Insperity, Inc. (NSP) Q2 2014 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, my name is Ryan, and I will be your conference operator today. At this time, I would like to welcome everyone to the Insperity Second Quarter 2014 Earnings Conference Call. [Operator Instructions] At this time, I would like to introduce our speakers for today. 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 our 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, they are not historical facts are considered to be forward-looking statements within the meaning of the Federal Securities Laws, words such as expects, could, should, intends, projects, believe, likely, probably, goal, objective, outlook, guidance, appears, target and similar expressions are used to identify such forward-looking statements 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 2014 financial results. Paul will then add his comments about the quarter and our plan for the remainder of 2014. Richard will discuss the Q2 gross profit results and our expectations for the remainder of the year. I will return to provide our financial guidance for the third quarter and an update to our full year 2014 guidance. We will then end the call with a question-and-answer session. Now let me begin today's call by discussing our second quarter results. Today, we reported adjusted second quarter earnings of $0.13 per share. These results were $0.02 per share above the midpoint of our forecasted range, as both paid worksite employees and gross profit for worksite employees were within our forecasted ranges, while operating expenses were managed below projected levels. Adjusted Q2 2014 earnings exclude an impairment charge of $0.06 per share, associated with reorganization of our Employment Screening business, which I will discuss in a few minutes. As for our key metrics, paid worksite employees averaged $128,274 for the quarter, just above the midpoint of our forecasted range of 128,000 to 128,500. Gross profit per worksite employee per month averaged $248 compared to our Q2 forecasted range of $248 to $250, and below the $257 reported in Q2 of 2013 due to the anticipated higher deficit in our benefit cost center. Operating expenses, excluding the impairment charge, totaled $89.6 million, approximately $1.2 million below our Q2 forecast and just a 2.3% increase over Q2 of 2013. We generated $14.6 million of adjusted EBITDA and ended the quarter with $122 million of working capital after repurchasing 27,000 shares at a cost of $856,000 and paying dividends totaling $4.9 million during the quarter. Now let's review the details of our second quarter results. Revenues increased 3.2% over Q2 of 2013 to $565 million on a 1.2% increase in average paid worksite employees. As for the components of our worksite employee growth, client retention came in slightly below forecast but still averaging approximately 99% for the quarter. We experienced net hiring in our client base throughout the quarter slightly above both our forecast and Q2 of the prior year, and worksite employees paid from sales for the quarter came in just below our forecast. Paul will update you on our recent sales activity in a few minutes. Our key pricing metric, gross profit per worksite employee per month, came in at $248. Favorable results were achieved in our payroll tax cost center, partially offset by a slightly higher deficit in our benefit cost center and lower average service fees. Benefit cost per cover employee per month increased by 5% over Q2 of the prior year to $935, included incremental taxes associated with the Affordable Care Act. Workers' compensation costs totaled 0.62% of non-bonus payroll, generally in line with our Q2 forecast. Actuarial loss estimates resulted in a $1.1 million reduction in previously reported loss reserves in the second quarter of 2014. This compares to a $3 million reduction in Q2 of the prior year. Payroll taxes as a percentage of total payroll were 7%, which is similar to that reported in Q2 of 2013. Gross profit contribution from our strategic business units came in at forecast, and increased approximately 20% from $14 per worksite employee per month in Q2 of 2013 to $17 in Q2 of this year. Richard will provide further details behind our Q2 gross profit results and expected trends over the remainder of the year in a few minutes. So let's move on to our Q2 operating expenses, which totaled $89.6 million excluding the impairment charge. This was about $1.2 million below our Q2 forecast which was already lowered from our initial 2014 budget by $3.1 million. Savings were achieved in various areas, including corporate headcount, marketing cost and G&A cost as we continue to focus on holding down cost until we return to our unit growth targets. This is further evidenced by our year-to-date increase in adjusted operating expenses over 2013 of just 3.2%, even when considering incremental costs of $2 million tied to our investments in our HCM technology. Now as I mentioned earlier, we incurred an impairment charge of $2.5 million or $0.06 per share during the quarter. This charge was associated with the reorganization of our Employment Screening business, which was running behind plan and has now been consolidated with the management of our Recruiting business to create future sales and cost efficiencies. Our effective income tax rate for Q2 was approximately 45% and was impacted by the tax treatment associated with this impairment charge. Excluding the impact of this item, our effective tax rate for Q2 was 42%, which was consistent with our forecast. Now as for our year-to-date cash flow, adjusted EBITDA has totaled approximately $38.9 million. Cash outlays included capital expenditures of $6.6 million, the repurchase of 496,000 shares at a cost of approximately $14.7 million and cash dividends of $9.2 million. At this time, I'd like to turn the call over to Paul.

Thank you, Doug. Today, I will comment on our action plans we are implementing in the back half of 2014 to position Insperity for a strong 2015. Our central focus is to grow units through the year-end transition and reverse the pattern we have experienced the last couple of years that has limited our growth. Our second area of emphasis is continuing efforts to align operating cost with the array of lower-priced service offerings we introduced recently that are gaining traction in the marketplace. Our third priority setting us up for a strong 2015 is continuing the development of our portfolio of strategic business units. Our current forecast from now through the end -- the year end shows accelerating sequential unit growth and a year-over-year growth rate in worksite employees of 4% to 5% in Q4. In this scenario, the anticipated year-end number of worksite employees is approximately 10% unit growth over the low point of the year, which occurred in February. In order to achieve growth rates we want in 2015, the most important factor is to not give up the gains we've had and expect over the balance of the year as we go from Q4 into Q1 of 2015. In each of the last 2 years, we fell back considerably in paid worksite employees from the year-end transition of new and renewing accounts. So I'll direct my comments today toward what's different as we head into the last half of this year in sales and retention of accounts in both the mid-market and our core business. In our core business, the critical driver is the number of business performance advisors with 1 year or more experience under their belt. Last quarter, we reported a 5% increase over the same period in 2013. We also projected a gradual increase in the percentage each quarter for the balance of the year to reach 26%. However, due to the continuation of a lower-than-expected turnover rate, the maturity of our sales staff is ahead of schedule. This quarter ended with the increase in trained business performance advisors with more than 12 months experience already over 25%. Most of this increase was in the 12 to 18 months tenure, and if we can maintain these low turnover rates, we will be very well positioned going to our strongest selling season of the year. In Q2, core Workforce Optimization sales were 111% of our budget, and business profiles increased 13%. Our sales budget reflects the tenure of staff and historical seasonality, so budgets are set to increase over the last half of the year. Our core sales team is developing nicely to be ready for a strong fall campaign. As you know, over the last 2 years, we've made a significant bet on health care reform and the impact on the small- to medium-sized business community. Last quarter, I discussed the magnitude and frequency of the changes made by the administration and the implementation of the law. In the second quarter, we saw the continuing trend of changes which deferred the compliance requirements into 2015 and beyond, which will be helpful when it happens but has dampened some the sense of urgency around the issue. Even so, there's an element of health care reform that should contribute to a strong fall campaign in the core market. You may recall the massive early renewal campaign that occurred in the small business healthcare marketplace in Q4 of 2013 in order to avoid the Healthcare Reform changes originally scheduled to go on effect on January 1, 2014. A large percentage of small businesses early renewed in Q4, and therefore, will be up for renewal again in the middle of our fall campaign. This shifting of the timing of renewals lowered sales activity in the first half of this year, but could substantially increase our activity in Q4. Now in addition to the size and maturity of the trained sales staff and increased activity from shifting of benefit renewals in the marketplace to Q4, we also have a new loyalty program ready to expand that may benefit sales and retention in our core market going forward. This program was piloted over the first half of this year and has been effective in delivering new prospect referrals from clients and worksite employees. This loyalty program also has the potential to increase retention of our core workforce optimization clients at year end and into 2015. In order to achieve double-digit unit growth next year, it's also imperative that we have a stronger year-end transition in our mid-market division. In each of the last 2 years, we did not sell enough new accounts to offset the client losses at year end. We are clearly focused on turning that around this year and off to a good start. We have a growing pipeline of new business opportunities in our mid-market segment and some early sales successes from our new approach to this space. Our new service bundles, including 2 co-employment and 2 traditional employment packages, are resonating with prospects. In Q2, we experienced a year-over-year increase of over 200% in business profiles from these larger prospects. This represents the highest number of bids for mid-market co-employment solutions since we began this segment in 2006. More importantly, we had some sales and retention successes in both the co-employment and traditional employment space. The combination of new sales and renewals during the period have resulted in 5,480 worksite employees in our new workforce synchronization offering at the end of the quarter. This lower priced and lower cost co-employment service model was developed late last year and is certainly gaining traction. We're also seeing saw strong demand for our traditional employment solutions, which include our Human Capital Management system as the centerpiece, along with our Time and Attendance in Payroll Services. This workforce administration bundle is an excellent starting point in our customer for life strategy to meet prospects at their point of need and grow with them. We sold 5 of these accounts representing 4,816 employees in Q2 after selling 4 accounts with 1,905 employees the entire year last year. Although these employees are not included in our worksite employee count, in our co-employment business, they do represent an opportunity to upsell them into that model in the future. These sales also included Time and Attendance in Payroll Services for a total of nearly 14,000 SaaS seats, since several SaaS offerings are included in the bundle. We currently have an additional 19 prospects in the pipeline at some stage in the sales process, representing approximately 12,000 additional employees. These sales and the strong pipeline for additional sales validate our decision earlier this year to invest in our HCM system to update the user interface and experience and to make it easier for customers using this technology to transition into co-employment at a later date. One negative trend we saw in the second quarter was an uptick in M&A activity, leading to a slightly higher attrition due to our historic success penalty. When our clients are successful and eventually sell their companies, many times they're absorbed into a larger firms with an HR infrastructure in place. In the first half of this year, we experienced an increase of 20% in attrition related to accounts being acquired in an M&A transaction. The accounts that left for this reason in Q2 fully account for our slightly higher attrition rate of 1% this year over last year's 0.8%. The accounts with the pending transaction in the last half of this year are factored into our guidance, but there's a silver lining to the increased M&A activity. First, we are having more opportunities to dialogue with private equity and strategic buyers of these firms. Our new mid-market service bundles represent a much better opportunity to retain some of these accounts and even add the acquiring entity to our customer base. Second, we have seen an increase in new business opportunities related to an M&A transaction. One of the large sales we made in the quarter was a spinoff of the division of a large corporation and several of the strong prospects for closing this quarter are connected to a transaction. The downside to these types of accounts is the potential for transactions to be delayed or fail to be completed, making the timing of enrollment less predictable. But all in all, I believe the M&A environment, while lowering our worksite employee count slightly for this year, the last half of 2014, will actually help accelerate growth through the year-end transition ahead. Our second major initiative for the last half of 2014 is to continue to align operating expenses to match our growth rate and service fees as we mix in new lower-priced, lower-cost service offering. Month in and month out this year, we have reviewed areas across the business to lower operating expenses. This initiative is one of the elements of our company-wide incentive and we have seen some good results so far, but we have more to do in this area. Our current target is a $14.5 million reduction from our original budget for this year. $5.8 million or 40% of these savings have occurred in the first half of the year, and the remaining 60% or $8.7 million is in our forecast for the balance of the year. The first step in cost reduction relates more directly to aligning cost with current growth rate. The next step is aligning cost with our new services that are gaining traction in the marketplace, such as our Workforce Synchronization offering. We've introduced lower-priced, lower-cost offerings recently in the mix of customers in different service models will affect our overall average service fee per worksite employee. As we sell new accounts and renew existing accounts into these services, we will see a reduction in the average service fee. Several of these service offerings have a small initial customer base and migration patterns are yet to be determined, so matching the cost infrastructure is no small challenge. We have seen the service fee average come down as we've gain traction faster than expected with our new offering. We've factored in a continuation of this into the balance of the year, and we'll continue to work on matching operating cost accordingly. Realistically, we'll need some time to gauge the demand and evaluate migration patterns of clients from new and renewing accounts into and out of various services. This represents some risk going forward related to the timing of mix-related pricing changes and the matching of corresponding service costs. The final aspect of our business I'd like to address today is the continuing development of our portfolio of strategic business units. These businesses are on track with expectations for the year. These offerings will play an increasingly important role going forward in several ways. First, the wide array of product and service offerings allows us to leverage more than 20,000 face-to-face visits we make in the small business community each year into more customers for Insperity. These customers make a relatively lower gross profit contribution compared to co-employment customers, but they increase the pool of customers to upsell later. This is similar to the upselling model that has driven ADP's PEO sales success in recent years. Second, these offerings are also sold with Workforce Optimization sales and add gross profit contribution to offset some of the pricing pressure from competition and the mix change I referred to earlier. Third, we have packaged several of these offerings together to create our new mid-market bundles, launching us into the traditional employment space. And fourth, this portfolio will turn from a drag on operating income to a contributor over time and provide additional EBITDA. Our recurring SBUs that started prior to 2012 are turning the corner this year from a small EBITDA drag to EBITDA positive in excess of $1 million. Our new strategic business units, including our Payroll and HCM businesses, are in an investing stage right now, but are gaining traction and showing great promise for the future. In summary, I believe the most important improvement we can make in our business model right now is to eliminate the type of year-end setback we experienced in 2012 and 2013, which held back our unit growth rate. Today, we have larger, rapidly maturing core sales team, improved mid-market sales and retention momentum, a more robust array of competitive service offerings and the potential for some marketplace tailwinds in the last half of the year. We believe we are well positioned to raise our growth trajectory to a double-digit unit growth as we execute this plan for the balance of the year. In addition, we expect the operating expense controls we put in place will allow for excellent operating leverage going forward. This combination of renewed growth and balanced costs makes us optimistic for a strong 2015. At this time, I'd like to pass the call on to Richard.

Thank you, Paul. This morning, I will comment briefly on the details of our second quarter gross profit results, and then I will give you our gross profit outlook for the balance of 2014 and a glimpse into 2015. Doug just reported that our gross profit per worksite employee per month for the second quarter was $248, which was on target with our forecast. Our gross profit consisted of $186 average markup, $45 of direct cost surplus and $17 from our adjacent businesses. Now let me give you the details of each component. The average markup was $2 per worksite employee per month lower than our forecast. The surplus was $2 per worksite employee per month better than forecast, and the contribution from our strategic businesses was right on the forecast. Now the $2 per worksite employee per month shortfall in the markup was the combination of slightly lower-priced new business, a slightly larger average client size and the traction we are gaining from the lower-priced, lower-cost services that we now offer. The $2 per worksite employee per month improvement in our surplus came from the combination of a $4 per worksite employee per month increase in the surplus from the payroll tax cost center and a $2 increase in the benefits cost center's deficit. The better-than-expected surplus in the payroll tax cost center was the result of the last group of states sending us final 2014 state unemployment tax rates. These rates were lower than what we had originally budgeted. As for the benefits cost center, the $2 increase in the deficit was the result of lower-than-expected allocations, partly offset by lower-than-expected health care costs. The lower allocations continue to be the result of employees selecting lower costs prior to deductible plans, which translates into lower cost trends for us in the future. However, this quarter, our health care costs were lower than expected due in part to the success we have had in reducing the number of COBRA participants enrolled in our plan. In fact, COBRA enrollments are down 25% compared to the same period in 2013, and the COBRA claims are down 26% versus Q2 of last year. The gross profit contribution from our workers' compensation cost center surplus was right on forecast. Lastly, gross profit contribution from our strategic business units came in on forecast at $17 per worksite employee per month, which is $3 per worksite employee per month better than Q2 of 2013, further supporting our long-term strategy of reducing gross profit volatility and enhancing our cross-selling opportunities. In summary, we are pleased with the second quarter gross profit results. So now let's shift that gross profit dialogue to the balance of 2014 and beyond. Based on our second quarter's markup, which reflects a combination of current pricing on new business sold that Paul touched on and the lower-priced, lower-cost co-employment offering that only mid-market prospects and clients can choose from, we believe it is prudent to forecast approximately $186 per worksite employee per month average markup for the balance of the year. Now let's discuss the surplus component of gross profit, beginning with the payroll tax cost center. The better-than-expected surpluses in both Q1 and Q2 resulted from receiving lower payroll tax rates than we had originally budgeted. This surplus should continue to produce a slightly better-than-expected result for the balance of 2014, remembering that the majority of the surplus is generated in the first part of the year. Switching to the workers' compensation cost center, we are seeing some changes to the cost drivers of the workers' compensation macro environment that I want to update everybody on. According to Express Scripts' Workers' Compensation Drug Trend Report, compounded medications used for injured workers increased 126% from 2012 to through 2013 with further increases expected in 2014 and beyond. In addition, we've had a number of states that we do business in have increased their monthly lost wage benefit payment to injured workers. On average, 20% over the last few years. Additionally, recent statistics indicate that people are continuing to work later in life than they used to. Therefore, when an aging worker gets injured, it takes them longer to heal and get back to work, which increases both the medication usage and extends the lost time wage payments. These factors are causing the workers' compensation claims adjusters and our outside actuary to increase reserves even higher on both the older claims that have not been closed out, as well as the newly filed claims. As I have mentioned in each of the last 2 quarters, our current policy period, which began October 1, 2013, got off to a rough start due to a few large claims. This produced a severity rate increase of 42% in Q4 of '13 over the prior year. That increase has settled down to 28% in Q1, and currently, it's down to 14% in Q2. In addition, our incident rate per 1,000 worksite employee is up 6% over the same policy period last year, which is slightly better than Q1's rate of 7%. However, because of the underlying factors that I mentioned a moment ago, we need to begin forecasting higher workers' compensation expense, more like 0.68% range of non-bonus payroll. This will reduce our near-term surplus in this cost center by approximately $4 per worksite employee per month over the balance of the year. If our incident rates and severity rates continue to decline and we're able to settle claims at lower levels than amounts being reserved, our costs could be lower than this forecast. As for the allocation side of the cost center, we are seeing increases for workers' compensation insurance premium in many states due to the same factors that I referenced a few minutes ago. Therefore, we will begin to increase our allocations for new and renewing business throughout the year, and by February 1 of next year, we should have approximately 70% of our business reflecting higher workers' compensation allocations. These pricing changes, combined with the continuation of the recent decline in our incident and severity rate should recover quite a bit of our surplus in this cost center for 2015. Now let me tell you what we anticipate happening in the benefits cost center for the balance of 2014. On the expense side of the benefits cost center, we continue to see a favorable 2.6% year-over-year claim trend in the medical portion of our UnitedHealthcare plan. Even when you add the new 1.4% cost of ObamaCare taxes and fees, our results continue to compare very favorably to what the small business market is seeing. A few minutes ago, I mentioned the decline in COBRA participation, as well as the decline in COBRA claims and the continued migration of participants enrolling in lower costs, higher deductible plans. These factors help to reduce the overall cost trend in our plan, but the seasonality of health care utilization increases our cost in the latter half of each year as the participants satisfy their co-pays and deductibles. Last quarter, we forecasted a potential increase in total benefits expense for the year to range from 4.6% to 5.8% over 2013. Assuming that the COBRA participation plan utilization and large loss claims remain at current level, we can again narrow the benefits expense range to 4.5% to 4.9% for the full year over 2013. From a pricing perspective, we plan to continue increasing our allocations at acceptable levels for both new and renewing business. When you combine all of the forecasted direct cost surpluses in the range of possible benefits expense outcomes, we should generate a net surplus of $46 to $49 per worksite employee per month for the year. Our last contributor to gross profit comes from our strategic business units, some of which have a recurring revenue and gross profit stream. Our cross-selling opportunities continue to improve, and we are seeing initial success from our channel opportunities. Additionally, we continue to have a nice backlog in a few of these businesses. Therefore, we will forecast a gross profit contribution growing to $18 per worksite employee per month by the end of this year. To summarize our outlook for 2014, when you combine the service fee markup, the surplus and the adjacent business contribution, our gross profit per worksite employee per month would be in a range of $250 to $253 for the full year. At this time, I will turn the call over to Doug for the remaining financial guidance.

Thanks, Richard. Before we open up the call for questions, I'd like to provide our financial guidance for the third quarter and an update to our full year 2014 forecast, which excludes the impact of the Q2 impairment charge. As Paul just mentioned, our efforts at this time of the year are focused on our fall selling season and year-end renewals, which impact the starting point of paid worksite employees at the beginning of 2015. Our guidance for the remainder of 2014 considers the plans to make this happen, recent trends in client mix and associated new and renewal pricing, expected direct cost trends and continued management of our operating costs. So as for our key metrics guidance, we have updated our full year guidance for average paid worksite employees to a range of 130,600 to 131,100, a decrease of approximately 1,000 worksite employees from our prior forecast. Our forecast assumes slightly higher client attrition related to the increase in M&A activity, maintaining recent sales efficiency levels for our core business and the onboarding of recently sold mid-market clients. Net hiring in our client base is expected to remain at recent levels over the remainder of the year. As for Q3, we are forecasting average paid worksite employees in a range of 131,750 to 132,250, which is a sequential increase of 3% over Q2 of 2014. We expect Q3 gross profit per worksite employee per month to be in a range of $243 to $245, and as Richard just mentioned, the full year to be in the range of $250 to $253. This is a $4 decline from our previous full year forecast and is due primarily to a lower average service fee and higher estimated workers' compensation costs. The impact of the lower average service fee on our 2014 earnings is expected to be offset by the continued management of our operating costs. Our Q2 expense savings, combined with our revised spending plan over the second half of the year, is expected to result in approximately $7 million in cost savings from our prior forecast. We are now forecasting full year 2014 operating expenses to be in a range of $350 million to $351 million, or a $14 million reduction from our initial budget. Approximately $6 million of these reduction is associated with cost savings initiatives in our G&A and corporate overhead areas. Holding down corporate headcount, outside of the planned hiring of business performance advisors and technology personnel, is expected to result in $4 million of budget savings. Savings in our marketing area are expected to total just over $1 million and other savings -- other areas of savings, including stock-based compensation, commission and depreciation on lower CapEx spend, are expected to total approximately $3 million. Now as for the third quarter, operating expenses are expected to be in a range of $86 million to $87 million. We are estimating an effective income tax rate of 42% and 25.6 million average outstanding shares. In summary, our updated key metrics guidance implies a range of 2014 full year earnings per share of $0.95 to $1.07. The midpoint of this updated guidance is approximately $0.07 per share below our previous forecast. And as mentioned earlier, our high workers' compensation cost estimate is a key contributor to this revision. Additionally, the updated guidance includes an offset between the expected reduction in our average service fee and the operating expense savings. At this time, I'd like to open up the call for questions.

[Operator Instructions] Your first question comes from the line of Michael Baker from Raymond James. Michael J. Baker - Raymond James & Associates, Inc., Research Division: Richard, I was wondering if you could comment in general, from a geographic standpoint, what you're seeing in terms of competition. I know you guys were one of the early ones to point out an increase in competitive dynamics. It sounds like paychecks has adjusted in their health care offering in at least one market. Just trying to get a better sense of how that is shaping up.

Well, we have seen in several of the markets, certainly out on the West Coast, we've seen quite a bit of competitive pressure out there, and of course, we always have a certain amount from ADP. So it's not any more or less in one area than another at this stage of the game.

I would say that the health care-related environment has a lot of moving parts going on it right now. And so it's a little tougher to kind of align things to see, apples-to-apples, what's going on in the marketplace. So I think there's quite a bit of confusion around health care in the marketplace, and that's weighing in also. Michael J. Baker - Raymond James & Associates, Inc., Research Division: Okay. And then, Richard, on the health care benefits side, I was wondering if you could comment on hep C, whether or not you think you guys have any meaningful exposure there?

No, I don't think we do actually.

Your next question comes from the line of Jim Macdonald from First Analysis.

It sounds like your estimate for service fees continue to go down. I think, a couple of years ago, you thought you could get those to go up. Is all this mix? Or how do you see this playing out over the longer term?

Yes, it's a combination of mix, is the biggest factor right now because of our new lower-cost -- lower-price, lower-cost offerings. As I mentioned, Workforce Synchronization is getting a lot of traction faster than we expected. So that's a good sign. However, I think another factor is just the maturity of the sales staff. New sales have come in at a lower price, and that does reflect 2 things: some of the competitive pressure we're talking about in the marketplace and also the maturity of the sales staff. And our experience is, is that as our business performance advisors mature and move into that 12- to 18-month and post 18-month period, they not only move up in volume of sales, but also their confidence rate is higher, success breeds success and they start actually selling higher prices as well. So there are 2 factors in there contributing to that, and we've just -- well, actually 3. And so we've just built all that into the going-forward scenario.

Okay. And then, are you having any indications yet of what price increases will be hitting the market for health care later in the year and for people that may want to migrate to your plans? Or is that just too early to see yet?

No. I mean, Jim, it is quite early to see what the rest of the marketplace is going to be producing. From our side of the fence, just because of our cost trends, we're doing so well, prospects and renewing customers are not going to see very significant increases. But there are so many -- as Paul said a minute ago, there are so many different plans out there right now with so many different options that when you got kind of a steady state base of plan, designs and offerings, there's a lot -- it's a lot more difficult to do an apples-to-apples comparison. So I expect because of the things that have driven the cost of health care reform that we have seen in the marketplace so far, it's way in the double digits. But those prospects are going to have to either stick with the plan that they've got for another year whether they like it or not, or else start to move into something that makes more sense. And when you think about it from our perspective, a prospect that's looking at 25% increase in benefits, what kind of dollars does that mean as it relates to our offering, and how much more they could get by being with us, it starts to change the mindset of the business some.

Yes, what we have seen in the most recent comparisons of prospects coming through the pipeline and what we're watching the most closely are companies who are staying in their old plan. So to try to get a feel for those increases I think is going to be critical. And it is early, but what we've seen, they look like they're in the 12% to 15%, 16% range. We'll be watching that closely. But if they're anywhere in that range, we should compare very favorably and be able to overcome that in this big renewal period that's been concentrated into the fourth quarter. If that's the range we're going to compare very favorably, and I think, can really get some movement coming to us.

And could you -- just one last one, could you give us your current level of trained salespeople and kind of how you expect that to trend over the rest of the year and next year?

Yes. As I mentioned in my script, we got to a 20% -- over 25% increase in number of trained advisors that are us over a year. And right at that 300 number where we've been focusing on and making sure we stay at that number. And so their maturity rate is a little faster. Turnover rate has been lower, which is very good. If we can maintain that, we're positioned really well for a strong selling season, so...

Your next question comes from the line of Mark Marcon from Robert W. Baird & Co. Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division: I was wondering, could you elaborate a little bit more with regards to some of the strategies to improve retention as we transition to the new calendar year? It sounded like there was going to be an emphasis with regards to preserving units. And I didn't know if that implied that maybe the service markup would potentially be altered further in order to achieve that target.

Yes, thanks. What we factored in are several things in terms of what we're doing for the retention of business over that year-end period. Most importantly is the level of connectivity that we expect to have with our customer base early in the process, both in the core business and in emerging and mid-market. So we are -- we've already begun concentrated effort of engaging those customers, and making sure they're aware of the variety of options that we have available in both co-employment and traditional employment options. And in the core business, we've got a new loyalty program that involves an interaction at the client location and -- with all the worksite employees and we've already seen in our early testing of that, that not only does it gin up referrals for new business, but it really tightens the relationship with that customer, and so we believe there's going to be some nice retention benefits to that as well. Now also in the markup component, we have factored in mix and the recent pricing on new business. So we've been more aggressive. We will be more aggressive over the course of the fall. I think your lowest-cost customer that you have for next year is the one that stays with you. So we'll be monitoring those things and managing this mix issue going forward. Fortunately, we have the offset to the pricing pressure in the new strategic business units, and the potential for growth there that was part of the original strategy being able to add the gross profit per employee by having other product and services that are available. So we will also be pushing those buttons with new and renewing accounts and helping to combat some of the pricing pressure that way. Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division: And then so between the SBUs relative to the service markup mix, how do you think that would end up trending?

What we're showing just for the balance of this year is you're moving up to about $18 on the ABU contribution, and we've got a couple of bucks coming out on the -- due to the mix and pricing issues. So you're seeing some balance in there, and hopefully over time, that will be even better.

But you're also seeing some increase in the surplus for the payroll tax cost center. And we'll be offsetting that, too. Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division: Yes. Okay. So does that mean relatively stable, do you think?

Yes, I think, in gross profit where your -- the issue in terms of the gross profit line really ends up being the recent workers' comp changes. The rest of the picture, you have moving parts up and down in there, but that's fairly stable. Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division: So even with the potentially lower mix on the service side just because you are going to be discussing the other alternatives that you have with your existing clients, we could still see the GP per WSE remain relatively stable to this year's level?

Yes, correct, oh yes.

Your next question comes from the line of Tobey Sommer from SunTrust Robinson Humphrey.

I know the pricing environment has been discussed a little bit already, but I'm curious from your perspective, given the multiple services and bundles adjacent business units that you're currently involved in, is it primarily pricing pressure on the legacy premium bundle? Any kind of color you could give on the pricing environment kind of across the service offerings would be helpful.

Sure. Yes, I can do that, yes. And I'm pretty much talking about a transition we've gone through from the one product offering to a host of offering. And in terms of the pricing environment on our core bundle, the price pressure has come from a combination of the competitive environment, but then also, as I mentioned earlier, I think it's the maturity of our sales team gaining momentum will help to offset some of that. But that's, I would say, yes, we're talking more in the core bundle than we are others. Also it's the fact that you have now additional co-employment offerings in the mid-market and it's factoring in the mix change related to that. So for the customer, that Workforce Optimization is their solution. Pricing is not the reason that someone either does or doesn't do it because it makes perfect economic sense. We do have some things going on in the marketplace that I mentioned last quarter around -- actually I mentioned last couple of quarters, around some competitors out there really slashing price. So we're responding to that to some degree, but I think in an appropriate and balanced way.

Okay. And Paul, historically, there's been a pretty tight relationship, albeit on a lag, between an increase in trained salespeople and ultimately, the direction, either acceleration or deceleration, in the worksite employee growth. The relationship appears to, at least for now, have more of a lag than it has historically. Can you comment about that, and kind of how you're thinking of the relationship now and going forward?

Yes, I think the reality is that the year-end transition that I referred to in my comments having a setback to that level at year end is the answer to your question. There's a tight relationship between growing -- we've grown through the year each year, but then at year end, didn't have a satisfactory transition. And the reason for that is very clear. With the size -- first year, the size of the sales staff was not enough to offset the mid-market attrition. You lose a large account, you got to replace them with a lot of small accounts. And if your size of your base isn't big enough, if the size of your sales staff isn't big enough, you're not going to do it. So in the second year, we also had -- if you go back to this year, the setback wasn't as bad, but it was still more than you could resolve with such a young sales staff even though it was larger, and mid-market sales were not enough to offset mid-market attrition. So that's what we've attacked, and we're really excited about the balance of this year because we're hitting all the right buttons. We have a detailed plan relating to every element of that equation that goes after a more successful year-end transition. So obviously as we grow, our forecast, as I mentioned in my script, as we get to the latter part of this year, you have 10% unit growth from February to December. So the big issue is, can you hang on to those gains as you go across into the year end, and that's what we're focused on, and it's what gives us a lot of confidence about 2015.

We have no further questions in the queue. I would now like to turn our call back over to Mr. Sarvadi.

Once again, thank you for your participation today. We appreciate your interest. We look forward to seeing you out in the marketplace over the next quarter. Thank you very much.

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