benefits cost than we have had in a long time. We know the reasons that those took place, but when we start to compare our forecast for the fourth quarter of 2015 compared to the forecast of 2014 or the actual cost, you're going to see quite a difference there because it was low in the fourth quarter of 2014, as well. So that would be the only thing that I would say is going to be different that you'll see when we report next quarter.

Okay. And maybe you could talk a little bit more about the ACA. Is that -- are you able to get some additional pricing and maybe any commentary on whether it's significant for the ACA compliance out there in the market this year?

There is no question that we have all seen a significant increase in the demand for the service because of the complexity associated with the Affordable Care Act reporting that's going to hit all employers in January of 2016. From a pricing perspective, we've seen what I would call a stable pricing for this whole year, as we've talked about how that's going to affect employers for next year.

And so what we will see going forward is, as employers see the complexity next year of what they had to report on for 2015, we might see some upside next year. But because they haven't seen the complexity yet (laughter), they are not willing to pay for it quite yet.

Jim, I would just add to that we've got such a real strong low trend in many of our direct costs that we do expect that to translate into very stable and favorable pricing over the course of this fall selling and retention season. And usually in those kind of periods, we are able to build our mark-up for HR services a little more strongly than you can in other periods, but we haven't really baked any of that in, but that will certainly be our objective.

Okay. And just one more philosophical question, you had strong share repurchases this year -- or this quarter. What are your thoughts on repurchases going forward?

Well, yes, we have had. This is a very strong year on that front. Really -- is able -- the fact that our working capital, actual available cash, has gone up in spite of that this year gives you the feeling for the strong cash flow nature of our business. We will continue to look very favorably at share buybacks as an important component of our thoughts about improving return to shareholders.

Great, thanks.

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

Good morning, and thanks for taking my question. I apologize, but I got connected to the call a little bit late. Can you just repeat what specifically happened on the direct cost for this quarter relative to a year ago and how we should think about that going forward?

Mark, as far as the direct costs in Q3, they really came in -- medical costs came in right on target. We talked about the fact it was only a year-over-year increase of about 1.9%, so they continued to trend favorably. Then on the workers' comp payroll tax side of things, those came in a little bit favorable relative to our forecast.

We're aware of the fact we're not giving detailed guidance at that level, so we wanted to give you a little more flavor there, but if you look at the reported gross profit number, it was about 6% over Q3 of 2014. But as you probably know, if you remember the last half of 2014, we experienced very unusually low healthcare costs into Q4 of last year.

We, in fact, experienced a negative trend in healthcare costs, which had never been seen in quite some time. And others in the insurance industry also experienced that phenomenon. So one thing we pointed out in my script was the fact that you're doing a year-over-year comparison into Q3 of last year, we actually had a $6.4 million-reserve adjustment for the claim run-off -- more favorable claim run-off, and so you take that reserve adjustment, exclude that, you would be at gross profit increase consistent with your unit growth for Q3.

Richard just mentioned the fact that it was the whole latter half of the year. So Q4, we experienced a similar phenomenon where we had a reserve adjustment a little bit higher than the $6 million in Q4 and so that's going to affect the comparables Q4 this year over Q4 last year. But all things equal, our direct cost programs are being managed very well to our expectations and we've done a good job this year managing those programs.

Yes, Mark, I was going to say that part of the decline in our cost last year was because COBRA participation has continued to dwindle as the effect of the public exchanges has come into existence. That was a targeted game plan throughout 2014 and has continued into 2015. So part of our trend in healthcare costs is because of how we manage that whole part of our business, number one.

And number two, it's about the pricing for new and renewing customers. We know the kind of -- the customers that we want, we know the profile that we want, and so we become very attractive to those particular groups. That's what helps keep the cost side of healthcare down, which then translates into favorable pricing for our customers when they come up for renewal. So our revenue, when people look at our revenue, they are really looking at the wrong thing because it really is a meaningless number.

Well, it's affected by the mix of our business, which products people are choosing, et cetera. But the real message in our gross profit area, in my view, is the stability of those programs and how that translates into favorable pricing and a favorable competitive position in the marketplace. We're very excited about that for this fall and we think that bodes well for -- as we go into this year-end transition.

That's great. And can you talk a little bit about just the ACA and the potential tailwind you might get there. What percentage of your clients that are above 50 employees are actually signing up for your ACA program and what could that look like the following year?

I tell you that the ACA is definitely helping. I mentioned it in my script, that the reporting and the complexity of that and other compliance issues are top-of-mind and getting a lot of play. You're also going to see significant cost increases in the marketplace in the exchanges and other things. It's going to get a lot of publicity going forward through this primary selling season for us.

All of that feeds well into our ability to get in and have productive conversations with business owners, CEOs, and CFOs. We look at that as a positive. We know what our results are. Once we get in front of a customer, they are very strong, and so anything that helps us have a good reason to get in the door is certainly favorable to the business.

So as we expected for a long time, it took a little longer than we thought, but as we expected, the implementation of the Affordable Care Act as it cascades down state-by-state and carrier-by-carrier to the small, medium-size business community is helping us get in the door.

Any feel for what percentage of your existing client base has already signed up for your processing of that?

Oh, yes.

Every one of them.

They don't have to sign up.

No. It's automatic. They are forced to do the reporting. And so we have a whole group of customers that we have already been communicating with for about 60 days. And it's near 1,000 customers.

Great.

That are going to have to do this reporting. So we're all set to go. We're just waiting for January 1, 2016 so we can start processing the data.

And that's when you recognize the revenue?

Yes, that's correct. And also, at that point we'll also see continuing demand to solve the problem because the problem is going to land on the doorstep of all these customers big time in January.

Great. If I could ask one last question, just on the big client signing, can you give us a little more color in terms of what they were doing before they decided to sign up with you and how has their pricing compared to an average mid-sized client? Sounds like it's a little bit larger than the usual?

We have continued to see, on the heels of introducing a broader array of MidMarket solutions, we've continued to see an increase in accounts that -- in the MidMarket space, and an increase in the size of accounts that we really are a good fit for. In this particular case, we sold the account in the second quarter.

They do take longer to put into place and bring online, but this one happens to be coming on at very good time of year since they will enroll in December. It gives us a lot of confidence around our year-end transition, and more so than typically in some of our growth rate for next year. We feel more confident about where we are today than we typically do this time of year.

But it's a great account, private equity-backed, which also is a great channel for us for MidMarket accounts, one that we're working diligently on to make more of a streamlined channel and provide services to private equity-backed firms. So it's a great account that we'll really be able to leverage into other accounts of that size going forward.

Good to hear. Thank you.

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

Thanks. Richard, I was wondering if you could give us some color on what you're seeing on the workers' comp side. That would be helpful. Then I have another question on a different topic.

Sure. On the workers' comp front, we are seeing, I would say, stable pricing. The marketplace has not increased -- the insurance carriers are where they have been for a while. On our cost side, we had about 18 months or so ago, we had several claims, just random claims, that were a lot more abnormal than what our typical 20-year trend has been.

So that drove up our cost a little bit over the last two quarters. However, we have seen the incidence rate and the severity rate has trended right back in line. As a matter of fact, it's actually lower than the growth rate of worksite employees that produce those claims. So next year we could have a little bit more of an upside than we do right now.

That's helpful color. And then I was wondering if maybe we could get a little bit more color around the operating expense initiatives. Obviously gave us some sense of where those line items are having an impact. Can up give us some indication as to how much is left on those fronts?

Yes, thank you, Michael. We have been diligent, and I mentioned programs that we've had in place, continuous improvement programs, on the cost side. And as Doug pointed out in his script, we've held our service and support staff fairly in line with a period of a year ago, even though we've had over 13% unit growth this year. So you can really clearly see the leverage in the operating model.

On the cost side for this year, we've actually grown the BPA significantly. In fact, as I mentioned in the call -- in the prepared remarks, we were at 388 coming out of the third quarter in total hired Business Performance Advisors. So that's been the significant area.

So for our costs to be coming in this favorable, that's really the result of a lot of hard work and efficiency gain in the service side and the support side of the business. As we go into next year -- having a lower base allows you to go into next year and just have your increases in targeted areas for specific purposes and should be able to continue to see some strong operating leverage on the kind of growth rates we're experiencing.

On the marketing/advertising line, is there some level we should expect that to balance out at?

Yes, different times and different periods, you make your investments in different ways, but again, we'll be targeted in that respect and it will revolve around how much activity you want to produce for the number of BPAs that you have. And a lot of the big cost drivers are pretty much in place and so we don't anticipate any dramatic increase in the marketing side of the business.

We do expect marketing expenses to increase in raw pure dollars because you're increasing the number of BPAs and you want to increase the lead production to support those. But again, we think there's still plenty of operating leverage, even on that side of the business.

I appreciate the color. Thanks.

Our final question today comes from the line of Jeff Martin from Roth Capital Partner. Your line is open.

Thanks. Good morning, guys.

Good morning, Jeff.

It would be helpful if we could get a rough estimate of the impact of this single MidMarket client on gross profit in the fourth quarter, or gross profit per WSE given the double taxation on payroll taxes, if you don't mind?

It's--

It's only going to be one month out of three.

Yes.

And I can't remember the calculation, but it's not going to be as dramatic as you might think. It just is going to squeeze that surplus a little bit. But don't get too concerned. It's more important about 2016.

Okay. That's helpful. And then could you speak to Business Performance Advisor retention and how that's tracking, both versus historical numbers and your internal expectations?

Sure. Historically, if you go back -- we've been around now for -- we'll be coming up on our 30th anniversary next year. It's been normal to be around the mid-30s%, low 30%s in good times, a little bit above the mid-30%s in times that we're not so good on our attrition rate, or turnover rate, of BPAs or sales staff.

Last year, we reported we were closer to the 25% range, which is one of the main goals of our whole new Insperity Selling System, because we make a heavy investment into our Business Performance Advisors and we want them to have successful careers. And obviously, the more people you can move through those phases of increasing their tenure and productivity, the effect on the business model is huge.

So this year, once again, we're continuing to track favorably below that 30% number. I'm not sure we're going to make the 25% again, but we're in a definitely favorable range compared to where we have there and it looks like we've made some progress on a systemic change. So we're -- that's one of the things that gives us tremendous confidence in the future, as I mentioned in my remarks, about being able to grow the number of advisors and reach targeted sales efficiency metrics.

That's the front of the ship. That's what the whole growth plan is about and that's why we guide to number of worksite employees and then all the way down to the adjusted EBITDA line because if you can get that growth rate right, there's a lot of things that -- moving parts, if you will, in a risk-based business model like this. We've got a lot of years of experience in managing the direct costs and the pricing.

Of course, as you can see from recent results, we're very effective at calibrating our operating expense to make sure we manage to a nice growth in adjusted EBITDA. So that's the way the model works. We've worked diligently over the last several years to improve our capability to do that and to increase the likelihood of doing that over an extended period and we believe we've accomplished that.

And when you add in--

Go ahead.

When you add in the fact that you've got this ongoing continuation of -- from our strategic business units that are consistently adding to the gross profit because of customers are wanting to buy more than just Workforce Optimization, that's a real plus, as well.

That was actually my next question. Can you quantify the contribution of those strategic business units to gross profit per worksite employee? Is it continuing to be profitable on an overall basis and are you seeing a leverage in that?

Yes, it's been increasing. We're up to around $18 or so for gross profit per employee. That's continued to meter up over the past several years, and really the beauty of it is, there's not really a ceiling on it. You've just got to keep working with customers to increase the attachment rates and we think there's a very natural progression there.

At the adjusted EBITDA line, the recurring SBUs that were started prior to 2012 are definitely adding to adjusted EBITDA. The final few that we added, the payroll business and HCM, improved tremendously this year or are expected to by the end of the year, however, are still not at where they are contributing. But we should be seeing that crossing that line to where we'll start talking about the contribution both at the gross profit and at the operating or adjusted EBITDA line.

Okay. And then what's the conversion ratio like on customers that you initially bring onto the SBU platform into a full Workforce Optimization client?

That varies a lot by -- depends how they come on. We're still working on that. There's a migration path there, depending -- lot of our customers, when they come on with our recruiting, which is more of a consultative business model, those fairly rapidly turn into Workforce Optimization customers. Some of them that come on just maybe a SaaS technology solution, it's harder to build that relationship over time, takes longer.

So we don't have a lot of good numbers on that yet. But we know that we've been able to cast a much wider net, so that when our Business Performance Advisors -- we're going to see 25,000 business owners face-to-face again this year. And we are able to convert more of them to customers than we have in the past, in fact, nearly double the number of customers.

One-half of them on Workforce Optimization and another -- almost an equal number on some -- that have come into the ecosystem somehow on one product or another. Those customers become good prospects on a going-forward basis and that's part of the plan. And we're happy with where we are on that front.

Thanks for taking my questions and good luck with the fall sales campaign.

Thanks.

Thank you, Jeff.

And at this time, I would like to turn the call back over to Mr. Sarvadi for closing remarks.

Once again, we would like to express our appreciation for everybody who joined the call today. We look forward to completing our year-end transition with a successful fall campaign and getting off to a good start for 2016. We'll provide our guidance for 2016 on our next call. Thank you very much.

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