Good morning. My name is Ginger, and I will be your conference operator today. I would like to welcome everyone to the Insperity Third 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, believes, likely, probably, goal, objective, outlook, guidance, appears, target and similar expressions are used to identify such forward-looking statements and involve a number of risks and uncertainties that have been described in detail in the company's filings with the SEC. These risks and uncertainties may cause actual results to differ materially from those stated in such forward-looking statements. Now let me take a minute to outline our plan for this morning's call. First, I'm going to discuss the details of our third quarter 2013 financial results. Richard will discuss trends in our direct costs, including benefits, workers' compensation and payroll taxes and the impact of such trends on our pricing. Paul will then add his comments about the quarter and provide an update on our initiatives as we head into 2014. I will return to provide our financial guidance for the fourth quarter. We will then end the call with a question-and-answer session. Now let me begin today's call by discussing our third quarter results. Today, we reported third quarter earnings of $0.39 per share, a higher-than-expected number, and associated cost of large health care claims contributed to these results being just below the low end of the implied EPS range from our key metrics guidance. As for our key metrics, paid worksite employees averaged 129,248 for the quarter, which was a sequential increase of 2% over Q2 of 2013, however, below our forecasted rate of 130,000 to 130,500. Gross profit per worksite employee per month…

Thank you, Doug. This morning, I will fill you in on the details of our third quarter gross profit results, then I will comment on our gross profit outlook for the balance of 2013. And I will conclude my remarks with an update on how we see Obamacare affecting our gross profit picture in 2014. As Doug just reported, our third quarter gross profit per worksite employee per month was $251 and was $10 per worksite employee per month below the midpoint of our range. The gross profit consisted of $191 of average markup, $45 of direct cost surplus and $15 from our adjacent businesses. Now let me give you the details of each component. The $10 per worksite employee per month shortfall in gross profit was the result of an $11 per worksite employee per month shortfall in the surplus, offset by a $1 per worksite employee per month improvement in the contribution from our adjacent businesses. Our service fee component was right on forecast at $191 per worksite employee per month. Now 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 both cross-selling opportunities and channel sales. The $11 per worksite employee per month decline in our surplus was the combination of the payroll tax cost center surplus being $1 per worksite employee per month lower than forecast, the workers' compensation cost center surplus being $3 per worksite employee per month better-than-expected and the benefits cost center's deficit was $13 per worksite employee per month higher-than-expected. The benefits cost center's deficit was due to a combination of both lower-than-expected allocations and higher-than-expected costs. Now the lower allocations were a result of a fewer number of participants enrolling this quarter than what we had…

Thank you, Richard. Today, I'll provide a brief update on several initiatives focused on accelerating revenue growth in 2014. I'll also dedicate a considerable portion of my time explaining community rating for small businesses under health care reform and the sticker shock we expect to drive customers our way very soon. I will begin, however, by explaining factors which have caused a shortfall in paid worksite employees for the last half of 2013. The primary drivers falling below our expectations on our worksite employees in Q3 and rolling into Q4 were: number one, a lag in converting worksite employees sold into paid worksite employees; and number two, a soft spot in hiring we have seen in our client base. 2 of the 3 months this past quarter, the net change in new hires versus layoffs was negative. We previously budgeted a small tailwind from hiring at the rate we were experiencing in the first half of the year. The cumulative effect of this reversal compounds over the balance of the year and accounts for about 35% of the shortfall. This soft spot in hiring is consistent with survey results from our client base we reported today and other recent reports about hiring in the small business community at large. Therefore, we have adjusted our forecast to reflect weak hiring through year end. The second factor relates to the timing of enrollment of sold accounts as sales activity ramped up in Q3. We achieved a 102% of our sales targets in the quarter. However, 50% of the total were sold in September as growth in the number of new trained Business Performance Advisors began to contribute to sales. Unfortunately, the later in the year sales occur, the more likely accounts will schedule their start date of January 1 of the coming…

Thanks, Paul. I'd like to now provide our guidance for the fourth quarter. We are forecasting average paid worksite employees in a range of 131,250 to 131,750 for Q4. This guidance incorporates the lower starting point coming out of Q3 and a continued trend of lower hiring in our client base through the end of the year. As Richard mentioned, we now expect gross profit per employee per month to be in a range of $230 to $232 for Q4. As for Q4 operating expenses, we are forecasting a range of $81 million to $82 million, a slight sequential increase over Q3. We are estimating 25.6 million average outstanding shares and an effective income tax rate of 41% for Q4. This estimated tax rate excludes an expected tax credit associated with our investments in software development as allowed under a recent interpretation of IRS guidelines. We will be finalizing this project in Q4 and, therefore, expect to take a tax credit of $2 million to $3 million associated with software development activities dating back to 2009. Going forward, we would expect a reduction in our effective tax rate of approximately 1% associated with this spread at the current software development levels. In summary, our updated key metrics guidance implies a range of 2013 full year earnings per share of $1.35 to $1.40 or approximately $0.20 per share below our previous guidance. This expected shortfall is generally split evenly between the forecasted lower level of paid worksite employees and the higher deficit in our health care plan. As Paul mentioned, we are now focused on closing out a successful fall sales campaign and year-end renewal period. We look forward to a strong 2014, and we'll be providing detailed 2014 guidance in our next earnings call. At this time, I'd like to open up the call for questions.

[Operator Instructions] You do have a question from Tobey Sommer from SunTrust.

It sounds like you've got a lot going on, a lot of developments and seeing some interesting progress. My first question has to do with the health care assumption, so maybe it's for Richard. Do you assume a higher level of health care expenses from this kind of recent trend of large number or larger health care claims?

Yes. But our forecast, we believe that it's possible that there could be increased utilization in the fourth quarter, which would reflect just the normal utilization being stepped up, as well as potentially a step-up in large loss claims. We can't -- you just can't tell. But really it's all centered around the mindset that we've seen over the years when people get concerned about their health plan or potentially losing it or changing or whatever. They say, "Well, I know what I've got right now, so I'll go get this taken care of or I'll go get that taken care of." And they do it in the fourth quarter because, anyway, the new year starts a restart on their co-pays and their deductibles, so there's already a natural tendency to do that. But we believe it's possible it could even be more accentuated this quarter.

Yes. A lot of that anxiety goes away once the -- if there's a new card in their hand for the next year.

Yes.

And Paul, for the metrics you've seen so far for the selling campaign, and I know it's early, what would you point to as the most encouraging and maybe most concerning elements of what you can see so far?

Sure. The most encouraging would be, of course, that you have a 20% increase in the number of advisors on a year-over-year basis, a 28% increase since the first of the year. So you start looking to see if the activity tracks that. We have a 20% increase in the year-over-year number of trained advisors and an 18% increase in the number of outstanding worksite employees in the business. So that's perfect, exactly what you want rolling on through. You add to that, that we have a really strong increase in the number of worksite employees that are in the queue that will be paid by January. At 6,200-plus instead of 4,000 a year ago, that is obviously -- that's the whole point right now is to build that pipeline of employees flowing into the paid count in January. So we're off to a good start there. On the other side, we're always in that nervous point, as you come towards the end of year and don't know how terminations are going to go. We obviously have had great results this year on client retention, 99% again this quarter. But the big toss-up in the air is how well we do over the balance of the year. With our new approach to mid-market, we've had some successes, such as the pilot program just started. We feel really good about that going forward. But it's hard to turn that ship in just a 1-year period. So we'll see. We'll see how we do. The range of our possibilities is still wide and it always is at this time of year. So we'll be working diligently on that. Like Doug said, that's the focus, the selling and the retention.

Your next question is from Jim MacDonald from First Analysis.

Paul, you mentioned that whether it's early or whether it's later, you expect 2014 to be a good year. What kind of factors could result in an earlier or later result?

Well, mostly it's just a result of this fall campaign. If the starting point is better, how that rolls in our recurring revenue model, it just gets you off to a better start for the year. And if the ramp-up is later in the year, then we don't make quite as much profit on companies that come on later in the year in that year. But as far as growth rate, it's -- the normal is 12 to 18 months after you have a double-digit growth in the number of reps you see it flow into the employee count. The second quarter was the first quarter that we had an increase in trained advisors that hit 10%. So if it happens sooner than that, than the 12 months, it's because we had a great fall campaign. If it happens a little after than that, it's still on track.

And you talked about your mid-market initiative. I think some of that also involved more unbundling. Any idea of what impact that could have on gross profit because it's a less bundled offering?

Well, actually, it is not really less bundled, it's 4 total bundles instead of selling 1 all-in comprehensive bundle. It's 2 versions of co-employment, Workforce Optimization and workforce synchronization, that simply allows a customer to have a little more control over project-related HR cost. And there's pros and cons to that. In the all-in Workforce Optimization, your speed of delivery, speed of execution is way better because there's no pricing of every project and trying to decide when to do it and the decision-making process. So in the workforce synchronization, you have lower cost and more control over incremental cost, but you have slower execution potentially. So there are tradeoffs there. But on the other side of the non-co-employment offerings, we have workforce administration, which is -- takes our HCM product as the centerpiece, adds time and attendance and payroll service, and then also adds HR services that are through a call center and HR support and some other services as well. But that base offering, we think, is a fantastic entry level. We've got a lot of interest in that -- in this pilot program as a way to bundle some of these maybe new services that we've developed offerings into a nice introductory bundle. Now some customers will want to go beyond that to a higher level of service, add benefits that would be through our insurance agency and have the flexibility to have their benefit designed however they want to, but they want a more comprehensive service and we have that available now through workforce collaboration. So early interest is good on that front. We are managing through how that's presented. And that's what we're learning right now, exactly how the sales process works, how this works with renewing accounts to either validate their current buying decision or put them into another offering. There's a learning curve to that.

So as a follow-up, I guess, my question is so the latter 2 options you just described, would those be considered ABU revenues? Or would those be considered worksite employees with a lower gross profit?

They would be ABUs.

[indiscernible] ABUs. We'll be evaluating how all this comes together into our financial picture and how to best assess that as we move forward.

Yes. What could happen, dependent upon the volumes and, of course, we've don't -- I mean, it's too early to tell. But if you thought about it in terms of the average markup might go down slightly on the ones that go to those other 2 traditional employment offerings. But the gross profit on the ABU side would go up, so...

Right. And if you had to hazard a guess, any idea? Or potentially 20% could go to the last 2 offerings or any idea what's the mix might be?

I don't think we'd lose any Workforce Optimization customers to any of those that were that really that extensive [ph] -- but I mean, we've seen that already, it really validates their decision. But for those that would have otherwise left us, so this is all upside because they would have been gone. And to keep them in one of those is definitely new upside. We are managing through -- and this is why it's a pilot program and didn't get moved out more dramatically, because we want to make sure that you manage any of that migration because you don't want to cause some cannibalization and things of that nature. So we're carefully working our way through it. And so far, we feel good about how that's coming together.

Okay. And then just quickly, 2 questions on the Affordable Care Act impact. Do you think that has impacted your customers' ability to make a decision here on your services, all the confusion around there right now? And second of all, you mentioned a private exchange. Will you have your new customers have access to a private exchange as an alternative?

Let's start with private exchange. I mean, we're looking at that as a potential option. But at this stage of the ballgame, it's really not necessary. And so we haven't seen anything that causes us to want to move in that direction and bear that expense to get that set up. But we're monitoring it very closely. And this is really all about the public exchange that may present quite a few options for our folks.

There are also enough private exchanges being formed, where if we need to work with someone else on that, that may be a better approach. So we're keeping all the options open. We do think it's important they'll be able to support any customers who might be better off in that environment. So we're -- specifically even the smallest of the small that might even get a tax credit. We estimate about 15% of the companies under 25 employee level may be eligible for a subsidy or a tax credit, it's actually for coverage in an exchange. You have to buy through the exchanges as of January 1. So we won't ready to support that if that's a better option for people. I forgot your first question already.

So the first question was is the ACA impacting your customers' timing of their decision?

Yes. I think there's been a lot of craziness, as you know, in the marketplace and people are trying to figure out how they're going to be impacted. And so yes, there has been some. But our sales came in, so we were 102% of our budget that came in later in the quarter than expected. So I don't know if that's driven by the health care reform or the economic climate. But it did come in a little later than we normally would see in a quarter. However, the biggest sense of urgency is just now about to hit. We want to make sure our investors really understand this. The community rating that begins the policies effective January 2014 and on, that is going to be a huge driver for our most attractive prospects from a benefits selection point of view. And the reason that hasn't hit yet -- it's just now hitting, we are now seeing substantial increases that prospects are receiving from their carriers. But the strategy that most of the carriers used was to take their January renewals and move them into December, so they could avoid handing this 20%, 30%, 50%, 70% increase to their best customers. So now that the February renewals will have to be delivered to people soon, in the next 30 days or so, and those folks, there's no way to move all of them into December this year, so we are just now starting to see the sticker shock and the disruption that is about to occur in the small business community, the sweet spot of our core. So these customers with 10 to 50 employees, they're going to need some serious help. And the better prospect they are for us, the more likely their increase is more than enough to pay for our entire service. So we'll be going after them and saying, "Look, if you have to pay more, what are you getting for that? Why not get a complete infrastructure, better benefits and have an opportunity to make that money back by having your business run better, grow faster?" So the whole point is to make more money. And I don't think we're uniquely positioned to address that.

Your next question is from Mark Marcon from Robert W. Baird. Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division: And I was wondering, Paul, if you could just give just a little more granularity with regards to the last comments that you were providing. Like if you gave an example of, say, a 10 employee company, say, that they are one of those 60% that's going to see a 20% increase, how much would they typically would they end up seeing? How much would be absorbed by the employee versus by the company? And how does that match up with your total expense? And then how quickly do you think a business owner would be able to react to that? It seems like that would just cause another level of paralysis, at least initially.

Well, they will react very quickly. And once they get up off the floor, then they'll start to say, "What do I do about this?" Let me answer your question directly with an analysis I've done that is a depiction. There's no way to precisely pin this down because it varies client-by-client, account-by-account and all the specific factors of their business profile. But if we use averages, if you use the Kaiser Permanente average cost for a small to medium-sized business benefit plan for 2013 and if you look at just the employer paid portion, that average cost is $982 per employee per month, per covered employee per month. Now if you -- under the former rules, the way you can price accounts prior to 2014, where you could look at experience, you could look at gender, you could look at age, you could look at a whole list of other things, geography and so forth, under those rules, there was an 8:1 ratio around pricing. That gave you a price range off of the average that would go from basically around $218 per employee per month all the way up to $1,744 per employee per month. That's a wide range. Now what's happening under the Affordable Care Act is a compression related to the range and the factors that you can use to price coverage. So you can no longer use actual claims experience, which is actually the biggest driver of cost, and you can no longer use gender. You can still use age, you can still use tobacco use. But the range from the lowest to the highest price, a factor that you used to determine the price, can only be 3:1. So what happens is that compresses the range between the lowest price and the highest price…

Well, remember, our cost is an all-in proposal. And so it's the full value of the service, which adds up all the costs related to being an employer and that you pay for an HR department. And so when you take our cost of the payroll taxes, workers' comp, benefits, our markup for our service, employment practices, coverage, all that, that typically ends up costing a potential buyer around $100 a month above their cost. And they get administrative relief, better benefits, reduced liability, a technology platform and a systematic way to improve productivity. That's the value proposition. But it typically costs someone $100 per employee per month above their cost, even though our markup is $200. So that's $200 above our cost or if you look at gross profit, $250 or so above our cost. So what I'm saying is that most customers when they analyze this, they see a cost above their current cost of about $100 and they justify that on getting rid of a lot of administrative stuff, sometimes having improvement or at least a better opportunity to manage benefits. They see nice technology infrastructure to help them. And they think they can make more money doing business this way. But now for a 60% of the marketplace, the mandatory increase is equal to the difference, so... Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division: And for the exact same type of health care plan?

Right.

Or better.

Yes. Or better, in a lot of cases.

This concludes our Q&A session. Mr. Sarvadi, do you have any closing remarks?

No. Just to say thanks for everybody for participating. And we look forward to getting through our year-end transition and giving you information about 2014 on our next call. Thank you all very much.

Ladies and gentlemen, this does conclude today's conference call. Thank you for participating. At this time, you may now disconnect.