Insperity Inc (NSP) 2016 Q4 法說會逐字稿

Good morning. My name is Christina and I will be your conference operator today. I would like to welcome everyone to the Insperity fourth-quarter 2016 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 plans for this morning's call.

First, I'm going to discuss the details of our fourth-quarter and full-year 2016 financial results. Paul will then recap the 2016 year and discuss the major initiatives of our 2017 plan. I will return to provide our financial guidance for the first quarter and full year 2017. We will then end the call with a question-and-answer session where Paul, Richard, and I will be available.

Now before we began 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.

Now let me begin today's call by discussing our fourth-quarter results which included strong bottom-line results, driven by continued double-digit worksite employee growth, effective management of our direct cost programs, and operating leverage.

Adjusted EPS increased 76% over Q4 of 2015 to $0.58 and adjusted EBITDA increased 37% to $23 million. Our fourth-quarter results were driven by a 13% increase in average paid worksite employees over Q4 of 2015.

Client retention remained strong, averaging -- again averaging over 99% for the quarter. Net hiring by the client base continued to be weak compared to our historical levels and, in fact, was overall a negative for the quarter.

Gross profit increased by 14% over Q4 of 2015 with both benefit and workers' compensation costs managed to favorable trends. Q4 adjusted operating expenses increased by 10% and included our continued investment in growth with an 11% increase in the number of Business Performance Advisors. We continued to produce operating leverage in various areas of the business, as demonstrated by a decrease in adjusted operating expense per employee per month from $191 in Q4 of 2015 to $186 in Q4 of this year.

Our Q4 effective income tax rate was 33.5%, which was lower than expected, due primarily to credits associated with software development activity. The full-year 2016 effective income tax rate came in at 37%. During the quarter, we repurchased approximately 253,000 shares of our stock at a cost of $17.7 million, in addition to our ongoing dividend program as we continue to focus on return to our shareholders.

Now before I turn the call over to Paul, let me summarize our record-high full-year 2016 operating results. Adjusted EPS increased 64% to $3.59 and adjusted EBITDA increased 28% over 2015 to $141 million.

Average paid worksite employees increased 14% over 2015, with client retention reaching a new historical high of 86%. Gross profit increased 12% as we effectively managed changes in client mix, pricing, and direct cost trends, while adjusted operating expenses increased only 7% and declined on a per-worksite-employee per-month basis from $206 in 2015 to $193 in 2016. Putting all the pieces together, our key profitability metric, adjusted EBITDA per worksite employee, per month, increased 13% from $63 in 2015 to $71 in 2016.

Now as for our balance sheet and cash flow, we returned $197 million to shareholders in the form of dividends and share repurchases during the year. We increased our regular quarterly dividend by 14% to $0.25 per share in May of 2016 and repurchased 3.4 million shares in 2016, including a successful tender offer of just over 3 million shares. We ended the year with $45 million of adjusted cash and $95 million available under our credit facility.

This level of liquidity and credit availability, combined with our recent and expected strong cash flow, allow us to continue to provide strong return to our shareholders in 2017.

Now at this time I'd like to turn the call over to Paul.

Thank you, Doug. Thank everyone for joining us this morning. We're very pleased with the record results we are reporting today and our outlook to extend our double-digit growth and profitability into a third consecutive year in 2017. Our unique business model designed to provide consistent, predictable high-growth, combined with our strong cash flow, positions Insperity to continue to provide superior returns to investors in the years ahead.

Today I will focus my comments on three primary areas. First, I'll provide some color regarding our record-level sales and client retention, including our full-year results and our recently completed fall campaign. Second, I will fill in the picture of our year-end transition, which determines our starting point for the new year in both volume and pricing, and I will highlight the key initiatives driving our expected double-digit growth acceleration and profitability throughout 2017. Then I'll complete my remarks with a view of our long-term market opportunity in light of the new administration in Washington.

2016 was a record-setting year in both new sales and client retention for Insperity, which sets the stage for a strong 2017. For the full year, new sales exceeded 40,000 worksite employees and client retention reached a historical high of 86%.

In our residual income business model the most important factor to driving growth and profitability is client retention. This 86% record level follows a previous record 84% of client retention rate in 2015, both of which are substantially higher than our historical 80% average for most of the first 30 years of the Company's existence.

Our client attrition, measured in worksite employees lost due to terminating clients, has had a historical pattern of losing 10% to 12% of the worksite employee base in January and February due to the year-end churn of client accounts. The other 10 months of the year have typically averaged slightly below 1% of the base, adding up to our 20% historical attrition rate.

The recent improvement in the annual retention rate is primarily due to the lower year-end churn rate, which fell below 10% for the first time in 2015 at 9.5%, followed by an amazing 6.8% in 2016. These results are directly related to the business model and strategy changes we made several years ago.

A central element of our growth model is to offer a wide array of business performance solutions to support a customer-for-life strategy. With this strategy we are able to meet clients at whatever point of need we find them and make multiproduct recommendations over time to meet ongoing and changing needs.

Our retention results for the recent fall campaign indicate a continuation of this systemic improvement in client retention as we move into 2017. Based upon termination notices received and processed in January, combined with expectations for February, we believe we will end up between these two recent record years in a range of 7.5% to 8.5%.

Last year I mentioned two data points in consecutive years was encouraging, but it takes three points to establish a trend. We are pleased to drive home a third year in a row with this substantial improvement in client retention and we are excited for what that means to sustainable growth and profitability in the years ahead.

Our sales results were equally impressive. Our growth strategy is to rely on the consistent, predictable sales in our core market segment with clients with less than 150 employees and allow for a premium to our growth rate to come from sales of midmarket clients with 150 employees to several thousand employees, which is a more recently developing segment.

In 2016 our core market sales engine performed beautifully, finishing the year at 100% of forecast. These results were driven by a successful fall selling campaign at 104% of forecast, making up for the first eight months of the year that were just under budget at 96%.

Our marketing programs played a key role in our sales success during this period, as sales from leads provided directly from marketing efforts increased from 23% of total sales to 45%. Discovery calls made from marketing leads, on average, are 3 times more likely to close than a self-generated lead. This lead-generation capability is important in our model in order to maintain or improve sales efficiency as we increase the number of BPAs.

The number of trained Business Performance Advisors increased 11% over 2015 and our key sales efficiency metric was maintained at 0.72 sales per BPA per month in spite of adding more than 150 new BPAs over the year. These results also demonstrate the success of our BPA and district manager recruiting and training programs and our capability to grow the business in a systematic and strategic fashion to maintain double-digit unit growth and paid worksite employees.

Through our wide array of business performance solutions, we made excellent progress in 2016 expanding our customer base, improving retention, contributing to gross profit, and reducing BPA turnover compared to historical levels. Each of these priorities are important to growth and profitability in our model.

Business performance solutions sales increased 18% in Q4 and 12% for the full year. In addition, the attachment rate of BPS offerings to Workforce Optimization sales increased from 38% to 44% year over year. Turnover of Business Performance Advisors was 29% in 2016, slightly higher than the 28% level in 2015 but dramatically lower than historical levels in the mid-30%. This improvement in our business model is critical to growing the sales organization at the right rate and efficiency to control costs and optimize profitability.

We ended the year with 418 total hired BPAs and 394 trained BPAs, up 12% year-over-year, allowing us to enter 2017 in great shape to drive core sales. We will continue to grow the BPA staff throughout this year, targeting approximately 470 BPAs by year-end.

For 2017, we see a different growth pattern emerging compared to 2016 as core and midmarket sales are expected to cause an acceleration in our growth rate throughout this year. This acceleration is evident in our worksite employee growth guidance beginning at 10% to 11% in Q1 and averaging 11.5% to 13.5% for the full year, which implies ramping up to about 13% to 15% by Q4. These numbers are achieved by simply applying the math from the starting point for paid worksite employees in January to the results -- recent results in sales efficiency and the number of trained BPAs combined with the timing of enrollment of midmarket accounts that were sold late in 2016.

The nature of our midmarket segment includes a much longer sales cycle, multiple buyers and influencers, and the complexity requiring a high level of customization. These factors make midmarket sales more unpredictable as to the timing of the sale and implementation and can affect short-term comparability in the year-over-year worksite employee growth rate.

For example, in 2016, our unit growth rate started out over 14% in Q1 due to the full-quarter effect of a large client with 2,100 employees paid for the first time in December 2015. The growth rate declined slightly throughout 2016 as the year progressed to 11.5% in December on the anniversary of the addition of this large account.

During this fall campaign we saw two marketplace reactions that we believe were due to the uncertainty around the election, which slightly lowered our starting point in paid worksite employees for 2017. First, we saw some delay in midmarket buying decisions and, second, we saw weakness in the net gain from existing clients between layoffs and new hires, as Doug mentioned earlier.

This weakness continued into January with a net loss of approximately 1,400 worksite employees eliminated from the expected starting point. In our residual income business model, this reduction from this uncontrollable factor takes out just under 1% from the year-over-year growth rate for the first quarter and the full year 2017 from what we would have otherwise expected.

The timing of the sales and enrollment of midmarket accounts over these two periods also contributes to the difference in growth pattern in 2016 versus 2017. We've closed a number of midmarket accounts near the end of 2016, which are scheduled to roll into the paid worksite employee count in Q2 of 2017. The election-related delayed buying decisions made for a tougher first-quarter comparison over last year, but contribute to the acceleration of our year-over-year growth rate throughout this year.

Our key initiatives for 2017 are also expected to support our growth. Two of these initiatives related to confirming -- I'm sorry, continuing upgrades to our technology platforms for both the co-employment and traditional employment offerings.

Over the last several years we've increased our technology development capacity and continued to develop our cloud-based, co-employment platform to support our flagship Workforce Optimization solution. Our objective was to reach a point in functionality, flexibility, and usability for our PEO clients to offer a more complete human capital management experience within the co-employment model. This year we will be rolling out a new user interface, capping off several years of development to deliver on that promise.

In order to deliver a true HCM experience, our platform needed enhancements in a variety of areas including adding features and functionality, expanding and customizing client-specific data collection and reporting, integration of products into modules, a security upgrade, and finally, a more HCM-like user interface. Major progress in each of these areas has been achieved and the final piece of the puzzle is scheduled to fall into place as we upgrade the user interface midyear 2017.

We believe delivering a true HCM experience within our Workforce Optimization bundle is a real game-changer. Historically, in spite of providing a tremendous technology cloud platform for Workforce Optimization clients, we were unable to support a claim of providing a true HCM experience. This changes once our upgrade is completed later this year.

HCM within our Workforce Optimization solution has several unique advantages leapfrogging the competition. These advantages include a much shorter and more effective implementation and ongoing support to actualize the benefit of an HCM solution. Our history of providing software with a service, real HR professionals helping to get the most out of technology deployed, is a major differentiator in the marketplace.

We believe our Workforce Optimization offering, including this new HCM experience, will provide a clear competitive advantage and ease of implementation and speed of execution for our clients compared to competitive offerings.

Now the second major initiative for 2017 also involves a technology upgrade and a Software-with-a-Service bundle; however, in the traditional employment space. Our workforce administration bundle including HCM software, payroll service, time and attendance, online HR support, and optional brokered benefits is also ready for expansion this year. This bundle was originally piloted in our midmarket space, built on a software platform acquired through a code purchase and further developed internally. Last year we partnered with another provider to get an instant upgrade to the technology platform, improving our competitiveness in the midmarket and allowing us to offer this traditional employment bundle in our core market for the first time.

We introduced the workforce administration bundle in a soft launch during this fall campaign and this new offering seems to have struck quite a cord in the marketplace. The results were so positive we included extensive training of the entire BPA team at the annual sales convention in January in order to extend this offering across the country.

We're optimistic regarding this new offering because of the variety of ways this can positively affect our growth model. This offering is like a silver bullet supporting each of the priorities I outlined a few minutes ago. For our prospects not ready for a co-employment solution, workforce administration offers a premium service bundle of our business performance solutions with the Insperity level of care not found in the traditional employment services space.

BPAs now have two great options to convert a prospect into a client and a new way to address the competitive landscape. We also see potential for this offering in keeping clients at renewal in this traditional employment model or by reinforcing the Workforce Optimization renewal. We expect sales of this new premium services bundle of business performance solutions to contribute nicely at the gross profit line and may provide some upside to our gross profit per-worksite-employee, per-month metric.

The last topic I'd like to discuss today is our view of our long-term market opportunity in light of a new administration in Washington. We believe we are likely (technical difficulty) from expected policy changes on the horizon. We've already seen a real uptick in the sentiment in the small- to medium-sized businesses community just from the possibility of lower tax rates and more positive support and attitude towards business.

We've not seen corresponding action in hiring yet, but we have normally experienced a stronger labor market when business owner sentiment improves.

There also is the issue of Obamacare, which is on the table again, and changes in this area will require businesses to respond accordingly. Our track record of stability in compliance and providing valuable benefits to clients and worksite employees is typically seen as an excellent alternative to figuring it out on your own, just like we saw over the healthcare reform implementation period. We will encourage prospects and clients to focus on their profit opportunities and leave the government compliance to us.

We also see the possibility of a real battle for talent in the years ahead if GDP growth accelerates and the labor market tightens, increasing the need and demand for our services. We are uniquely positioned to help companies run better, grow faster, and make more money in this environment.

In summary, our total shareholder return over the last several years has been extraordinary and we are confident strong demand for our services, combined with disciplined execution of our strategic plan, will allow us to continue on an excellent trajectory for the future.

At this point I'd like to pass the call back to Doug.

Thanks, Paul. Now let me provide our 2017 guidance beginning with the full year.

As Paul just mentioned, we are forecasting an 11.5% to 13.5% increase in average paid worksite employees over 2016, resulting in a range of 185,000 to 188,000 for 2017. Our forecast is based upon the starting point coming off of our strong year-end sales and client renewals, partially offset by weak net hiring in our client base in Q4 and the layoffs that occurred in January.

We are forecasting an acceleration of worksite employee growth over the remainder of the year based on a higher number of trained Business Performance Advisors, continued high client retention, and a nominal level of net hiring in our client base throughout the year.

As for our gross profit area, we have gone through our usual budget process of analyzing client mix, pricing, and direct costs, including healthcare and workers compensation claim trends. As a result, we are initially budgeting for our gross profit per worksite employee to be in line with 2016, which is consistent with Richard's comments last quarter. Our budget process is intended to begin the year with a conservative forecast for direct cost trends and leave the upside to favorable developments as we manage pricing and direct costs over the course of the year.

In addition, our 2017 forecast excludes the favorable impact of the Small Business Efficiency Act on our payroll tax subsidy for new business sold throughout the year, as we are still waiting on the approval of our application from the IRS. Our operating plan includes further investment in our growth, including the 12% increase in trained Business Performance Advisors and the opening of four new sales offices. We are also increasing our investment in technology infrastructure, security and development to enhance our product offerings and continue to improve operating efficiency and leverage in various areas of the business.

The combination of accelerating worksite employee growth, stable gross profit, and continued operating leverage leads to our forecast of a 14% to 19% increase in adjusted EBITDA from $141 million in 2016 to a range of $161 million to $168 million for 2017. We are also forecasting a 17% to 23% increase in adjusted EPS from $3.59 in 2016 to a range of $4.21 to $4.42. This forecast assumes 21 million average outstanding shares and a full-year effective tax rate of 37%.

Now, as for the first quarter, we are forecasting a 10% to 11% increase in average paid worksite employees over Q1 of 2016, resulting in a range of 174,200 to 175,800. We are forecasting Q1 adjusted EBITDA in a range of $63 million to $66 million and Q1 adjusted EPS from $1.78 to $1.87.

Keep in mind that the year-over-year comparisons are impacted by the leap year in 2016 as we bill for revenue allocations on a per-worksite-employee per-day basis. One less billing day in 2017 equates to approximately $2 million lower gross profit and adjusted EBITDA dollars in the first quarter this year when compared to Q1 of 2016.

Our Q1 adjusted EPS guidance includes an effective tax rate of 35.5%, which is lower than our forecasted full-year tax rate due to the tax benefit associated with the vesting of our restricted shares which all occurred during the first quarter of each year. As for our quarterly earnings pattern, keep in mind that our Q1 earning results are typically higher than subsequent quarters. In particular, we earn a higher level of surplus prior to worksite employees reaching their taxable wage limits and benefit costs are lower in Q1 and step over -- step up over the remainder of the year as deductibles are met.

In conclusion, we experienced strong top-line and bottom-line growth in 2016 and are expecting another great year in 2017.

Now at this time I'd like to open up the call for questions.

(Operator Instructions) Jim Macdonald, First Analysis.

Good morning, guys. Nice guidance there. Could you go in a little bit more detail on your direct cost program, specifically how the health trends are going and how your pricing is in that area?

Sure. Yes, Jim, as I mentioned on our call last quarter, we have seen a very positive year in 2016 for our trend in the increasing cost of healthcare. And we -- because of what's going on in the marketplace now, and coupled with the fact that we renegotiated our administrative contract with UnitedHealthcare in the third quarter of the last year that started effective January of this year, we are going to see another very low year trend increase in healthcare costs. I would say, conservatively in the 2% to 3% range, which is, obviously, quite good.

And so, that will translate into pricing for customers that are new and renewing in that they won't have such big increases. So, for us, it's not a matter of the revenue side of the fence; it's a matter of the direct cost side and how low we manage those trends.

We are continuing to see customers, new customers, that are sold come in and select a lower cost, higher deductible plan. And we're also seeing new employees that are hired in the existing clients, when they get to come in and select, they are also selecting lower cost, higher deductible plans. So all of those facts start to drive -- are drivers to the low cost. But at the same time, you'll look at the -- you will see the revenue side, because that's where we get the allocations, they'll be lower, too.

And switching gears a little bit, you talked about some of your new workforce administration offerings, but in general, can you talk about your adjacent business units and --? Is that area growing faster than the core or still growing about the same? In other words, is the gross profit from that increasing or decreasing?

Yes, it's actually -- this is interesting; because the worksite employees are growing at 13%, 12.5-something-like-that-percent, the contribution at the gross profit line for the business performance solutions has got to be a lot higher than that in order for us to maintain the same level of gross profit per-worksite-employee per-month contribution. And so that's what we're seeing for 2017 will be a -- similar at the gross profit per-worksite-employee per-month contribution, but they are actually growing at a higher rate

Actually, Jim, we went through some organizational changes over the course of last year in those units to control some cost and to allocate -- to get the sales group in with the rest of our sales organization, get the technology group further integrated into our technology organization, and the same with operations. Those moves really did help on managing the cost side and now they are really in a position to move forward.

A good example of that is this new bundle in workforce administration in the core. Like I mentioned in my comments, I believe we could see some real acceleration there that, in this case, would move that number up from what Richard was talking about.

We didn't want to bake that in because it's too new, but we're really excited about these -- what used to be individual business performance solutions in strategic business units that are now integrated further into the organization. Now these services can be packaged together and we really think that's going to lead to faster sales growth in those units.

Part of the technology platform for the workforce administration, which was -- which is why we decided to move to it, is because it actually is the same technology platform that works very well for our midmarket prospects and customers that decide not to go into Workforce Optimization. So, regardless of the size, we now will have one platform to deliver the basic payroll and other components, and so that automatically will create some operating efficiencies as we move through 2017.

Tobey Sommer, SunTrust.

This is Kwan Kim substituting for Tobey. Thank you for taking my questions. My first question is: with the surging NFIB small business optimism, which in December hit the highest mark since 2004, what are some of the concerns you are hearing from your customers post election? And when do you expect the level of optimism to translate to increased hiring?

That's a good question; it's kind of a crystal ball type question. We did see, as I mentioned in my comments, kind of an uptick in business owner sentiment, but we did not see that translate into hiring yet. However, year-end is always a little bit quirky in terms of how hiring works and so it's kind of hard to tell; there is a lot of churn and fluctuation going on at that time.

But I do believe that as we see some of these policies get into effect and really just the optimism of the business owner community, it will translate into hiring over the course of the year. Now, we built into our forecast model kind of the same level of net hiring we had over last year, which was a low year compared to historical averages, but we thought it was best to leave that as upside in the model. And, hopefully, we'll start to see that hiring come in over the next couple quarters.

Thank you. And could you update us on the IRS approval of PEO applications to get the double payroll taxation issue out of the way?

You bet, sure. We're hopeful that that will be resolved fairly soon, but you never know since it's the IRS. And we're -- just for everyone to refresh your memory, this bill was passed in December of 2014 and the requirement of the statute was that the rules would be promulgated by mid-2015 and everything would go into effect in January 2016.

Well, the rules finally just got initially published last year and now another round of those recently. They have -- they did start taking applications in the fall, but to our knowledge, none have been approved at this time. And so it's taking a little longer based on just the way our government works, I guess.

But sooner or later, we'll have that approval in that -- we're hoping it's sooner in the year than later. That would have a nice the fact at the gross profit line and would help us not have to build in additional costs for new accounts that come on later this year. But we're not about to build that into a model until we have that paper in our hand.

Thank you. Last one for me. Are there other legislative initiatives that you have your eyes on as potentially being impactful in your business?

Well, you know, obviously, just whatever happens in a repeal-and-replace environment we'll be all over that and in the middle of that. But any time there is change that's going on, it's really good for us because business owners don't have time to figure out what Congress is doing and have that trickle down through the carriers and through the healthcare community into what they need to do at their specific business in terms of their benefit plans for employees. And that's part of what service we're delivering to our highly-skilled and trained Business Performance Advisors.

Thank you very much.

Mark Marcon, R.W Baird.

Good morning. Congratulations on a great year and thanks for the comprehensive guidance. Sounds like things are really firing in the right direction.

I was wondering: could you talk a little bit about the workforce administration? It sounds really promising. To what extent do you anticipate existing clients switching to that as a way of maintaining retention, as opposed to being a really effective arrow in your quiver to drive new sales from new clients? And how should we think about the pricing and profitability of that solution as a substitute for your optimization?

Great. Great question, Mark; thank you for that question. We're really excited about this because workforce administration is really going to help us deliver on the promise of really expanding our customer base, casting a wider net. When we go out and see -- this coming year we'll see 30,000 business owners face to face, and historically, we've had a 10% or 12% close rate into Workforce Optimization.

We think we can have that many close into workforce administration, although it's too early to tell, but we know this is -- this bundle makes a lot of sense for someone who is just not quite ready to pull the trigger. And so we think, as an entry point, bringing them into a premium service bundle like this really attracts the right prospect into our ecosystem, if you will.

Now, as far as moving up to Workforce Optimization, it is -- Optimization is so much more fully integrated, plus the liability transfer, plus the cost stability and cost management on benefit, that is a real makes-sense move into Workforce Optimization once they have been on that a little while, we believe. We believe that because we saw, even in the renewal process, customers who were considering leaving, once we presented Workforce Administration, some of them will say, yes, that's what I'm looking for and went to that. But a lot of those looked at Workforce Administration and reaffirmed what was available in Workforce Optimization, what those differences were.

So we think it's really a nice way -- remember -- you may remember that worked the same way in our midmarket a couple years back when we first introduced that concept. So, yes, we're really excited about that. We think that's going to help a lot of ways.

Even, for example, the BPAs, it's a little bit easier for them; there's less complexity in that sale so they can get some good momentum earlier in their career, possibly even ramp up faster or lower the turnover rate of BPAs. All those things are really important, so, as you can tell, we're pretty excited about it.

Now on pricing and competition, I think that's another important factor to understand. It is still built on a per-employee per-month type basis, but these are not co-employed worksite employees. So this is basically a bundle of BPS solutions that comes into our business model at the gross profit line in the BPS solution line, not the markup for our HR services for co-employment. So as we see that success, that's where we will see the upside in our gross profit per worksite employee from that contribution.

The other thing that's exciting about it from a pricing standpoint is that when we go in with our premium solution, as you know, other co-employment solutions come in well below our pricing and they even have some that it's kind of hard to tell whether they are really co-employment or whether they are traditional employment or some hybrid. And so there's a lot of other lower-cost offerings out there.

Well, our offering kind of brackets that with a premium-level traditional employment service and we are able to really explain the difference between our two and that -- in our view, of course, the inferior model that lands somewhere in between. And so we think that when clients can choose options that are both Insperity high-touch options, our customer will come our way more often.

I think the last part to this, Paul mentioned it a minute ago, and that is this Workforce Administration, because it is a bundle of several items put together, it is the only offering in the marketplace at this point that is billed on a per-worksite-employee per-month basis. In other words, we've got several other folks that have offerings that offer some similar stuff, but it's all a la carte. And so because another advantage for us and our Business Performance Advisors is they can sell this in a per-employee per-month basis.

Sounds like a great addition. When you said it brackets, so relative to some of the lower cost options that are out there, some of which are directly comparable, and some of which seem like they might be but they really aren't, this would come in below those, but above some of the really low-scale solutions. Is that right?

Right, right, right. Yes, that's correct.

Right, right. Mark, and I think you'll have other competitors in the PEO space who will have to justify value, maybe for the first time, instead of sell on price.

Yes. And then the gross margins on this would be comparable to your general BPS gross margins?

Yes, absolutely. Oh, yes.

Great. And then on the HCM, you -- how different is that going to be?

Well, it's really, really amazing because it's going to be quite different. We've had them side-by-side where we can look at them with users in the room and I would say it's like moving from more of a portal environment, where you can tell you're moving from here to here to here and you're using different applications within a portal. It's like moving to a fully integrated HCM solution, where it's just much more intuitive and quicker to get to everything that you want on an ongoing basis. It's just a lot closer to you and gives you that feeling.

So the folks that sat in front of those screen and used it, they were pretty excited about that and so are we.

That's great. And then a couple of quick follow-ups. Just average client size, how is that trending both in terms of mid as well as your core?

It's been moving up some on both fronts. And some we're kind of keeping an eye on and we will weigh in how the Workforce Administration option now plays into that. But again -- also as we add more midmarket accounts, you're going to have that average naturally move up, but it's been moving up.

Jeff Martin, ROTH Capital Partners.

Thanks. Good morning, guys. Paul, could you talk about the bundled nature of the premium workforce administration offering that's going to be coming out; how that compares with what was, from my understanding previously, an a la carte? And which services are going to be bundled and how much flexibility there's going to be to that.

Sure. There still will be a bundle-plus approach to that where we've put in the bundle what folks really basically have to have to payroll time and attendance, some HR support through our online support with a person available for escalation of an issue, and all the employee administration and process support that comes within an HCM system.

But coupled with that, it's really important to understand our strategy is a Software-with-a-Service mindset. We are a service company with great technology, not a technology company trying to build a service organization; that's a completely different scenario. And that's why I think we'll have a competitive advantage in the marketplace.

Our support people, our client service people, our HR professionals, they are not technology people teaching how to use software. They are HR professionals helping you get out of the software what you intended to do in the first place when you bought it. In addition to that, it's that level of care from an account manager, from someone who knows your company and cares about your business and cares about your success. That's what makes it a premium bundle in that space.

We think it's -- what we've seen so far is pretty encouraging. It seems to be quite a game-changer out there.

Okay. And then wanted to touch on the starting point for the year. You mentioned net loss of 1,400 worksite employees in January. Is that all hiring within or negative net hiring within the client base or is there anything else to that?

No, that was it; it was basically the net change between layoffs and new hires in the base, and it was more than we expected. I really didn't expect to see that as a starting point, but -- because it does seem really that consistent. The year-end labor market was not great, but not bad, and we -- so the --.

But we've had periods in our history where the reality of our numbers, which comes directly out of -- remember, we're the HR department, so we're processing every new hire and we're processing every termination, so our system doesn't lie. But sometimes we've had in the past where it doesn't line up exactly on a month-to-month basis with what you hear in the labor report out there; this was one of those times.

Well, if you take sentiment as a leading indicator, it would seem that that could reverse pretty quickly.

Yes.

I would think so. Plus, your normal seasonality in hiring: budgets get put in place, then hiring plans get put in place, then you have to implement. Takes 60 to 90 days to get folks in there and -- before they are enrolled and paid. It doesn't make us pessimistic at all about the net change over the course of this year.

Do commission and overtime trends conflict with that negative hiring that you saw in the quarter?

Yes, our overtime was still in the 10% range with the capacity measure, which is still a positive. And -- let's see, commissions I need to take a look at here.

I don't remember what they were.

I think they are in the 6% range, which is pretty normal also. So we're -- again, those data points are solid. Sentiment is strong; usually that means hiring is on its way.

Okay. One last question, if I could. The midmarket additions that you have that will accelerate the growth in the back half of the year in terms of the worksite employee base, could you give some detail as to how many clients those are and how many employees are tied to those clients?

Well, it's several clients and I really shy away from getting to specific employee counts because that does change over time as you are bringing on new accounts, but it's a substantial enough to mention. But we've got our sales engine going and we're confident in those growth numbers and that just helped boost the confidence a little.

Great. Thanks for taking my question.

There are no further questions. I will turn the call back over to Mr. Sarvadi.

Well, once again thank you all for joining us today. We appreciate your interest and look forward to seeing you out on the road in the coming months and look forward to putting another great year together on top of a very positive 2016. Thank you again and we'll see you soon.

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