Insperity, Inc. (NSP) Q3 2012 Earnings Report, Transcript and Summary

Good morning. My name is Laportia, and I will be your conference operator today. At this time, I would like to welcome everyone to the Insperity Third Quarter Earnings Conference Call. [Operator Instructions] Thank you. At this time, I would like to turn today's call over to our speakers, 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. 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, intends, projects, believes, likely, probably, goal, objective, outlook, guidance, appears, target and similar expressions are used to identify such forward-looking statements and involve a number of risks and uncertainties that have been described in detail in the company's filings with the SEC. These risks and uncertainties may cause actual results to differ materially from those stated in such forward-looking statements. Now let me take a minute to outline our plans for this morning's call. First, I'm going to discuss the details of our third quarter 2012 financial results. Richard will discuss trends in our direct costs, including benefits, workers' compensation and payroll taxes and the impact of such trends on our pricing. Paul will then add his comments about the quarter and the progress we have made to position ourselves for growth in 2013. I will return to provide our financial guidance for the fourth quarter. We will then end the call with a question-and-answer session. Now let me begin today's call by discussing our strong third quarter results. Today, we reported third quarter earnings of $0.45 per share, significantly above the high end of our expected range, and a 36% increase over to $0.33 per share in Q3 2011 when adjusted for the $0.17 per share of costs related to 2 nonoperational items. Year-to-date, EPS has increased 32% to $1.20 per share from the 2011 adjusted EPS of $0.91. As for our key metrics, paid worksite employees averaged 127,096 for the quarter, above the high end of our expected range, and an increase of 7.5% over Q3 of 2011. Gross profit per worksite employee per month averaged $258. This was significantly above the high end of our expected range, and an increase over the $245 reported in Q3 of 2011. Operating expenses came in above our forecast at $79.3 million, and included an accrual for incentive compensation tied to our favorable Q3 financial results. During the quarter, we generated $26 million of EBITDA plus stock-based compensation. We repurchased 82,000 shares and ended Q3 with $140 million of working capital and no debt. Now let's review the details behind our third quarter results. Revenues increased 8.5% over Q3 of 2011 to $512 million, driven by the 7.5% increase in average paid worksite employees. As for the drivers to our worksite employee growth, client retention remained at historical highs, averaging 99% for Q3. We experienced some net hiring in our client base during the quarter that was partially offset by the reduction of associated with seasonal summer help. Q3 total sales were just slightly below budget. However, we ended the quarter with September exceeding our budget. In a few minutes, Paul will share further details of our recent sales efforts. As I just mentioned, our key pricing metric, gross profit per worksite employee, averaged $258 per month for Q3. And this was significantly over the forecasted range of $235 to $238. Richard will provide the details behind our results in a moment, so I'll just provide some brief comments. Benefit cost per covered employee came in significantly lower than expected, declining by a little less than 1% from $849 in Q3 2011 to $845 in Q3 of this year. Workers' compensation costs totaled 0.57% of nonbonus payroll, including a $3.9 million reduction in previously reported loss reserves. This was just below our forecasted range of 0.58% to 0.60%. Payroll taxes as a percentage of total payroll remained relatively flat at 6.4%, as an increase in SUTA rates was offset by a higher worksite employee payroll and bonuses. Now let's move on to Q3 operating expenses, which totaled $79 million. This was approximately $3 million above the midpoint of our forecasted range due primarily to the accrual and incentive compensation tied to the strong Q3 operating results. The year-over-year increase in operating expenses of 8.7% also included a budgeted increase in salaries and wages, project costs and depreciation and amortization associated with our new adjacent businesses. Net interest income and other income for the quarter totaled $140,000, down from $245,000 in Q3 2011. Our effective income tax rate increased slightly from 40% in Q3 2011 to 41% in Q3 of 2012. As for our cash flow, year-to-date, adjusted EBITDA plus stock-based compensation increased 24% from $59 million in 2011 to $73 million in 2012. Year-to-date, cash outlays included cash dividends of $13 million, capital expenditures of $12 million and repurchases of 515,000 shares at a cost of $14 million. In summary, we are pleased with our results through the third quarter, particularly given the economic and general uncertainty in the macro environment. Unit growth in the high single-digits combined with stable pricing and improvement in our direct cost programs has contributed to strong earnings growth and a solid balance sheet. At this time, I'd like to turn the call over to Richard.

Thank you, Doug. This morning, I will fill you in on the details of our excellent third quarter gross profit results. Then I will update everyone on our gross profit outlook for the fourth quarter and conclude my remarks with comments on our new UnitedHealthcare contract extension. As Doug just reported, our third quarter gross profit per worksite employee per month was $258, which was $22 per worksite employee per month above the midpoint of our third quarter range. Gross profit consisted of $191 of average markup, $56 of surplus and $11 from the Adjacent Businesses. Now let me give you the details of each component. The $191 average markup was $1 per worksite employee per month higher than our forecast; the Adjacent Businesses contributed $1 per worksite employee per month less than our forecast, leaving all of the $22 additional gross profit coming from the surplus component. In looking at the details of the surplus, $21 of the $22 upside came from the benefits cost center. The payroll tax cost center was right on forecast and the workers' compensation cost center was $1 per worksite employee per month better than our forecast. When we analyzed the elements of the benefits cost center, we found that our allocations were $8 per worksite employee per month lower than our forecast, and our cost was $29 per worksite employee per month lower than our forecast. The $8 in lower than expected allocations is the direct results of participants selecting lower cost, higher deductible health plan. We have discussed this topic many times over the last couple of years. The revenue allocation declines immediately and the benefits costs should decline in future periods. However, we did not expect to see a $29 per worksite employee per month decline in the cost all in one quarter. Our large loss claims per participant were 14% lower than last quarter, and the pharmacy claims per participant were 10% lower than Q2. Last but not least, and consistent with UnitedHealthcare's third quarter experience, utilization was unusually low in both doctor and hospital visits during the summer months. In fact, we will likely see much higher utilization in Q4, which will result in a shift of expense between the quarters. So let's move on to the fourth quarter expectations, beginning with our markup. We would expect to see the average markup remain at $191 per worksite employee per month for Q4; based on the mix of new business sold, which was at $11 per worksite employee per month more than Q3 of 2011, and renewal pricing, which increased $3 per worksite employee per month in the third quarter. Now let's look at the surplus component of gross profit for Q4 beginning with the payroll tax cost center. Typically, our fourth quarter surplus increases slightly from the third quarter of each year, so we will forecast a slight increase in the surplus for this cost center in Q4 over Q3. Moving to the workers' compensation cost center, we expect the pricing side of the workers' compensation allocations for new and renewing business to continue to remain fairly constant. On the cost side of the workers' compensation cost center, we have had positive results for the policy year, which just ended September 30. For this policy year, we had a 12% increase in the number of claims filed over the last policy year, but the severity per claim was 12% lower than the prior policy year. We want to be conservative with our estimates but our most recent results would suggest that our expense should be in the range of 0.56% to 0.58% of nonbonus payroll for Q4, slightly lower than our previous forecast. Now switching to the benefits cost center, let me tell you how we see our deficit changing beginning with the pricing allocations. As I mentioned a few minutes ago, we have continued to see a significant increase in the number of employees selecting higher deductible health plan options, which automatically reduce our allocations. We constantly monitor our costs and the appropriateness of our allocations for these plans. We will continue to adjust our allocations on both new and renewing business to reflect our experience, which continues to be substantially better than the small business marketplace for comparable plans. On the cost side of the benefits cost center, we know it would not be prudent to forecast our fourth quarter's cost using the third quarter's expense as our base. Due to the expected shift in expenses into the fourth quarter, we see a trend of 4% to 5% in cost over Q4 of 2011. When you combine all of the forecasted direct cost surpluses and the benefits cost center deficit, we should generate a net surplus of $37 to $39 per worksite employee per month for the fourth quarter. Our last contributor to gross profit, which is our Adjacent Business services, should continue to add about $11 per worksite employee per month to gross profit for the fourth quarter, which is consistent with the third quarter. In summation, when you combine the service fee, the surplus and the Adjacent Business contribution, we should see our gross profit per worksite employee per month end up in the range of $238 to $240 for Q4, which would result in approximately $253 for the full year, which is at the top of our $249 to $253 range of our original 2012 forecast. Before I turn the call over to Paul, I'd like to comment briefly on our relationship with UnitedHealthcare and our new 3-year agreement. Earlier this year, as we celebrated our 10th anniversary of working together, we discussed the turmoil that most employers will experience over the next few years as a result of the implementation of healthcare reform. We believed that together, we could bring stability and certainty to the small and medium-sized business community in a very uncertain environment. So we refined our next 3-year cost structure, built in discounts to our admin fees as we grow and reduced inflationary caps to our dental plan. The bottom line is that we should save several million dollars through 2015. In addition, our client owners, worksite employees and their families can rest assured that the complexity, compliance and the cost challenges related to healthcare reform will not be a burden compared to those businesses that choose to go it alone. At this time, I'd like to turn the call over to Paul.

Thank you, Richard. I will discuss 3 topics today to inform investors regarding the outlook for Insperity in both the near and long term. First, I'll highlight the progress we made in the third quarter, finalizing our business transformation into a multiproduct business solutions provider. Secondly, I'll describe our plan for growth acceleration as we finish off 2012 and look ahead into 2013. I will also provide some insight into our year-end outlook and the ongoing Fall Campaign, which determines our starting point for 2013. Our third quarter and year-to-date financial results were strong in spite of the sluggish economy and the deliberate business transformation we've been executing. Over this period, we achieved our goal of laying the groundwork for future growth, while continuing solid financial performance with operating income up 27% year-to-date. This was achieved by continuing excellent performance in retaining Workforce Optimization clients. Attrition for the recent quarter was 1%, which matched the second quarter, and continues to reflect systemic process improvement and historical highs in client satisfaction. Sales in the face of the slowing economy were challenging in the quarter, coming in at 88% of forecast, which results in 94% of forecast year-to-date. These results reflect some reluctance in the marketplace to make buying decisions due to uncertainty over the election and fiscal cliff as we reported in our recent survey results. In addition, we've been making dramatic changes in our sales effort, including what we sell and how we sell it. With this as a backdrop, I am pleased with the overall results. The most significant accomplishment in the quarter is completing our refinement phase of our business transformation and entering our growth acceleration phase of this new strategy. We began this effort 2 years ago and each of the fundamental components that are necessary to broaden our reach and establish Insperity as a leading business solutions provider are in place. Over this period, we established an array of business performance solutions to help businesses run better, grow faster and make more money. These targeted solutions complement our Workforce Optimization service and are sold on a standalone basis to extend our reach in the small- to medium-sized business community. This year, each of these businesses have gone through a refinement phase, and they are well-positioned to grow and move toward profitability. Recently, we launched 2 additional adjacent businesses that round out our strategy in this area: Insperity Payroll Services and Insperity Financial Services. Insperity Payroll Services was launched with a complete set of related service offerings including pay as you go workers' compensation, online 401(k) and Time & Attendance. This payroll offering is a lynchpin in establishing a customer relationship with thousands of prospects we see each year, that are not yet ready for our full service Workforce Optimization offering. We also launched Insperity Financial Services at our Fall Campaign kickoff, after a successful pilot program earlier in the year. This adjacent business unit has 3 complimentary offerings, including Insperity Reveal, GrowthForce and The Receivables Exchange. This business unit is designed to help companies obtain accurate, timely and actionable financial information, and link this information to the investment these businesses make in human capital, supporting our Workforce Optimization growth plan. Also this quarter, we continued the development of our inside sales operation to support our Business Performance Advisors as they make multiproduct recommendations to our prospects. We now have the infrastructure in place to complete sales in this unit for each of the adjacent businesses. The implementation of this critical component of our cross-selling system is now operational. We also had 75 individuals recognized at the Fall Campaign kickoff as the first certified Business Performance Advisors, for completing the 80-hour certification program through the C. T. Bauer College of Business at the University of Houston. This program is ready to equip our advisors to provide a unique level of support and insight to our clients. In Q3, we also completed our brand transition with the introduction of our insperity.com site and some minor message tweaking and update. The Insperity brand is off to a great start, and we are confident this round of fall advertising will continue to build awareness and reinforce our positioning. We are also very excited to report we completed the development and introduction of the entire Insperity Trusted Advisor Selling System. All 252 of our Business Performance Advisors completed the training in conjunction with the Fall Campaign kickoff in September. This training included video production of each step of the sales process, including manager interaction and support. This show-and-tell, step by step training program was very effective in completing the picture for the new role of our Business Performance Advisors. This is particularly significant in establishing our readiness to grow our sales organization and ramp up individual performance. Now this brings me to my second topic and the main message for today. The Fall Campaign kickoff in September formally marked the beginning of our growth acceleration phase of our business transformation. While continued improvement and progress within each of the fundamental elements of our new strategy will continue, from now on, our central focus is growth acceleration. Over the last quarter this year and throughout 2013, we will be executing a game plan to produce consistent, predictable, faster growth. This plan includes a sales efficiency gain among current advisors, the addition of 50 new Business Performance Advisors, and channel development to increase leads. Our current Business Performance Advisors are implementing our new Insperity Trusted Advisor Selling System for the first time in this Fall Campaign. Last quarter, I used the analogy of a first run around the track in a new race car, and we're confident this run is going well and the room for efficiency gain is tremendous. We are closely monitoring performance and helping each advisor develop the new skills and habits to achieve success. The team is moving up the learning curve and I expect a nice efficiency gain in Q4 and into Q1 of 2013. While this efficiency gain is occurring, we are ready to grow the sales staff. We are confident we have the training ready to reestablish a growth plan for the number of Business Performance Advisors. Therefore, we have implemented a project that will hire and train enough new advisors to create a step up in the number of advisors by the end of Q1 2013. We plan to hire and train enough new advisors to increase staff 20% from the approximately 250 Business Performance Advisors we've had for the last year or so, up to 300 by the end of March. We are also ready to leverage our brand new -- our new brand and array of business performance solutions into new channels to increase leads for all of our product lines. We are formulating a plan to establish a number of significant channels to be up and running, producing leads as the size of our sales team increases. So for next year, our growth acceleration will be driven by our current advisors moving up the learning curve, a 20% increase in the number of advisors and new channels to increase leads. Now as for the immediate future, we're focused on our critical sales and retention season as we approach January of 2013. Our core residual income business model is driven off of our starting point of paid worksite employees in our Workforce Optimization solution. This starting point is determined primarily by the success we achieve in retaining clients at year end and replacing any attrition with new sales. We have some visibility into client retention due to notice provisions in our contracts, and what we see today looks very good. It appears we will continue to have excellent retention through year-end although this visibility is certainly not 100%. The sales pipeline has filled nicely in both MidMarket and core sales in spite of the heavy lifting it has taken to get in the door to see prospects. As I mentioned earlier, we've seen some reticence in the market business community awaiting the election results and the fiscal cliff ahead. One-way or another, these issues will be resolved in the near future but the effect on the Fall Campaign sales and retention is impossible to determine at this stage of the campaign. Over the next month or so, we'll have a clearer picture of the expected starting point of paid worksite employees, and we'll lock in on a budget for next year. Until then, we can only talk about next year in general terms as opposed to any specific guidance. Now broadly speaking, we expect our business to grow from current single digit unit growth levels up to low-double-digit units growth over the course of the next year, and average high single digits over the full year. We believe our direct costs are in good shape for next year and gross profit levels should rise accordingly with the growth of business. Our operating expenses are under control and current levels allow for an investment in growing the sales staff to increase future growth. We expect our portfolio of established adjacent businesses to increase the contribution at the gross profit line as they grow revenues. And some of these businesses should also add to the bottom line, reducing the total loss from these businesses from 2012 levels. We expect the investment in our 2 new adjacent business units will offset these gains, so at the bottom line, the entire portfolio of adjacent businesses should be in line with current levels. So in summary, we've had a strong 2012 thus far and expect a solid finish to the year. In 2013, we'll focus on growth acceleration and begin to see the fruit of our new business model represented by the Insperity brand. At this point, I will turn the call back over to Doug.

Thanks, Paul. Now before we open up the call for questions, I'd like to provide our financial guidance for the fourth quarter of 2012. In general, we are now expecting Q4 earnings to be fairly consistent with Q3, given the expected shift in healthcare utilization from Q3 to Q4, as Richard just mentioned, offset by lower operating expenses. This guidance implies an improvement in our outlook for the full year by about $0.04 per share from our previous forecast. As for our key metrics guidance, we are forecasting average paid worksite employees in the range of 129,500 to 130,000 for Q4 or a sequential increase of about 2% over Q3. Keep in mind that most Fall Campaign sales come onboard as paid worksite employees in the following year when we also have our heaviest client renewal period. As Richard mentioned, we now expect gross profit per worksite employee per month to be in the range of $238 to $240 for Q4. As for Q4 operating expenses, we are forecasting a range of $73.25 million to $74.25 million. And an expected sequential decline of approximately $5.5 million from Q3 is due primarily to lower travel costs, as our fall sales campaign kickoff occurred in Q3, and a lower incentive compensation accrual due to the impact of the expected shift in healthcare costs on our Q4 gross profit. As for interest income, we're forecasting a range of $100,000 to $200,000 for the fourth quarter. We are estimating an effective income tax rate of 41% and $25.7 million average outstanding shares. In summary, our key metrics guidance implies a range of 2012 full year earnings per share of $1.62 to $1.67, or a 40% to 44% increase over the 2011 reported EPS. At this time, I'd like to open up the call for questions.

[Operator Instructions] And your first question is from the line of Jim Macdonald with First Analysis.

Can you talk a little bit on the healthcare about what level you have now of high deductible plan participants, and what that's doing to kind of average pricing growth for the combined book? What's the mix impact?

Jim, I don't have those numbers right off the top of my head. But I'm going to say it's about 12% to 14% of our total is in the high deductible health plan now -- in one of the high deductible health plans. So it continues to -- we have the ability to look in our system and see when clients renew and they change plans or new business that's being sold now, a lot of those are actually buying the higher deductible plans, even more so than we've seen in the past. So it's driven that number up quite a bit over the last 2 years.

And maybe just as a follow-up. So is that growing 5% a year? And what's the average price points and some of it's borne by the customer? How much lower than your normal price point for the high deductible?

Well, that the -- if it was a static model, I can answer the question. But we're continuing to increase our allocations for those high deductible plans. So all you can do is look at it kind of on a client per client basis. And that translates somewhere in the 8% to 8.5%.

So what's 8% to 8.5%, Richard?

That's the -- that would be the increase in what clients see going from one year to the next in the same kind of plan. That's probably not the question you were wanting me to answer but -- it's a little bit more -- it's a good question, it's just a complicated answer.

So could you give me just a random ballpark, I mean, is the high deductible 20% less than that, plan? 30% less?

Yes, yes, yes. You're talking about planned value. Yes, it's in the 15% to 20%. I'm sorry. Yes.

Okay, 15% to 20% less. Okay. Moving over to the ABUs, I mean, you're now in the -- I assume the growth acceleration phase applies not only to the PEO business, but also the ABU business. You're sort of in stuck here at $11 or $12 gross profit of the ABUs. Do you see that starting to accelerate as well now and grow faster than your core business? Or when do you think that will start to happen?

Yes, I do. And I'll tell you what. This year, like we said earlier, was really focused on more of a refinement phase, getting those businesses ready to take on volume. Getting their sales operation up and in place to handle higher a volume of leads as they come through. And so yes, the growth acceleration phase certainly applies to the core business but also the adjacent businesses.

And I assume you expect the Adjacent Businesses to grow faster than the core, at some point?

I think yes, what we're looking for, ultimately, is for those to grow at about 30% or so revenue growth, because they're small. And we ought to be able to really put some volume on top of them and that will be kind of like an average. And we do expect, as I mentioned in my prepared remarks, that it is a portfolio of business. They're at different stages. Some are real close to breakeven, some even make just a little bit of money. But you have more of a move over in the profitability as we move along. And that will happen because they're growing faster and you're putting more volume over the infrastructure.

Yes, not to hold you a timetable, but I mean, is it possible to get to that 30% like next year or the year after?

Oh, no, it's possible.

Your next question is from the line of Tobey Sommer with SunTrust.

In the context of the kind of GDP growth that we have now, so kind of not a real change in the economy and in that backdrop for sales, what sort of expectation do you have for your plans to accelerate growth impacting the rate of growth headed into '13 or '14?

Well, you have several factors -- or several different things that we're doing to accelerate growth. So if you take them into pieces, first of all, efficiency gain is your best -- is your most profitable type of growth. When salespeople just become more efficient, you get more out of each individual's effort. And we do expect that to happen. Like we said, we've been through a transition. We've taught a lot of new skills, a lot of new concepts, a lot of new things are going on. And this Fall Campaign kickoff was awesome in terms of the progress we've made on everybody understanding the full picture and understanding what the specific expectations are. And now they are out doing it. And when you start something new, there's a learning curve. They're moving up the learning curve. I expect that to show in improve efficiency over these next 2 quarters, a pretty decent ramp up. So that's your most profitable growth. And the most certain and predictable growth is always adding more sales staff, which is the second component of our strategy for next year. We're going to have 50 new Business Performance Advisors trained, ready to rock 'n roll second quarter. Now those you can kind of figure out how that ramps in new growth. If you grow that 20% you're going to get some substantial growth as you get into this period next year. So that to me -- it's a kind of a forward indicator in how much new growth you're getting based on that 20% increase. Now the other thing that's more of a -- it's harder to get your arms around, but we have so many more substantial channel opportunities now that we have a wide array of product offerings from bank channels to CPA channels, to a specific distribution channels in the software world, in the cloud business. So we have got so many great opportunities. It's really kind of hard to predict how those might layer on. But we're -- for internally here that next year, from a marketing perspective, it's going to be the year of the channel. And we're going to really focus on high impact channels that can produce some real quality and high volume of leads, which will really make a difference with the sales organization.

From an investment standpoint, is the hiring in the push towards channels -- is that -- are those investments starting to be outlaid in the fourth quarter or is that?

No, those are already kind of baked in to a large degree. We kind of have some channel management or channel development staff kind of spread out throughout the ABUs and the core business. We'll bring that together in a consolidated unit and -- well, not necessarily bring them together from a reporting perspective. I was talking about in terms of really getting that team focused and getting our processes in place to develop higher impact and deeper channel relationships. So there's not a lot of cost in that beyond what we are already bearing.

And the increase in the sales force itself starts to occur in the fourth quarter or is already underway?

We -- with a project of Recruiting and Selection is underway. Sure, we'll bring some of them on here in the fourth quarter. The big -- we got to -- we need to have all of them on in the January time period for the schedule of training programs that will happen in the first quarter. So they're up and running at the end of Q1.

And what kind of financial cost should we think about for a 20% increase in the sales force?

It's -- we haven't put the whole picture together. Like I mentioned, because you don't know the starting point of paid worksite employees yet, but this is a comfortable level of investment in sales. If you look at our investment last year in -- or actually in 2012, we've had heavy investment in the infrastructure in our adjacent businesses, and we've had some other costs. Last year, it was the rebranding and some cost that will be in built in. So this, to me, is not a major disruptive thing in our operating expense picture. It should fit in nicely because we're in good shape across the rest of the organization. We'll obviously grow our service teams in line with the expected unit growth and make sure our service operation continues their excellent performance. But beyond core service and new sales personnel growth, there's not much else that has to grow.

And my last question, just based on the Q&A that preceded me, it sounds like there are -- there is more room for a transition towards high deductible plans over time, because you're not at a very large percentage of the mix currently. Is that accurate?

Yes, Toby, we've -- we can see -- we've continued to see an increase in that number every quarter for the last, I'm going to say, 11 quarters. And so we expect to continue to see it.

But it's slow and steady. It's not that -- it didn't jump up huge number in the quarter it just continues. In fact, as Richard was saying earlier, a higher percentage of new businesses is coming in, in the higher deductible plans. And then obviously, at this big renewal period that the year-end, we may see a significant percentage of the base start to move. And you know, we may have more migration in the first quarter than you're seeing quarter-to-quarter right now. So -- but I think that's good for everybody. Remember in our world, it's all about matching price and cost anyway. And that's -- the good news is we have a wide range of offerings that our clients can choose from to meet whatever business need they have at the time. And having a 20% to just a little over 20%, I think, fewer from our richest plan to our lowest cost plans it's -- 20%, 25% differential. And so that gives people some flexibility.

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

I was wondering obviously, you had the Fall Campaign underway. If you could comment on at this point which Adjacent Business services appear to be attracting the most attention? And just kind of general expectations of which one will be kind of the greatest contributor to incremental revenues?

Well, that's a good question. We've got -- we've had a couple of areas of nice success this year in the -- in our Retirement Services business. We've had pretty good adoption of what we would call a Bundle Plus selling of the retirement of the 401(k) plan with Workforce Optimization, a real good uptake rate on that. And it's nice to turn that business into a contributor. And so we've done well there. Also, one of the easiest things for companies to try -- it's kind of a try and buy world if you will, in our services, are our Employment Screening services. And we've been making good progress on that front with some steady sales growth there. But I'd probably say that the service that's -- the most prevalent across our current base and for new accounts would probably our Time & Attendance business. But we have some new product offerings out there that I think are really going to shake things up. We've got our expense control card, that is integrated with our Expense Management business, has tremendous upside for customers and for Insperity, because you literally can put your policy into effect through these cards. You can control the expense by being able to put money on or take it off of a particular -- so it's a reloadable and rescindable debit card that you can -- day in and day out limit the dollars you're putting on the card to the certain merchant codes. You have just more much more control over how you direct your Expense Management of employee-related business expenses. So there's -- we have other products within each of these offerings that could come out of the woodwork and really hit their stride.

Your next question is from the line of Jeff Martin with Roth Capital Partners.

I was just curious if you could -- with respect to the Adjacent Businesses, could you give us more of a base case scenario, what you see 3 to 5 years from now in terms of the contributions? How meaningful is it to profitability? And is that the right time horizon to look at in terms of when you start to see it really contribute?

Yes, I'm sure hoping it's closer to 3 than 5. But certainly in that time period, I can see this adding comfortably in the way we look at it today at the gross profit line. We're only looking at $11. It can be $30, $40, $50 of additional comfort, if you will -- buffer to the gross profit in the model. And then as we reached profitability, these -- a lot of these businesses are the type of business -- for example, if you look at our technology offerings at our cloud businesses, Software-as-a-Service and in our world, we call it software with a service. Those businesses, as you grow them, they are really cash efficient. They really spin-off a lot of cash. And we're -- in this quarter, we reached $100,000 SaaS seats on our different SaaS business. Basically there's 3 today: It's the Time & Attendance, Expense Management and our Performance Management business. But later this quarter, we'll have our organization planning, our OrgPlus business, will launch its Software-as-a-Service offering. The Payroll Service we just launched has a Software-as-a-Service option with it. We've got HCM coming down the pipe. We've got a substantial Software-as-a-Service business. Why that can't be millions of people on it, I don't know. That will be our goal. And those -- that business -- those are very profitable businesses once you get that volume going over that infrastructure.

Okay. Could you help us characterize when you're selling those -- your current experience today, how much of that is with your existing client base? How much it is brand-new clients?

Well, the selling system that we've just put in place is to put in front of our customers, our prospects, if you will, a Business Performance Advisor that makes a multi-product recommendation. So the goal there is for every customer we see, we will make some kind of recommendation of what we can do to help their business run better, grow faster and make more money. We should not call on a customer that we don't have something that should be helpful to them. But today, in this first phase, the real focus is for the -- our BPA's are out there looking for that Workforce Optimization customer and bundling additional services on top of Workforce Optimization. That's been effective so far. And we think that will continue to ramp up substantially, as our advisors get more comfortable with each of the business solutions. Now we haven't been quite as effective yet but we are with -- like I say, it's starting for our advisors to, maybe when they see something that's not a Workforce Optimization customer, to go ahead and make a recommendation 3 or 4 non-Workforce Optimization offerings. That is going on but not quite at the level that's part of the efficiency I expected to see going forward this quarter to next. So there are steps and stages and phases for this to take place.

Excellent. And then I wanted to ask a clarification question on your 2013 kind of high-level guidance. When you speak of gross profit levels should rise with growth in the business, does that mean you expect stable gross profit per worksite employee per month contribution next year to relative to this year?

I think we don't see anything today that kind of moves that one-way or another. But keep in mind, we're not really giving guidance today. This is just a general framework. And when we sit down and start to pin that down, we'll have a little better feel. But Richard and his team have done an awesome job this year on that front. And things appeared to be kind of just rocking along in that area. And we think at this early stage -- to be in the range where we are this year as a starting point is fine.

Okay. And then one final question in terms of sales force. Adding 50 is a pretty monumental change from what you've been doing in the last 2, 3 years. Do you see that as Phase 1 of several phases? And what, ultimately, do you see as kind of an optimal size for the business advisor force?

Yes, we -- well, now that we're -- have all the training ready to rock and roll. We've got the experience we need to help people reach the right level of efficiency. We're ready to bring in that first wave and start to grow the sales staff. We were as high as 350 or so at one point. So first priority is to get these 50 and back up to 300. Let's see how that goes over the 3 to 6 months after they're out there we'll probably bring on, if we're on the right track. You should get back up to where we're bringing somewhere between 10% to 15% every year. 15% would be the ideal number where you add 15% sales staff as you ramp the business up.

Your next question is from the line of Mark Marcon with Robert W. Baird.

A line of questioning, what's the current sales force retention rate?

Well, our turnover there has been in the low 30s. And that's one of the numbers we're hoping. The new selling system really does help. And it's funny because business-to-business sales of this type where you -- it takes a level of expertise. That 30% number is about right. I don't like it, but that's kind of what you see, for example, in some of your wealth management businesses and other types of businesses where you have pretty sophisticated operation. But I'm hopeful we can move that down in the mid-20s.

Right. And in terms of -- so when we think about net hires and we're probably talking something that's closer to 100, right? I mean, gross hires in order to get to the 300 level?

That's 86.

Okay. And in terms of the expenses that are associated with that, just how much is -- when we take a look at the salaries and compensation and commissions, how much is that -- of that is just purely on the sales side?

You mean our total operating cost?

Yes. I'm just trying to -- I'm just trying to ask...

What I would suggest you do on that front -- I mean, there certainly is a slug of new expense related to that sales staff. But the way we've managed it internally, this is all timed right, and basically, this is an investment -- we're placing an investment we've made last year that's already baked in.

Yes. It's not like you're going to see a big step up in operating expenses because we went and hired some people.

That's what I was trying to get at.

I mean, there's probably a step up and that is synched with the growth rate. It's not going to be a bubble or clipped [ph], yes.

So I mean, basically, the expenses as a percentage of revenue should remain relatively constant, is that what you're saying?

Yes, generally speaking, if we grow like high single-digits, with this kind of investment, you're probably going to grow the operating expense in high single digits as well, not have any leverage that year. Does that make sense?

It does. Because I knew that there were some expenses that should've been coming off because of all the investments behind the ABUs and so the new branding. So I was just trying to get a sense for that just in terms of whether or not we should be keeping the operating expenses roughly constant as a percentage of revenue and/or how to think about that.

Yes, for this early stage in planning next year, that's appropriate. We have to kind of lock things down closer on our next call.

Yes, and I'm just going to say that even with the addition of the growth in the sales staff, we don't have to open new offices. We don't have all that kind of expense. We've got existing space in all the offices. So it's really a very economical growth strategy.

Great. So it -- so essentially, for the same kind of the same expense profile, we should be able to bolster the revenue growth? That's essentially the...

Yes. Correct. It kind of given -- to me it's an added confidence level in the growth levels.

Are you actually seeing a pickup with regards to the efficiency in terms of the sales force, in terms of the number of closes per month?

Yes. Absolutely. Well, actually our closing rates are really good. We're -- good activity levels. But you have a combination of things going on. Our efficiency gain kind of happens -- increases as the year goes on anyway. So how much is -- it's hard to attribute -- to break that down and attribute it to each contributor. But we'll see over this Fall Campaign out. We're optimistic that we'll have a good campaign and good sales efficiency. But like I said, there's so much new -- so many new skills, new habits that are being developed that there's just a lot of upside in terms of individuals moving up the learning curve on their own performance. So this ramp up of the learning curve should really continue for several quarters for our current base. What's different about it, we will always have some at that level that are ramping up the curve, the newer Business Performance Advisors. And the difference here is that the entire 252 advisors all got there -- this year they've been retrained to do something different from what they were doing. And so we managed our way through that and kept everything rocking and rolling pretty well.

Great. And then so what are you seeing in terms of the efficiency rate at this point?

Well, we expect them to be in the 0.8 or so range about this time of year and we don't have that number right in front of me. I had to scramble around looking for it. But it's probably in the 0.75 to 0.8 range, which is pretty good.

Yes, great. And then what are you seeing with regards to the new payroll ABU? I know it's early, but how is that being managed from -- in terms of cross-selling it with the existing sales force, pricing -- any early indications in terms of take up rates?

Oh, yes. On the payroll side, it's really, really too early to tell there. I mean, we've got -- we a had great little pilot effort to get this rolling during the summer. It was very well-received at the Fall Campaign. And we've got a lot of prospects in the pipeline. It were close in business, but it's really too early to tell. In fact, you're not just look at a bunch of those numbers on the last few days, and you're still at the stage where you know a couple of accounts can change all those metrics on you. So it's too early to really lock in on any of that.

Can you just disclose how your -- how you've trained people to sell it? Or how the pricing is going?

Yes. We were -- again, the launch of our payroll business -- it's important to understand that our payroll operation is what we call a premium payroll operation. So it has a high level of service with it. It's for a target market that fits well into our whole universe of offerings. And so it's priced a little bit above the market, but we have clearly demonstrate the value you receive, both on the technology and on the service side. So we're very comfortable with where we priced the offering and what value we're delivering and how our cost structure should work for that.

And no indications of cannibalization at this point in terms of your pilot markets?

No. In fact, what we have been kind of excited about is you could probably fill a pretty big payroll business if you could just keep the ones that leave Workforce Optimization in the payroll operation. And we're still working on the nuts and bolts of that process. But we've had some good success already. One thing we've always had around in Insperity is that when companies leave us, they leave as friends and they loved what happened while they were here. And a lot of times, it's just the year they got bothered. They're financial world changed a bit but if they're continuing on and they're still going to need payroll, it's not a bad way to -- for us to stay and keep them as a customer.

Great. And then how much is the savings going to be from the new UnitedHealthcare agreement on an annual basis?

Well, I'm actually going to tell you what I am allowed to say. It will be several million dollars over the period between now and the end of 2015.

Okay. Is that number is several million -- is that closer to 2 or to 10?

The answer is, it all depends on how fast we grow. The faster we grow, the more it is.

That's all the time we have for questions today. And I would like to turn the call back over to Mr. Sarvadi.

Well, once again, thank you everybody for your interest and for your support. We look forward to having an excellent Fall Campaign and a strong year end. And we'll look forward to providing more specifics about 2013 next time we get together. Thank you very much, and have a good day.

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