Insperity, Inc. (NSP) Q2 2013 Earnings Report, Transcript and Summary

Good morning. My name is Dennis and I will be your conference operator today. I would like to welcome everyone to the Insperity Second 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'd 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 second 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 provide an update to our major growth initiatives. I will return to provide our financial guidance for the third quarter and an update to our full year 2013 guidance. We will then end the call with a question-and-answer session. Now let's begin today's call by discussing our second quarter results. Today, we reported adjusted second quarter earnings of $0.24 per share, which was above both the implied EPS from the mid-point of our range to $0.21 and Q2 2012 earnings of $0.22 per share. Adjusted Q2 2013 earnings exclude the previously announced impairment charge of $0.10 per share associated with our minority investment in The Receivables Exchange. As for our key metrics, paid worksite employees averaged 126,696 for the quarter, an increase of 2% over Q2 of 2012 and at the mid-point of our forecasted range. Gross profit per worksite employee per month averaged $257, this was above both our Q2 forecasted range of $253 to $255 and a $234 recorded in Q2 of 2012. Operating expenses totaled $87.5 million, just below the low end our forecasted range. And we generated $19 million of adjusted EBITDA and ended the quarter with $119 million of working capital and no debt. Now let's review the details of our second quarter results. Revenues increased 5.4% over Q2 of 2012 to $547 million, on the 2% increase in average paid worksite employee. As for the drivers to our worksite employee growth, client retention averaged just over 99% for the quarter. We experienced modest hiring in our client base throughout the quarter, including some seasonal summer help. Q2 sales came in above budget, and Paul will share the details of our sales efforts with you in a few minutes. As I just mentioned, our key pricing metric, gross profit per worksite employee per month averaged $257 for the quarter, exceeding our expectations. Now Richard will provide the details behind our gross profit results in a moment, so I'll just provide some brief comments. Benefit cost per covered employee came in slightly lower than expected, increasing 1% over Q2 2012 to $891. Higher-than-expected claim costs of the current quarter were more than offset by lower-than-expected premium taxes and claim cost from prior periods. Workers compensation cost totaled 0.55% of nonbonus payroll and included a $3 million reduction in previously reported loss reserve. Payroll taxes, as a percentage of total payroll were 7.1%, which was relatively flat compared to Q2 of 2012. Gross profit contribution from our adjacent businesses came in higher than forecast and increased 17% from $12 per worksite employee per month in Q2 of 2012 to $14 in Q2 of this year. Now let's move on to Q2 operating expenses, which totaled $87.5 million, just under the low end of our forecasted range. The 12% increase over Q2 2012 included costs associated with the recent ramp-up in the number of Business Performance Advisors. Although the Q2 average BPA count was slightly less than planned, we ended the quarter with 331 total Business Performance Advisors and the 299 trained BPAs, which puts us back into position as we head into this year's fall selling season. These additional BPAs, along with other budgeted headcount and a higher incentive compensation accrual tied to our improved operating results, resulted in a 14% increase in salaries and wages over Q2 2012. Stock-based compensation increased 18% over Q2 2012. Now consistent with our budget, our 2013 restricted share grant was at a similar level as that granted in 2012. However, with the 3-year vesting period, we have a lower priced 2010 grant, which occurred during the economic downturn being replaced by grants at higher priced level. Advertising increased by approximately 14% over Q2 2012 as we move forward with our budgeted marketing plan and increased activities surrounding health care reform. G&A expenses increased by about 8% and included travel and training associated with the recent hiring of Business Performance Advisors. And depreciation and amortization increased by approximately 18% due primarily to the amortization of recent systems and software enhancements to support our Workforce Optimization and our adjacent businesses. Net interest and other income for the quarter totaled just $64,000 in this low interest rate environment. Our effective income tax rate for Q2 was approximately 54% and was impacted by the tax treatment associated with this quarter's impairment charge. Tax deductibility associated with this expense must be deferred until the asset is sold and then can only be taken to the extent of any capital gains. Excluding the tax treatment associated with this item, our effective tax rate for Q2 was 40%, which was consistent with our forecast. As for our Q2 cash flow, adjusted EBITDA totaled approximately $18.9 million. Cash outlays included cash dividends of $4.3 million, capital expenditures of $3.8 million and the repurchase of approximately 60,000 shares at a cost of $1.6 million. For the first half of the year, we've now generated adjusted EBITDA of approximately $48.5 million and repurchased 532,000 shares at a cost of $15.1 million. At this time, I'd like to turn the call over to Richard.

Thank you, Doug. This morning, filling you on the details of our better-than-expected second 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 on health care reform and how we see it affecting our business. As Doug just reported, our second quarter gross profit per worksite employee per month was $257, which was $2 per worksite employee per month, above the mid-point of our range. The gross profit consisted of $191 of average markup, $52 of surplus and $14 from our adjacent businesses. Now let me give you the details of each component. The surplus in the adjacent business gross profit contribution were each $1 per worksite employee per month, better-than-expected, while the average markup was right on our forecast. The additional $1 per worksite employee per month of adjacent business gross profit came from better-than-expected revenues as we continue to see increases in cross-selling opportunities that we talked about last quarter. The $1 per worksite employee per month of additional surplus came from a slight improvement in the deficit of the benefits cost center. So in summary, this quarter's results give us a lot of comfort that we should have a solid gross profit picture for the balance of the year. So let's start with the markup. We are conservatively forecasting the average markup to remain at the current levels for the rest of 2013. The markup on new business sold is typically lower than the markup on renewing business. Therefore, we expect to see an offset in the new business pricing versus the renewing business pricing. Now let's look at the surplus component of gross profit beginning with the payroll tax cost center. As most of you know, our surplus in this cost center declines throughout the year, especially when we are growing. So for now, we will conservatively maintain our forecasted surplus in this cost center at essentially the same levels that we discussed last quarter. 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 flat with where they are now. On the cost side of the workers' compensation cost center, we have some interesting dynamics to talk about. We have continued to see a decline in the incidence rate, however, the severity rate is up primarily due to a higher number of large claims compared to the prior policy year. The good news is that these particular accidents were not the result of systemic problems in our client base and we do not see this as a trend going forward. However, we will be conservative and increase our expense forecast to about 0.58% of nonbonus payroll for the rest of this year, thus reducing our surplus in this cost center from our prior forecast. Switching to the benefits cost center. We expect to see further improvement in both pricing allocations and in our cost. As I mentioned last quarter, we continue to increase our allocations even as participants continue to migrate to lower cost plans. As more and more prospects find out how health care reform is going to raise their health care costs, that should allow us to continue to increase our allocations as well. On the expense side of the benefits cost center, we know that our costs go up each quarter throughout the year as participants deductibles and co-pays are satisfied. However, both our first quarter and second quarter results have been below our previously forecasted trend. So that should now translate into lower health care costs for the full year than previously forecasted. Therefore, we are reducing our benefits cost estimates for the full year to now reflect a 3.5% to 4% increase over 2012. The net effect of the allocation increase and the lower cost trend will be resulting in a further reduction to our deficit in this cost center. When you combine all of the forecasted direct cost surpluses and the lower deficit in the benefits cost center, we should generate a net surplus of $56 to $58 per worksite employee per month for the full year. Our last contributor is gross profit, which is our adjacent Business Services should maintain their current level of gross profit contribution. Sales have again exceeded budget for the second quarter in a row. However, we will remain conservative and not forecast further increases to gross profit for the balance of this year from these adjacent businesses. 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 $261 to $263, which is consistent with our last quarter's discussion. Now let's shift gears and talk about health care reform. Last quarter, I shared with you all the things that we have been doing to prepare our clients and prospects for what to expect beginning January 1, 2014, as it relates to health care reform. As you will see from Paul's remarks in a few minutes, our efforts have begun to pay off. We are well positioned to help businesses of all sizes deal with Obamacare. A couple of weeks ago, you probably heard that the Obama administration announced that it was delaying the reporting requirements and associated penalties for large employers until January 1, 2015. This was done because the administration recognized that the reporting requirements were too complex. Since the reporting requirements are necessary to determine which employers would be subject to the penalties, the administration had to delay the employer penalties as well. However, the real issues of cost, taxes, fees, state exchange reporting and the individual mandate are still scheduled to go into effect January 1, 2014. These are the significant issues that businesses have to deal with this year. We are seeing an increasing amount of activity as we continue to educate and inform clients and prospects how Insperity's business performance solutions can take away much of the pain associated with health care reform. At this point, I'd like to turn the call over to Paul.

Thank you, Richard. Today I'll provide an update on our current plan for growth acceleration, including 3 major initiatives. First, I'll address the ramp-up in Business Performance Advisors and the corresponding sales activity increase we expect. Second, I will comment on our customer-for-life program and specifically our mid-market changes we made to improve the sales and retention. And third, I will provide some color to the continued margin expansion we expect from successes we are having in our adjacent businesses. Last fall, after validating our Business Performance Advisor training program, we set an objective to ramp up the trained Business Performance Advisor count by 25% to approximately 300 over the first half of 2013. Our average trained BPA count increased from 239 in Q4 last year to 243 in Q1 and then stepped up to 292 in Q2, an increase of more than 20%. Although this is slightly behind our target of 300 for this leading indicator for the second quarter, we are starting the second half of the year with over 330 hired and over 300 trained Business Performance Advisors. This ramp-up is already beginning to generate the desired results. Sales for the second quarter were 112% of budget and sales activity is ramping nicely. The number of discovery calls, which are initial face-to-face visits with a qualified prospect was up 36% sequentially over Q1 and 14% over Q2 last year when we had 11% fewer advisors. We also had a substantial increase in leads due to our health care reform initiative. Our television advertising generated an increase of more than 40% in qualified leads over the same quarter last year and over Q1 of this year. Leveraging the complexity, compliance and cost of health care reform into opportunities to meet face-to-face with business owners has been very successful. Our executive briefing on health care reform has opened many doors and established Insperity and our BPAs as trusted advisors and led to further discussions of our services. In fact, and as a result of this success that we have had getting leads and getting in the door, we are shifting marketing dollars Q4 to Q3 and waiting the advertising spend more toward health care reform. The delay in the employer mandate, in my view, is a positive for Insperity. This reprieve ensures that health care reform will be an issue for employers for an entire additional year. We intend to capitalize on these delays throughout 2014. So we are looking to continue to ramp up in the third quarter in discovery calls and in obtaining census of business profile information necessary to be in Insperity Workforce Optimization and other services. We expect this ramp up in sales activity in Q3 to translate into strong Q4 sales and accelerating worksite employee growth into 2014. The second major area of emphasis to ensure growth acceleration is to improve our mid-market sales and retention results this fall compared to last year. During the second quarter, we completed development and implemented a pilot program, which we expect would have the desired result of losing fewer and selling more mid-market clients on a variety of services. Our customer-for-life program is a way to bring together the entire new Insperity growth strategy on a client-by-client basis. It requires an ongoing analysis of client needs and the commitment to flexibility in order to alter a client service plan as their needs change. This mindset has led to a repackaging of our services to align with a wider range of possible client needs for HR service options. Mid-market clients and prospects will now be able to choose from among 4 Business Service bundles to meet their HR needs. Our premium Workforce Optimization offering on our unique co-employment platform, will remain a flagship service for companies that want to move ahead as far and as fast as possible. Customers and prospects that want a full service solution, group buying advantage, reduced employment risk and no impediments to any HR service project will continue to choose Insperity Workforce Optimization. However, we will also introduce an alternative lower cost co-employment solution called Workforce Synchronization. This service does not include project-related HR services in the bundle. These services will still be available but will be quoted and purchased on an as needed basis. In the pilot, we are also introducing 2 traditional employment packages that are not on our co-employment platform. These options were developed in response to customer and prospect input we have received over the last year. These offerings will target mid-market customers that, for whatever reason, are not ready for co-employment and may prefer more flexibility and autonomy over lower risk and group buying advantages. We have bundled Insperity HCM, TimeStar and Insperity Payroll to form Insperity Workforce Administration. This service will target customers who has the need to gain control over HR information and processes in order to grow their company. The fourth option for mid-market customers is workforce collaboration, which adds broker benefits, workers' compensation and a dedicated service team through workforce administration in a traditional employment model. These options are precisely suited to specific target prospects and clients and allow them to self-select based upon the level of service, risk, cost and integration desired. This also provides the opportunity to move from one service to another as priorities and needs change. The simple introduction of make sense options is a dramatic improvement over our previous all-or-nothing approach. The response from mid-market business performance consultants and prospects has been very positive and we are hopeful will lead to better mid-market sales results this fall. These changes has contributed to a step up in sales activity in the mid markets. So far this year, we have an 84% increase in mid-market prospect over the first half of last year. Hopefully, the new approach will convert this pipeline into a healthy increase in mid-market sales. We've also piloted this approach with a number of mid-market renewing accounts with favorable results. In some cases, a new service option is a better fit and in others, the current service is validated through a discussion of alternatives. In either case, our customers have appreciated the flexibility and clarity these options provide. We believe these options will also help in discussions with prospects when competitive offerings are being considered. With 4 Insperity options, it's easier to align with competitive offerings, distinguish the differences and highlight the value of Insperity. The third initiative feeding our growth acceleration involves our adjacent businesses and the gross profit contribution they provide. This portfolio of business service companies have been established over the last several years and include operations at varying degrees of maturity. These operations are contributing at the gross profit line, but are still a drag on operating income. We are, however, making substantial progress increasing the gross profit contribution and moving this portfolio towards profitability. This is the second quarter in a row with an increase in our contribution from our adjacent businesses exceeding our forecasted gross profit per worksite employee. We are gaining traction driven by establishing sales and marketing systems in each business, focused on producing consistent, predictable growth and increasing lead activity from Business Performance Advisors. In the second quarter, we experienced a 94% increase in leads into the inside sales team from BPAs for business performance solutions in our adjacent businesses. This cross-selling activity is the tip of the iceberg in terms of the potential for daily selling efforts of Business Performance Advisors driving sales growth in these businesses. We are also seeing progress toward our goal of reaching profitability as these businesses mature. As you will see from Doug's guidance in a few minutes, we now expect [ph] 2013 EPS to be approximately $0.05 better than our initial budget for the year. This outperformance is expected to be driven by a $0.02 beat in the core Workforce Optimization business and $0.03 outperformance from a smaller loss from adjacent businesses than previously expected. In order to get a feel for the progress we've made in this area is helpful to look at the established adjacent businesses that existed prior to 2012 and the new adjacent businesses started since that time. As expected, the new businesses are creating a drag at the bottom line as investments are made to develop these business units. However, the loss from the established adjacent businesses is falling faster than previously expected. In 2012, the established adjacent business has resulted in a $0.22 loss and the new adjacent business had a $0.03 loss for a total of $0.26. Our original budget for 2013 included an expected improvement of $0.04 to an $0.18 loss from the established adjacent business. As a result of our outperformance over the first half and the current sales activity, we are now forecasting a loss of only $0.13 for 2013 on these established adjacent businesses, a 5% improvement over our original budget and a $0.09 improvement over 2012. We do, however, expect this 5% improvement in established adjacent businesses to be offset by a slightly higher $0.02 loss on the new adjacent businesses, primarily to shore up our new standalone payroll business infrastructure now that our growth plan for this business has been validated. So in summary, we are quite pleased with the trends and activities underpinning our new growth strategy. We formally launched our business transformation with the Insperity brand just over 2 years ago. We knew cross-selling would have to become part of our DNA as a company and many paradigms would have to shift. At this point, I believe every critical element of our new strategy, including the new brand, the Insperity selling system and adjacent business developments have been validated. It is time to pour gas on the fire on all fronts and return to the double-digit growth rates that have been a hallmark of our 27-year legacy. When we announced the reinvention of our company a couple of years ago, I've stated my belief that once implemented, we would enter the 3- to 5-year period of the highest value creation in the history of our company. It appears to me we are on the doorstep ready to handle that period. At this point, I would bring Doug back to provide guidance for the balance of the year.

Thanks, Paul. I'll now provide our financial guidance for the third quarter and an update to our full year 2013 forecast. However, as Paul has just mentioned, our main focus of this time of the year is on our fall selling season and year-end renewals, which primarily impact next year's growth rate. But in general, our guidance for the second half of the year is consistent with that provided in our previous conference call with a few slight changes among the key metrics and some timing between the quarters. The timing of the ramp up in hiring of BPAs was slightly behind our initial plan, therefore, we're bringing the average worksite employee forecast for the full year down just slightly. However, we are forecasting strong sequential unit growth of around 3% in Q3 and 4% in Q4 as the newly hired BPAs transition from training to full-time selling. We are maintaining our forecast of gross profit per worksite employee as the upside to the first half of the year is offset by a more conservative estimate of our workers' compensation cost. As for our operating expenses, our advised forecast includes a reduction of approximately $2 million and some slight changes in the timing of our spending between the latter 2 quarters. So as for our key metrics guidance, we are forecasting average paid worksite employees in a range of $130,000 to $130,500 for Q3 and have updated our full year guidance to a range of $128,750 to $129,250. As Richard mentioned, we expect gross profit per employee per month to be in a range of $261 to $263 for the full year, which is similar to our previous guidance. As for the third quarter, we are forecasting a range of $260 to $262. And you may recall from our previous conference call that we expect a step down of about $20 from Q3 to Q4 on higher benefit cost associated with the high deductible health plan. As for our operating expenses, we are now forecasting full year 2013 to be in a range of $338.5 million to $339.5 million. Remember that the high end of our full year operating expense guidance is tied to additional incentive compensation which will be only accrued upon achieving higher operating results. For the third quarter, operating expenses are expected to be in a range of $84 million to $84.5 million and takes into account a slight shift in some advertising dollars from Q4 to Q3 from our previous guidance. Taking into account this shift and some seasonality in our operating cost, we expect a sequential decline of approximately $3 million from Q3 to Q4. As for interest income, we are now forecasting $250,000 to $300,000 for the full year. We are estimating an effective income tax rate of 40% and 25.6 million average outstanding shares for both Q3 and the full year. The full year effective income tax rate excludes the treatment associated with the Q2 impairment charge. So in summary, our updated key metrics guidance implies a range of 2013 full year earnings per share of $1.52 to $1.61, which is an improvement of approximately $0.05 from our initial 2013 budget. At this time, I'd like to open up the call for questions.

[Operator Instructions] And your first question's from the line of Tobey Sommer with SunTrust.

I was wondering if you could give us the growth in seats year-over-year in the adjacent business units. And then maybe describe the areas that are, maybe, driving that growth?

Well, we are making a lot of progress in that area in terms of our SaaS offerings and increasing the number of seats. It's driven a lot by our Time and Attendance business. But also, we are doing really well in the Performance Management business as well. On a year-over-year basis, we're looking at approximately around 140,000 seats now, which is about a 40% increase on a year-over-year basis.

Okay, that's helpful. And then Paul, what do you do to kind of manage internally in a smooth fashion the rolling out of multiple packages for the mid-market? Because I'm sure that can be a challenge, particularly as you gear up for the selling season?

Yes, fortunately, that group in terms of sales group, is not that large. It's a group between the 8 or 9 sale staff plus the support team, it's nimble and a group that's been with us a long time. And we're able to work directly with them to implement and test things. Also on the service side, we have a good team there that are definitely able to work with our renewal group. And keep a handle on where each customer is in terms of their service plan and how their needs are changing. I think that's really been a great improvement over last year in terms of how closely tied and aligned we are with each of these mid-market customers. A lot of that was because that's who we wanted to meet with and understand the changing needs so we could design a service bundle set that would more appropriately fit their needs going forward.

And just 2 last questions for me. You think these bundles will kind of adequately prepare you for the selling season such that any surprised departures could be minimized? And then, what's your expectation for hired and trained sales people by the end of the year?

On the mid-market side, we are really deeply involved in that all year. I think we're way ahead in terms of being more in touch with customers and what their plans are going forward. And we've much more on the front end of it than I think we were, say, a year of ago. So we're hopeful, we've already know, we've mitigated some client anxiety with clarifying some options, and really, it’s exciting to see how just having these options can put us in a position being a little more agnostic with the client as to which service actually fits. And in many cases, it simply validates the choice they've already made. It helps them to understand better the value that they -- and the investment they're making and what they're getting for the investment. So we're pretty pleased on how that's going on that front. As far as the growth in the Business Performance Advisors, we've hit our target. But we feel strongly that it's really is time to pour gas on the fire and we're going to make sure we stay above this level that we're at in Business Performance Advisors, and if we have an opportunity to grow that a little more as the year progresses, as we have prospects or candidates that are that we think are excellent, I think were likely to hire those and see that number. We don't plan for that to creep up but if that does creep up, that's where we intend for it to keep going in the next year.

Your next question is from the line of Jim MacDonald with First Analysis.

I wanted to start with a couple measurement questions. So can you talk -- remind me how you measure seats. And am I thinking about this right, that you -- with 140,000 seats that's kind of an average of 1 per kind of -- existing customer although the customer is not, I guess, the same. But -- so is that how you -- so I mean -- and how many SaaS type offerings do you have, so how many seats per customer could you have?

Right. So we have a -- these really --those seats really don't relate directly to worksite employees at locations. We do have, for example, the Performance Management, Time and Attendance, I think we have about 20-something percent, 25-or-so percent of our customers are now using our Time and Attendance system. But the number of seats inside Workforce Optimization relate to how many different services were there on that system paying us a fee for per employee per month fee for that system. But most of these numbers are outside of Workforce Optimization with clients that were selling every day that become prospects for other services as we go along.

And how many of your 9 or 10 offerings would you count as seats?

Well as SaaS offerings, we have, Performance Management, Time and Attendance, we recently launched OrgPlus RealTime. It's an organization planning and management tool and modeling tool. We also have now Insperity HCM, which is a full-blown end-to-end HCM system with first customers just now coming on. But being reported as live seats. So we've got some other things in [indiscernible] and we also have, of course, Expense Management, which is also a SaaS offering.

So about 5. And while I'm on my measurement bent, so with the -- congratulations on the new mid-market offerings. I -- the non-PEO offerings, I guess, you'll still count those customer employees as employees but they won't have the same revenue impact, is that right? Or how will that sort of be measured?

Yes, we still -- worksite employee is relate to co-employment relationship. The other bundles are really comprised of some of our adjacent businesses and over the last few years, because we added these adjacent business, we were in a position to put together a traditional employment bundle. But those won't to be counted as worksite employee.

You'll just see that gross profit from the adjacent business contribution continues to increase.

So if somebody shifted from the PEO offering to one of the other bundles, it would show up as a decline in worksite employees. But gross profit could be if you'd still have some gross profit from that customer?

That's correct.

That's right.

So if their Workforce Optimization or Synchronization, both of those are on the co-employment platform. Those are paid worksite employee.

And back to your hiring and your slightly reduced worksite employee guidance here. So you've ramped up the sales but yet you're slightly reducing your worksite employee guidance. Any -- can you talk again about what's sort of impacting that? And why it's maybe a little slower than you thought before?

Yes, it's just a bit -- it's a slight error of timing of when they ramped up. And when that turned into paid worksite employees. And then it's also a little bit of with seeing a little bit of weakness in the labor market, it was a little bit of a tailwind last quarter but not much, and not much happening there. And so I think we just want to be conservative about that as the rest of the year goes on.

So specifically on that, I mean, how was hiring in your existing customers in Q2?

It was still a slight positive. But less than I would have expected for that time of year. And again, the labor market has continued to kind of limp along. And we would have expected a little more aggressive hiring plans this year than what we saw.

And are you impacted -- how are you impacted if at all by the, I guess, these are mostly larger customers than you would generally have, but by some employers dropping peoples hours down to 29 hours to avoid the impact of ACA.

Yes, we haven't seen a lot of that yet. Were ready to watch for it and keeping an eye on it and advising clients on that. And you do see some evidence of real concern. I mean, when we first started advertising about health care reform, we got a significant percentage of the responses came from customers, customers and prospects, that had 40 to 60 employees. So customers in that range, they are concerned about how their business is going to be affected by that requirement to provide the coverage. Now, if that's put off a year, that takes off a little heat on that one subject but for those few customers that fit that description. But all the other changes are still coming fast and furious.

I mean, when you think about the fact that when we look at our total worksite employee base, you've got really about 92% of the ones that are eligible or covered under one of our health plans, it doesn't really -- the people that are talking about doing this layoffs and stuff like that for the most part are in businesses that don't become a part of our target market anyway, Jim. So it's not going to be quite the same.

That's what I expected, I just check. And just finally, you repurchased the last shares in the first quarter but the second quarter was kind of a big dip. You were willing to buy back a lot more shares under the tender last year. Can you talk about what your thoughts are there?

Yes, we'll revisit that again with our board. We've kind of put a plan in the place which we kind of do every quarter and the doctors ran away from us.

Your next question is from the line of Michael Baker with Raymond James. Michael J. Baker - Raymond James & Associates, Inc., Research Division: Paul, I was wondering if you could give us a little bit more color on your conversations that your sales force has been having with prospects and how that changed around when the employer mandate was pushed back? In other words, it sounds like there are a number of drivers to reform that will still drive some decisions, but I'm just trying to get a better sense as to -- in the prospects, how many you expect are going to be pushed by some of these nearer-term drivers versus some that may make some decisions kind of later on?

Well, for your small companies, the biggest hammer coming is the community rating and I think people are just now starting -- we hear a little bit about pricing for example, in exchanges and this is going to be a wholesale change in the pricing of the small and midsized company benefit plan. And it's going to be massive because the younger folks are going to pay a lot more, and first of all, everybody is going to pay considerably more because of the taxes and fees and all of the necessary or parts of the law that help to fund the -- covering the uninsured. And that is a huge cost that's going to be socialized. And then depending on what age group you're in, if you're young, you get a higher increase. So there is going to be sticker shock big time from October through the end of the year.

We are -- we've already calculated out, that just in the fees and taxes that people are going to be paying next year in the small group market, those fees and taxes are going to equate to an automatic 3.5% to 4% increase in the cost of health care just across-the-board, just in those items. There was an article in the Post yesterday that talked about the fact that the delay of the penalties and the reporting requirements is going to cost the federal government, the OMB or Congressional Budget Office said that they believe that those costs are going to be reduced by $12 billion. In other words, the federal government is going to lose $12 billion in revenue in 2014 because of this one delay. But that does not include the rest of the fees and the taxes that are going into play on January 1. So it's going to be interesting. Michael J. Baker - Raymond James & Associates, Inc., Research Division: It also sounds like or it seems to me that the insurers would be incented to have lives go through you, per se, than the exchanges. I was wondering if they're doing anything kind of above the call of duty, so to speak, to support your efforts.

I would say, yes. Absolutely. I mean, UnitedHealthcare has already indicated that they are going to only be in about 10 states with the -- in exchange. And the rest of them, they're not going to touch. Well, UnitedHealthcare, has about 90% of our business.

Yes, I think it's been recognized already to this point that we are a very good option for even some of their customers who need to look at other options. So I'm hopeful it's going to lead to a lot of increased activity as we get into the fall renewal season. Michael J. Baker - Raymond James & Associates, Inc., Research Division: Another topic that I was interested in and it sounds like or it seems as though one of your competitors is pretty active on the M&A front. And I know you're very focused in on your organic dynamics. But was wondering kind of if you could provide some commentary on maybe why you shied away from that? Or haven't seen that as a vehicle to growth as well?

Well, over the years, we've looked at possible acquisitions within our own space. And we end up kind of in the same place where the customer bought a lower valued service. And that the margins are much smaller and doesn't really fit the profile of the clients. On a good percentage of the business. So if when you buy the business, even though you might get, say, 30% or 40% of customers that fit the profile that you'd have to raise prices on some to fit our model and increase the service a lot to match it. But you've got too much waste there, 60%, that they have to find something to do with. Now that could change in the future as we develop more of these other options that may actually open up the opportunity for us to consider some of those.

Your next question is from the line of Mark Marcon with Robert W. Baird. Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division: I was wondering if you could talk a little bit more about the pilot programs that you have going into effect. First of all, is it -- are you just limiting those to the mid-market clients? Or could you potentially also explore that with your more traditional small client base?

Yes, we're focused only on the mid-markets for those options at this point. If something comes out of that, that we think might be valuable for the core market, we would work on that next year. Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division: And how are you thinking about the pricing just on the service side relative to typical mid-market pricing?

Well, the beautiful thing about the way this has worked out is that when we look at, let's say, of the 2 options in the workforce, in the co-employment side, Workforce Optimization and Workforce Synchronization, we were able -- since we know so much about our cost, we are able to formulate another option that reduces the price and reduces our associated cost in tandem, which kind of makes us more agnostic about it, which service do you want, which way do you want to buy these services. And that's a nice position to be in, it just gives them more flexibility. Some customers they feel better about only paying for the projects when a project is occurring. Some of them don't like that -- some say, look, I don't want to have to bid anything, I don't want to have an impediment old enough something I need done to move the ball forward. So it is just an option, which do you want? Do you want a little tighter ongoing cost structure with an opportunity to have flexibility to increase that when you want to buy certain services? Or do you want the all-in approach that it gives you no impediment to moving ahead as fast as you can. So that's nice, and from our perspective, we pull the cost out as you pull the services out and we are still in good stead and how that works from a margin perspective. On the other 2 non-co-employment services, it's interesting because if you look at the traditional employment, the workforce collaboration, where you've assembled the Workforce Administration services, HCM and Time and Attendance and payroll and then you've added brokered benefits and workers' compensation, that service model gives a customer some more flexibility because -- but they're not -- they lose the group buying advantage of being in a co-employment model. But just clear choices, which do you want? You want more flexibility and a little more autonomy where -- and you're not worried about risk, in other words you're willing to take the employment risk and that's a model for you we can support that and make a good fee on that. But if not, if you are concerned about risk, you have to give up a little flexibility but you get some group buying advantage. These are just easy conversations to have, perfect for an advisor or a consultant to say here's the grid, here are the 4 choices, here's why customers fit in this group or that group, pretty soon, they pick where they belong, for the right reasons or just validate, in the case of a renewing customer. This is where I should be. And so far, we like that a whole lot better than the take-it or leave-it approach we had over the last few years. Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division: It makes all the sense in the world. And just to get back to the question, can you give us a little bit of a feel with regards to how differently those services would be priced or I know you negotiate with each client on a case-by-case basis. But just trying to get a general sense?

Yes, now we try to target it to where it made a big enough pricing difference that if you recall last year when we had some customers go away and we did a lot of research on that, we had a lot of customers who said, they would have stayed with us and would have paid more but they just couldn't pay as much as they were paying. And so we structured this based on the feedback about what customers want to buy and what they value. I really think we're in a good spot in terms of giving people some options but some different cost ranges so they can say, this is why I can afford to invest right now, and this is what I'm getting for that. And you know what, maybe next year, I'll step up to that service. So it gives people a little bit of attractive run-on. And the same goes with the other way. We may have somebody who came on Workforce Optimization. They have been with us 5 years. We've done every project you can think of and maybe for the next year or 2, they're going to have fewer projects and maybe they want to go back to Workforce Synchronization for a while and maybe come back to the full service, all-in service at another time. So I like the approach. We are testing it now, so far so good. But it's early. And hopefully, it really makes a difference in this fall. Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division: And would you anticipate that just being defensive in terms of the existing clients or are you going to use it for approaching new mid-market clients as well?

No, no. We're -- it's both for new sales and retention. Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division: Great. And then can you just go back and talk a little bit again, about the -- what you saw in terms of the increase in terms of qualified leads that came from the campaign? And how we should think about that?

Well, we had a lot of increase in qualified leads from different sources. But the health care reform advertising and the -- our ability to offer this executive briefing, the webinars -- yes, we've been invited to have -- to go conduct luncheons and breakfasts and meetings everywhere, to do this executive briefing, it's been extremely well received. It's reducing some anxiety and giving people to feel like they've got a little bit more understanding of what's coming down the pipe. And it's continually leading to more opportunities for us to visit about our services as well. It's almost like it's a natural thing. After we've given them that kind of information, that kind of advice, that kind of support, okay, so now let's talk about how we can work together. And of course, if they really want to eliminate the need to learn about health care reform at all, you just sign up for Workforce Optimization. So that kind of increase in leads has been good. We also don't have had increases in leads coming from BPAs, this whole notion of getting cross-selling in our DD&A. We're getting there. We're getting there and it's starting to really happen. But there's so much more room for improvement. We are still early on the learning curve, but you can see it ramping up and people are really starting to understand that if you go on to any prospect, we now have a wide array of business service offerings that fits just about any prospect at any time, that's far fact from having 1 offering that was just for a perfect fit customer at the just the right time, which is where we were just a few years ago.

And we have a brief follow-up question from the line of Tobey Sommer with SunTrust.

Doug, I was wondering if you could review the annual EPS guidance in the revision again. I just don't think I jotted down the numbers correctly in squaring it against the previous guidance.

Yes, I think if you look at the key metrics that we provided, it would imply the EPS for the full year of $1.52 to $1.61. So the mid-point of that is about $1.57. And I think the previous estimate was in the $1.54 range or so. So you got the second quarter beat by about $0.03, and we talked about the fact that we're maintaining the full year, the second half of the year where we were and the reason for that is basically it puts forward a little bit more of a conservative workers comp estimates based upon Richard's discussion and being conservative on that. But I hope that answers your question and going forward we were previously in our guidance and where we are today. So at the end of the day, we are about $0.05 above on the EPS line in our current guidance versus where we were in our initial budget.

And the annual guidance range excludes the impairment charge--

Impairment charge.

Noncash impairment charge, okay. So $1.57 is the mid-point, you say was$1.54 was before? Or would have been $1.52 if you're saying there's a $0.05 improvement?

From the beginning of the year, yes.

Yes, from the beginning of the year.

From the begin of the year, okay. All right.

And ladies and gentlemen, that is all the time that we have today for questions. I will now turn the call back to Mr. Sarvadi for any closing remarks.

Thank you all very much for being with us today. We appreciate your interest and look forward to speaking with you again next quarter.

Ladies and gentlemen, this conclude the Insperity Second Quarter 2013 Earnings Conference Call. You may now disconnect.