Insperity, Inc. (NSP) Q1 2013 Earnings Report, Transcript and Summary

Good morning. My name is Thea and I will be your conference operator today. At this time I would like to welcome everyone to the Insperity First Quarter 2013 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. 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, believe, likely, probably, goal, objective, outlook, guidance, appears, target and similar expressions are used to identify such forward-looking statements and involve a number of risks and uncertainties that have been described in detail in the company's filings with the SEC. These risks and uncertainties may cause actual results to differ materially from those stated in such forward-looking statements. Now let me take a minute to outline our plan for this morning's call. First I'm going to discuss the details of our first quarter 2013 financial results. Richard will discuss trends in our direct cost, 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 major initiatives of our growth plan. I will return to provide our financial guidance for the second quarter and an update to our full year 2013 guidance. We will then end the call with a question-and-answer session. Now let me begin today's call by discussing our first quarter results. Today, we reported first quarter earnings of $0.51 per share, which was above the midpoint of our forecasted range. As expected, earnings declined slightly from the $0.54 per share reported in Q1 of 2012. This was a result of higher worksite employees and gross profit per worksite employee, offset by our recent investments, including the expansion of our Business Performance Advisors group and the implementation of our health care reform strategy. As for our key metrics, paid worksite employees averaged 123,391 for the quarter, an increase of 1.2% over Q1 of 2012 and within our forecasted range. Gross profit per worksite employee per month averaged $292, this was above both our Q1 forecasted range of $287 to $291 and the $282 reported in Q1 of 2012. Operating expenses were in line with our budget, totaling $86.1 million. We generated $30 million of EBITDA plus stock-based compensation and ended the quarter with $114 million of working capital and no debt after repurchasing 472,000 shares at a cost of $13.5 million. Now let's review the details of our first quarter results. Revenues increased 3% over Q1 of 2012 to $612 million on a 1.2% increase in average paid worksite employees. You may recall from last quarter's conference call that our January starting point was lower than initially anticipated. As an improvement in worksite employees paid from new client sales was offset by declines associated with lower client retention and net hiring on our client base. The good news is we returned to sequential growth in worksite employees by the end of the quarter. In addition, the loss of cost sensitive lower-priced clients showed up an improvement in gross profit. As you are probably aware, our key pricing metric is gross profit per worksite employee and our Q1 results exceeded our expectations. The average gross profit per worksite employee per month of $292 was $3 above the midpoint of our forecasted range and a record high for our first quarter. Favorable results were achieved by an improvement in our benefit cost center and an increase in the contribution from our adjacent business unit offerings. This more than offset a sharp fall in the payroll tax area, which is expected to impact only Q1. Richard will provide the details behind these results in a few minutes, so I'll just provide some brief comments on our direct cost. Benefit cost per covered employee increased by just 3.6% over Q1 2012 to $862. And approximately 72% of worksite employees were covered under our health plans during the quarter. Workers' compensation cost totaled 0.53% of non-bonus payroll, below our forecasted Q1 cost of 0.55% and included a $3.6 million reduction in previously reported loss reserves. This reserve reduction was similar to that reported in Q1 of the prior year. Payroll taxes as a percentage of total payroll were 9.4%, just a slight decline from the 9.6% in Q1 of 2012 as SUTA rates declined slightly from the prior year. Now let's move on to Q1 operating expenses, which were in line with our budget of $86 million. In addition to the impact of some investments made during the prior year related to the build out of several new business lines, the 7.7% increase over Q1 2012 included a recent ramp up in the number of Business Performance Advisors and investments made in our health care reform strategy. Net interest and other income for the quarter totaled just $80,000 in this very low interest rate environment and our effective income tax rate remained at 40%. As for our Q1 cash flow, EBITDA plus stock-based compensation totaled approximately $30 million, cash outlays included the repurchase of 472,000 shares at the cost of $13.5 million, cash dividends of $4.3 million and capital expenditures of $2.8 million. 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 record setting first quarter gross profit results, then I will update everyone on our gross profit outlook for the balance of 2013 and I will conclude my remarks with an update to health care reform and how we see it affecting our business. As Doug just reported, our first quarter gross profit per worksite employee per month was $292, which was $3 per worksite employee per month, above the midpoint of our range and the highest gross profit we have ever had. Gross profit consisted of $192 average markup, $87 of surplus and $13 from the adjacent businesses. Now let me give you the details of each component. The average markup and the surplus were $1 per worksite employee per month better-than-expected and the adjacent business gross profit contribution was $2 per worksite employee per month better-than-expected. The additional $2 per worksite employee per month of adjacent business gross profit came from better-than-expected revenues as we saw a nice increase in cross-selling opportunities that began in the fall of 2012 and have continued into 2013. The $1 per worksite employee per month of additional surplus came from a $7 per worksite employee per month lower surplus in the payroll tax cost center, a $1 lower surplus from the workers' compensation cost center and offset by a $9 per worksite employee per month improvement in the deficit in the benefits cost center. Here are the details of each cost center. The $7 per worksite employee per month lower surplus in the payroll tax cost center came primarily from the distribution of worksite employee payroll in states with higher state unemployment tax rates than we had originally forecasted. Even though it affected us in Q1, this mix change should not adversely affect our forecasted surplus for the balance of the year. The benefit cost center's lower than expected deficit of $9 was due primarily to higher allocations than were originally budgeted. Part of the increase in allocations was due to the successful execution of our pricing strategy, along with the favorable impact of a mix change that we discussed last quarter. In summary, the drivers of this quarter's positive results provide the opportunity to raise our gross profit expectations for the balance of 2013. So let's start with our markup. We are conservatively forecasting the average markup to remain at the current levels for the rest of 2013 due to the volume of new business that we expect. The markup on new business sold is typically lower than the markup on renewing business so we expect these to offset. Now let's look at the surplus component of gross profit, beginning with the payroll tax cost center. As I mentioned earlier, the sharp fall in this cost center surplus in Q1 should not repeat. Therefore, our forecast for the balance of this year remains unchanged. 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 with where they are now for the balance of 2013. On the cost side of the workers' compensation cost center, we continued to have good results. Even though we have recently experienced an increase in the severity rate over the last policy year, our frequency has been slightly lower. Therefore, our expense should still average about 0.54% of nonbonus payroll for the rest of this year and our surplus for the workers' compensation cost center should be about the same as our previous estimate for 2013. Switching to the benefits cost center. We expect improvement in both pricing allocations and in the costs. We continue to improve our allocations, as I mentioned earlier, even as the participants migrate to lower cost plan options. As this year goes by and more prospects find out how health care reform is going to raise their health care cost, I believe this will allow us to continue to increase our allocations. On the expense side of the benefits cost center, we know that our cost will go up each quarter as participants, deductibles and co-pays are satisfied. Our first quarter's results were definitely below trend so that should positively affect our full year's final costs. Therefore, we are reducing our benefits cost estimates to reflect a 4% to 4.5% increase over 2012, further reducing our expected deficit in this cost center. When you combine all of the forecasted direct cost surpluses and the benefit cost centers or deficit, we should generate a net surplus of $56 to $59 per worksite employee per month for the full year. Our last contributor to gross profit, which is our adjacent Business Services, should maintain its current level of gross profit contribution. Although sales have exceeded budget over the first few months of this year, we will remain conservative and not forecast any further increase in contributions to gross profit for the full year. In summation, when you combine the service fee markup, the surplus and the adjacent business contribution, we expect to see our gross profit per worksite employee per month end up in a range of $260 to $263, which is an increase from our guidance last quarter. Before I turn the call over to Paul, I would like to comment on health care reform and what we are doing to prepare for it. Last quarter, I talked about the creation of a health care reform task force and how it would help develop and implement our strategies for 2013 and beyond. We have now developed and are currently executing a comprehensive game plan to address what business owners need to know this year about how health care will affect them in 2014. All businesses will experience new and significant compliance, complexity and cost issues next year. But they have to prepare now to deal with 5 major provisions that will affect them this year. While we don't have the time on this call to go into detail, I will tell you what the provisions are. Number one is the individual mandate. Number two is the employer play or pay responsibilities. Number three is the government reporting and information tracking. Number four are cost, taxes and fees. And number five are the state and federal exchanges. Recently, all of our Business Performance Advisors and consultants were trained to present an executive briefing to prospects that explain how each of these provisions will affect their businesses in 2013. Very early feedback from prospects that have seen the briefing indicate that Insperity's business solutions can take away much of the pain that health care reform is going to inflict on their business throughout this year. At this time, I will turn the call over to Paul.

Thank you, Richard. Today, my comments will focus on three of our 2013 major initiatives. First, I'll discuss the Business Performance Advisor ramp up designed to fuel our future growth. Second, I'll discuss our plans to leverage the complexities, compliance and cost of health care reform into more selling opportunities and options for Insperity. And third, I'll discuss the first signs of gaining traction in our adjacent business strategy and what this means to Insperity over the long term. Growing the number of trained Business Performance Advisors was the central focus for the first quarter. The number of trained Business Performance Advisors is the leading indicator for future growth for the company. Throughout our history, as we grow the number of trained sales staff, acceleration in worksite employee growth follows within 6 to 12 months. Last October, we determined our Business Performance Advisor training program, The Insperity selling system, was ready to rollout and we announced a plan to increase our team of advisors from approximately 240 to 300 in 2013. Since we made this decision, we've hired 114 new Business Performance Advisors, bringing our total number of BPAs to 325 today. New BPAs are counted in the trained BPA account after 2 months and 2 levels of training have been completed. 74 new BPAs completed their training in the first quarter, bringing the total trained BPA count to 264 in April, an additional 28 completed their training in April and 26 are scheduled for completion in May. I'm very pleased to report, over the next 2 months of this quarter, we expect to exceed our goal 300 trained Business Performance Advisors, a 25% increase over the fourth quarter of 2012. In addition to training new BPAs, we continued our certification training for experienced advisors through the University of Houston. In Q1, 74 advisors achieved the certified Business Performance Advisor designation, bringing the total number of CBPAs to 150. We also held our annual sales convention in Houston, training advisors on many aspects of the selling system and the wide array of business performance solutions now available from Insperity. Our emphasis was the introduction of our customer for life philosophy and the paradigm shift required to execute our long-term growth plan. Our customer for life philosophy brings together the completed business transformation of Insperity. We have gone from offering 1 solution to a perfect fit customer at just the right time to offering a wide array of HR business performance solutions that fit almost any prospect at any time. This new paradigm requires BPAs to gain a holistic view and understanding of the customer's needs initially and on an ongoing basis thereafter. This allows us to establish a relationship, an appropriate set of solutions and upsell and cross sell other solutions as the customers needs change. To be successful over the long term, we are establishing the role of the Business Performance Advisor with necessary foundational training to identify business issues and properly match Insperity's solutions. This is where health care reform has teed up an excellent opportunity for Insperity. On January 1, 2014, the Patient Protection and Affordable Care Act will bring a wave of complexity, compliance and cost to the business community. The implementation happening now will affect every company. Business owners and managers are feeling the anxiety that comes with the uncertainty of how this law will affect their company and their people. The time to become informed cannot be put off any longer and we are ready to fill this pressing need. As Richard mentioned, there are 5 major elements of health care reform taking effect on January 1. We have condensed the analysis of more than 15,000 pages of regulations into an executive briefing and trained our advisors to take this information to the marketplace. Our Business Performance Advisors are equipped to explain these changes and help business owners understand the decisions and choices they must make in the months ahead. I cannot think of a better way to establish the relationship between our advisors and our prospects than conducting an executive briefing on health care reform. These meetings provide an opportunity to demonstrate our expertise in all things HR-related and the clear advantage of our comprehensive Workforce Optimization solution. Just like it says in our new advertisement, a business owner can spend their time and money to figure out health care reform or simply trust Insperity to handle it for them. Our goal is to leverage health care reform to increase the number of sales opportunities throughout 2013. I believe once a prospect receives the value of our executive briefing, they will welcome an ongoing relationship with our advisor and very likely, consider working together to help them comply with the new law. Compliance with health care reform can take many forms for these prospects, many of which lead to new customers for Insperity. Our Time and Attendance, HCM and payroll solutions are ideal for meeting the reporting requirements of the new law. Our Insurance Services unit is prepared to help customers choose their best alternative to provide benefits from the new options coming available or traditional sources. And best of all, the complexity, compliance and cost of health care reform points a customer directly toward our premium Workforce Optimization solution. The issues surfaced by health care reform reinforce the co-employment benefits of Insperity Workforce Optimization. There is simply no other way in the marketplace to eliminate the need to even be concerned about health care reform. The combination of administrative relief, government compliance and the reduced liability that comes with the co-employment relationship is a perfect fit solution for health care reform. This became crystal clear in our recent interaction with customers and prospects at the masters. Over 5 days we entertained over 60 clients and a guest of their choice. Essentially our customers brought us a prospect with them and the contrast between them on the issue of health care reform was amazing. The guests had a visible level of anxiety as discussions ensued about specific requirements coming on January 1. Our clients stated openly and clearly how they have no concern at all because in their words, "Insperity handles all that for me." So we are being served up a gift in the unlikely form of health care reform and we are focused on conveying this -- or converting this into more selling opportunities for Workforce Optimization or our adjacent business performance solution. These adjacent businesses provided a highlight in the recent quarter by exceeding our gross profit contribution expected from these offerings. Year-over-year growth exceeded 30% in gross profit per employee from our adjacent businesses, increasing from slightly less than $10 to just over $13. The exciting aspect of this, from my point of view, is the validation of our improved business model. There's tremendous potential for this margin expansion to continue as we gain traction in these businesses through our BPAs and other channels. We are developing a very nice software as a service business with 42% year-over-year growth in SaaS in Q1. This establishes a nice foundation of recurring revenue underneath the 23% revenue growth in our ABU portfolio over the same quarter last year. In addition, these businesses are new and as a portfolio, are not yet contributing at the operating income line. Seeing this growth points to the progress made and the potential for the operating income drag to become a contribution in the not-too-distant future. Also, as these businesses grow, the prospect base for Workforce Optimization opportunities increases. In fact, the opportunity for cross-selling our entire array of offerings increases and the synergy of our new strategy and business model is clear. Although this was an exciting quarter in this respect, we have not built in any acceleration into our forecast beyond what we previously budgeted at the beginning of the year. These businesses are too new and developing to consider this a trend so we will leave this as upside potential. So in summary, we are off to a very good start for 2013 and for our 3 major initiatives expected to yield future growth. We are very pleased with our increase in the number of Business Performance Advisors, our preparation to leverage health care reform and the traction we're seeing in our adjacent business. At this point, I'd like to pass the call back to Doug to update our guidance for the year.

Thanks, Paul. Now before we open up the call for questions, I'd like to provide our financial guidance for the second quarter and an update to our full year 2013 forecast. In general, we are slightly increasing our full year guidance as follows: we are continuing to forecast sequential unit growth over the remainder of the year within the range of our initial guidance; we are increasing our forecast of gross profit per worksite employee per month based on a slightly improved outlook on pricing and direct cost trends coming off of first quarter's positive results. As for our operating expenses, our revised forecast includes only slight changes in our spending, including incremental cost associated with being ahead of plan on the hiring of Business Performance Advisors. It also assumes a higher incentive compensation accrual to be paid only upon achieving higher operating results. Additionally, with the benefit of the actual first quarter results, we're able to refine a seasonal pattern in gross profit over the balance of the year. This resulted in some tweaking of gross profit between the quarters. So as for our key metrics guidance, we are forecasting average paid worksite employees in the range of 126,500 to 127,000 for Q2 and have updated our full year guidance to a range of 129,750 to 130,250. As Richard mentioned, we expect gross profit per worksite employee per month to be in the range of $260 to $263 for the full year, which is slightly higher than our initial guidance. As for the second quarter, we expect gross profit per worksite employee per month to be in the range of $253 to $255. The expected step down from first quarter's results reflects the seasonality associated with payroll taxes and the impact of increased participation in high deductible health plans. We now expect a sequential increase of $5 per worksite employee from Q2 to Q3 followed by a decline of about $20 from Q3 to Q4 on higher benefit cost associated with the high deductible health plan. As for operating expenses, we are now forecasting full year 2013 to be in the range of $340.5 million to $342.5 million. For the second quarter, operating expenses are expected to be the range of $87.75 million to $88.5 million. Taking into account some seasonality in our operating cost, we expect a sequential decline of approximately $4 million from Q2 to Q3 and a decline of approximately $1 million from Q3 to Q4. As for interest income, we are forecasting $200,000 to $250,000 for the full year. We are estimating an effective income tax rate of 40% and $25.6 million average outstanding shares for both Q2 and the full year. Consistent with our previous methodology, this estimate of average outstanding shares does not assume further share repurchases, although you've noticed that we have recently been actively repurchasing our shares in the open market. In summary, our updated key metrics guidance implies a range of 2013 full year earnings per share of $1.51 to $1.61, or an improvement of approximately $0.04 from our initial budget. At this time, I'd like to open up the call for questions.

[Operator Instructions] The first question will come from Jim MacDonald with First Analysis.

Could you give us an update on your sales in the first quarter and kind of how you expect new sales and attrition, how you expect that to pan out for the year?

Yes, we had a solid quarter on both the sales and the retention front once we got past the year-end issues that we reported on last quarter. So retention settled back into the 1% range, and we'll expect them have to continue monthly retention -- monthly attrition, excuse me. And then on the sales side, we were at about 92% of our budget for the quarter. Of course first quarter always has a low budget, I mean, it accelerates throughout the year because of all the sales convention and training, et cetera that goes on. So we're -- things are in-line on that front, and we're expecting to see some acceleration now.

Okay. And on the adjacent business units. What -- can you talk a little bit and give us some color about which ones are doing better and what made the -- made up for the success performance?

Yes. We had -- we've really worked diligently over the last 6 months to get the selling system, the individual systems, within each of the business units and the integration between that and our BPAs and our inside sales staff so now that all that's in place and we're getting enough repetitions, we're starting to see it really, really gain, gain some traction. Over the past year or so Time and Attendance has kind of led the way and that continued. But we also had a very nice quarter out of our Performance Management and organization management unit. And as a portfolio, it was a 23% year-over-year revenue increase, and of course, over 30% of the gross profit line. So that's good. A lot more to come. But again, as I mentioned in my remarks, these businesses are new and we're going to allow that to kind of come on as upside as opposed to up in the forecast at this time.

One quick one, maybe for Doug, and then I'll get back in queue. Was the repurchase activity mostly late in the quarter? There doesn't seem to be too much of an effect in this quarter's share count and you're not kind of forecasting much of a carryover impact for next quarter. So just some thoughts on, in general, on what you've done and how you expect to continue the repurchase activity?

Yes. I mean, it's a combination of being a little bit late in the quarter. Now you also know we have restricted shares to our employees that adjust every year, and those are typically granted in the first quarter. So you had some offset of those that adjusted versus what we repurchased in the quarter, although we did repurchase in excess of the restricted grant vesting. And as I mentioned in my comments, although we don't forecast further share repurchases throughout the year, you can tell we've been active in that and I'd say at this point, our plan is to continue along the [indiscernible].

The next question will come from Tobey Sommer with SunTrust.

Question for you about health care and benefits. On the last conference call, you mentioned that the opportunity there is significant. But how it unfolds is a little bit fluid. And you mentioned health care exchanges. Do you have any refined thoughts on what the company's view is on health care exchanges? And whether you have any plans to develop anything internally?

Yes. Toby, the situation with the health care exchanges right now is just kind of -- it's still out there, it's still something that we can do if we need to. The demand for that right now doesn't seem to be as high as it was, maybe a quarter ago. And especially as we look at the carriers and kind of their commitment into some of these markets, and we think there's not going to be near as much rush to create exchanges like there was in the past. So it's kind of steady as you go, from our perspective.

I think that the biggest different since last quarter was the admission that the exchanges are going to be weaker than originally expected and some of the implementation seems to be stumbling. We stand ready to implement a private exchange. Of course, express purposes if that becomes a way to go. There are some signs of some -- the resurgence of defined contribution plans for benefits, some going -- handled through an exchange, that might be a positive. But we're ready to -- our commitment was to be in a position to move forward with any options that make it better for our customer. But I would say at this point, as Richard said, one quarter further along, that's less of a threat and less of a an issue.

Okay. That's helpful. I wanted to ask a question about the sales force growth. You said you're running a little bit ahead of plan we've -- and you baked that into slightly higher expenses. How do you go about or when should we see kind of milestones to enable us to judge the success of the efforts to increase the sales force?

Sure. I think the first step we have to look for is activity numbers. So in that -- that's what we're all over for this quarter that we're in right now. We want to see activity numbers up, you've got the number of advisors out there, let's get that first call number up, get the number of censuses and referrals to -- for adjacent business opportunities, let's see that activity move up. And then of course, in the next quarter, we'll start looking more at closing rates and in the third and fourth quarters in our Fall Campaign. Things are lining up very well to be in a position to really see the actual sales numbers in the fourth quarter be considerably higher.

And my last question has to do with the payroll taxes, Richard. Any kind of change in trend there or something of note that we should anticipate as kind of 2013 unfolds or you've just pretty set?

Yes, now we're fine. The -- as I mentioned in my remarks, the real change was each year when we go to forecast for the year on the payroll tax side of things, we're estimating how many employees we're going to have in different -- in each state that's going to be sold and renewed going into the new year and then that, obviously, multiply times the tax rate in that state and the payroll dollars produces the amount of expense. So what happened this quarter was we actually had more employees and some higher unemployment rate states than what we forecasted, so the expense was actually higher in the quarter. Now, now that we made that adjustment into our forecast, it just didn't seem to be that big of a difference going into the second and third quarters and beyond because the difference between the allocation and the cost is kind of accentuated in the first quarter and basically flattens out as employees earn their wages throughout the balance of the year. People...

Many employees hit their pseudo wage limits in the first quarter.

Yes.

So the surplus that we earn on the pseudo piece of payroll taxes is generally first quarter related so it shouldn't impact, to any significant degree, quarters going forward.

Thanks. That makes a lot of sense. Doug, can I get one last number question from you. What's the share count, kind of, as of today, so we could see kind of what the flow through is from the first quarter late repurchase?

I don't know. I think it's about 25.6 million or so. Right, maybe a little less than that since that was the average for the quarter and we bought some more towards the tail end of the quarter, but it's materially off that number.

The next question will come from Michael Baker with Raymond James. Michael J. Baker - Raymond James & Associates, Inc., Research Division: As you get a better sense of some of these state regulations or state based regulations, are there any that stand out as better-than-average opportunities?

Are you talking about health care reform? Michael J. Baker - Raymond James & Associates, Inc., Research Division: Yes, health care reform. And as you know, it's going to vary by state, and just wondering if there are any particular ones, given recent dynamics, that are standing out in your mind as even greater than average opportunities?

Yes, I would say that quite a few of them are going to be really good opportunities for us. And I'll just leave it at that for right now. But no, we -- it's really with the amount of regulations that hasn't been published yet, we see that as a big opportunity. We continue to look at how we have operated in the state of Massachusetts for 5 years now, since Romney Care went into existence. And it's been a great opportunity up there. And we just see that happening in all of the other states. Michael J. Baker - Raymond James & Associates, Inc., Research Division: And then has reform itself changed your target market both in terms of employers size well as type, industry type?

No, not at all. We have -- we typically have always used the client profile and selection process that deals with the type of businesses from a worker's compensation perspective and from turnover and low pay. And those are still be obviously at the forefront of our Workforce Optimization solution. But we still see some pretty significant opportunities in the nonworkforce Optimization solutions with the customers just with HCM, our payroll, separate payroll offering and our Time and Attendance. Because you see that one of the things that health care reform is bringing to the table is a significant amount of reporting. And the tracking of the information that businesses are going to have to provide comes out of 3 systems. One is the payroll system, one is the benefit system and one is the human resource system. And so trying to accumulate all of that separate information to do monthly reporting that's going to be required is going to be pretty onerous for a lot of the businesses and we see an opportunity there that's really good.

I would add to that, that even though our target market for Workforce Optimization has not changed, like Richard mentioned, health care reform has teed up an opportunity for us to have more flexibility in how benefits get provided to our customer. And I believe it's going to create some new options for us on combinations of services that might fit more prospect beyond our original target for Workforce Optimization. So that's why we've geared up our agency, our insurance agency, so we can place coverage for customers that may want to be covered outside of our plans that are under our co-employment relationship. There's new flexibility and that always expands your market. And so we're looking forward to seeing that develop a little bit further as we go through this quarter and get some other items in health care reform locked down so we make sure we have the freedom and flexibility we're looking for. Michael J. Baker - Raymond James & Associates, Inc., Research Division: And then based on conversations with prospects, is there any indication at this point, which way, which of your services is having a greater potential?

Well, what's so interesting to me is here after 27 years now, it's like this spotlight on health care reform highlights the advantages of a co-employment relationship where you become a part of a much larger buying group for benefits and you end up in a situation where you're not the plan sponsor, you don't have the liability, you don't have so many of the issues that are very scary, frankly, for a business owner. And you don't have all this administrative work and complexity to figure out. You just say you take care of it. And that, I'm telling you, is really an opportunity to highlight our core business and I think it's going to get a lot of people to take a look at that, that maybe wouldn't have taken a look at it previously.

The next question will come from Jeff Martin with Roth Capital Partners.

I'm going to ask a similar question in a different way. Let's say someone wants to let Insperity handle their health care reform issues and the administration of it. Does that mean they become a Workforce Optimization client or is there another for them to get your help?

Sure, it's not necessarily Workforce Optimization. I think it's the best way because it solves so many of the issues. In fact, it goes all the way to saying okay, fine, now you're done, don't worry about it, we'll take of their rest. So that's the ultimate solution for health care. But if they're not ready for that, let's just take the reporting issues. Richard just mentioned there's 3 systems involved. Normally right now, the information to do the reporting, the ongoing, monthly reporting, the data is a 3 system. We have worked, and are in the process of very soon, our systems will be what I'll call health care reporting compliant, so that somebody wants to solve that with our HCM system, having us do the payroll and we have all the HR information and the benefits and enrollment information, the HCM system, we'll have those reports ready to rock 'n roll. So if that's -- their biggest issue is the reporting side, we can help them there. But also, if they just simply want to evaluate what their benefit options are and find out what is their best benefit solution, we can handle that through the agency and in our case, of course, we would always want to group that with other offerings that we have. So I can see someone saying, "Hey, look I need to deal with health care reform. But you know what, I'm not ready to call for co-employment." Maybe they end up with our payroll, HCM, Time and Attendance system, as an administrative and reporting solution, coupled with our pay-as-you-go workers comp and benefit plan through our agency and they have a non-co-employment fairly comprehensive solution, handles a lot of the health care reform issues but leaves them with the liability and responsibility.

And the cost.

And the cost.

To that nature, with the sales force having more complex things to talk about, are you concerned at all that the number of first cost for sales person may go down?

Well, actually, I think that the biggest issue we've had now since the recession is getting in the door with business owners because they've been kind of hunkered down and not very open to having meetings and discuss things. But their openness to having a meeting to discuss health care reform is very significant. And so that becomes our entrée in the door, I would be surprised if this doesn't create more of those opportunities. You are correct that our advisers have been kind of drinking through a firehose the last 6 months or so on training and so forth. But they're doing great and they're -- it's a matter of getting out and having the repetition so that they could be very effective. But I can tell you what we've equipped our advisors with, when they walk in the room, they're the smartest person in the room on health care reform, I can tell you that.

Fantastic. And Paul, you mentioned the adjacent business units maybe reaching an operating profit contribution a little earlier than expected. Was curious if you could just elaborate on that in whatever way you want to?

Well, I'm just looking forward to that day. It's not in the immediate future but it's certainly in the foreseeable future, and I don't want to put a date on it. For the reasons I've said, these businesses are young and developing and many of them have some huge upside potential in just a nominal number of deals. So when those occur, I don't know. The fact that I expect it to occur where our confidence level is not occurring has gone up tremendously and this quarter was a good reason to increase that confidence.

The next question will come from Mark Marcon with Robert W. Baird. Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division: I was wondering if, on the ABUs, can you just talk about which ones are actually seeing the most traction?

Well, Time and Attendance is probably seeing the most and I think we -- that Time and Attendance system is going to be really critical for health care reform. And so, in fact, I can't see a company, that doesn't have a Time and Attendance system on January 1, 2014, those people are crazy. They're going to be having to track all of that data somehow. It becomes a major input to their reporting. So that's going to -- I think the traction there is excellent. We're in good shape on our sales team and our service team, our implementation teams. So that business is in decent shape. We just got to keep our nose to the grindstone. Our HCM system is new and just launched and just got new customers and it has incredible potential. It wasn't a big contributor in the quarter but has a lot of potential for us in the immediate future also health care reform related. As far as the traction in the recent period, I mentioned that Performance Management and Organization Planning part of our organization, they had a just a really good sales quarter, just speaks well of how nicely those SaaS products are being received in the marketplace. Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division: Great. And then can you talk a little bit -- I know some of it's still unfolding. But to what extent have you received clarity from some of the states with regards to the potential to offer single-employer plans versus whether or not you're going to have to multiemployer plans on the health care side?

We haven't had any dialogue or any new information on that front. It seems like across the board that the type of plan that we offer is certainly going to be allowed. And we haven't seen -- heard of anything to the contrary of that.

We have a group working on that state by state to keep track of it at the state level and we do have flare ups here and there, now and then where something comes out about how this will be viewed and we're on the ground there very quickly to communicate how this works, how it's different, and at this point, we're comfortable with the structure of our program. And it is unique. The way we deliver our program, the way we've managed our plans, has a uniqueness to it that's identifiable and demonstrable. And so far so good, and we'll stay on top of that. Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division: I mean, when would you expect to get final clarity on that or is it possible to -- it's going to stay open ended?

Yes.

I would say that it's going to be open ended for a long period of time. I mean, the states are focused on trying to get the exchanges up and running and there's a lot of consternation going on about that and what we're hearing now is that, that some of the states that are -- have committed to having their exchange opened in October, is going to be nothing much more than a website. I mean, there's a lot of wood to chop between now and October and I wouldn't be surprised if even some potential discussion about extension happens. Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division: Can you talk a little bit more about Massachusetts, just in terms of your experience over there? And to what extent you think that, that's transferable to the nation at large from your perspective?

Yes, I would say it's 100% transferable. We've actually gotten some videos from testimonials from clients of ours in Massachusetts that I think are either up on the website or getting ready to be put on the website, where they talk about the fact that using Insperity, how that has absolutely taken all the pain and agony of health care reform off the table for these companies. And that they're all different sized companies. And they all have different -- they're all in different businesses. And -- but they all have the same end result that this has really been a real savings for them in every way.

Yes, we just 3 Massachusetts customers in a room around the table to talk about it and they said exactly what we're seeing out there, they said, well, "I don't know why anybody wouldn't go this route because you can't afford to take the time to learn about it, you can't take -- afford to take the time to comply and why would you, because you got to focus on your business." And so what -- that aspect in terms how a business person needs to react to sweeping legislative reform, that is exactly transferable to this situation in cross spend. Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division: And is Massachusetts like a higher penetrated market than the other northeastern markets around it?

No. I wouldn't say that. I would say that...

We did have great success in that market.

We did, yes.

Once we got this in place, we had a lot better results once we solved this problem. Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division: So once the problem came along, then it actually picked up? Your sales growth rate increased post?

Yes.

Yes, it did.

Absolutely. Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division: Okay, great. And then can you talk a little bit about the OpEx pattern for Q3 to Q4, just the sequential changes?

From Q3 to Q4?. Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division: Yes. Just going from Q2 to Q3 and then Q3 to Q4.

Yes, Q2 to Q3, we have gone down by about $4 million or so. And that's primarily in the advertising line item. So as we did mentioned, we're having some advertising around health care reform as we speak today in promoting that and then we're going to take a little bit of a break in Q3 on that. And it's pick up -- It's going to pick up a little bit again in Q4 in the advertising line item as we go into the Fall Campaign, okay? So that's one of the major drivers from the Q2 to Q3 sequential pattern. And then from Q3 to Q4, we got it going down by $1 million or so, its primarily in the G&A area, I don't know the details behind that. But there's a little bit of a decrease in seasonal pattern from Q3 to Q4.

Ladies and gentlemen, we have reached the end of the allotted time for the Q&A session. At this time, I would like to turn the conference over to Mr. Sarvadi for any closing remarks.

Well, thank you, once again, for joining us today. We really appreciate all of your interest and your questions, and we look forward to seeing you again next quarter. Thank you.

Ladies and gentlemen, thank you for participating in today's conference call. You may now disconnect.