Insperity, Inc. (NSP) Q4 2017 Earnings Report, Transcript and Summary

Good morning. My name is Devin, and I will be your conference operator today. I would like to welcome everyone to the Insperity Fourth Quarter 2017 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. Thank you. 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. Let me begin by outlining our plan for this morning’s call. First, I’m going to discuss the details of our fourth quarter and full year 2017 financial results. Paul will then recap the 2017 year and discuss the major initiatives of our 2018 plan. I will return to provide our financial guidance for the first quarter and full year 2018. We will then end the call with a question-and-answer session, where Paul, Richard and I will be available. Now, before we begin, I would like to remind you that Mr. Sarvadi, Mr. Rawson, or myself, may make forward-looking statements during today’s call which are subject to risks, uncertainties and assumptions. In addition, some of our discussion may include non-GAAP financial measures. For a more detailed discussion of the risks and uncertainties that could cause actual results to differ materially from any forward-looking statements, and reconciliations of non-GAAP financial measures, please see the company’s public filings, including the Form 8-K filed today, which are available on our Web site. Now, let me begin today’s call by discussing our record setting fourth quarter bottom line results as we executed our plan for a continued double-digit worksite employee growth, pricing strength and direct cost management. Adjusted EBITDA increased 67% over Q4 of 2016 to $38.5 million. Adjusted EPS totaled $0.55 after taking into account the recent 2-for-1 stock split. This is an increase of 90% over the fourth quarter of 2016 and above the high end of our guidance of $0.46 to $0.48 per share. As for the details, average paid worksite employees increased by 10% over Q4 of 2016. Client retention remained strong again averaging over 99% for the quarter. And as Paul will discuss in detail in a few minutes, we experienced a successful fall sales and retention campaign. These results will be reflected in our first quarter 2018 guidance as worksite employees sold in Q4 are typically enrolled and paid in January of the following year. Net hiring by the client base was once again minimal as a net loss during the first month of the quarter was followed by slight gains in each of the following two months. Gross profit increased by 29% over Q4 of 2016 on the 10% worksite employee growth, continued pricing strength and favorable outcomes in our payroll tax, benefit and workers’ compensation programs. Our fourth quarter adjusted operating expenses increased 23% to $118 million and included a 16% increase in the total number of Business Performance Advisors over Q4 of 2016 and additional sales commissions associated with higher Q4 sales volume. Q4 operating expenses also included an additional accrual for our cash and stock-incentive compensation plans tied to our outperformance. Last week, we incurred additional stock-based compensation related to the acceleration of the vesting of restricted shares from Q1 2018 into Q4 2017 in order to maximize our tax deductions. Our Q4 effective tax rate of 35% was impacted by a write-down of deferred tax assets to a new corporate tax rate of 21%, largely offset by a tax benefit associated with the acceleration of the vesting of the restricted shares from Q1 of '18 to Q4 of 2017. Now, before I turn the call over to Paul, let me summarize our record high full year 2017 operating results. Adjusted EPS on a post stock split basis increased 37% to $2.45 and adjusted EBITDA increased 26% over 2016 to $178 million, both significantly above our 2017 budget. Gross profit increased 17% on 10% worksite employee growth as we effectively managed changes in client mix, pricing and direct cost trends. In the payroll tax area, we benefitted from the recently passed Small Business Efficiency Act, effective management of our health plan resulted in an increase in benefit cost for covered employee of only 1.2% over 2016 net of plan migration. Workers’ compensation costs as a percentage of non-bonus payroll declined slightly from 2016 due to continued discipline around our clients’ election and safety and claims management. Adjusted operating expenses increased 14.5% over 2016. When excluding additional cost related to our incentive compensation plans for our outperformance, adjusted operating expenses increased by 11% which was in line with our budget at the outset of the year. Putting all the pieces together, our key profitability metric, adjusted EBITDA per worksite employee per month increased 14% from $71 in 2016 to a record high of $81 in 2017. Now with our strong balance sheet and cash flow, we were in a position to return $105 million to shareholders during the year in the form of dividends and share repurchases. We paid $1 special dividend in December of 2017, increased our quarterly dividend by 20% in May and repurchased 900,000 shares over the course of the year. We also completed a 2-for-1 stock split which is a reflection of increasing shareholder value and serves to enhance the liquidity of our shares and build an attractive share price. Our balance sheet remains strong as we ended the year with $61 million of adjusted cash and $245 million available under our recently expanded credit facility. This level of liquidity and credit availability combined with a continued forecast for strong cash flow should allow us to continue to provide excellent return to our shareholders in 2018. Now at this time, I’d like to turn the call over to Paul.

Thank you, Doug. Good morning, everybody. My comments today will cover three areas including highlights that drove our outstanding results for the third year in a row in 2017, our successful fall selling and retention campaign just completed, and our game plan for another record setting year in 2018. Our excellent results in 2017 demonstrated the strength of our business model as we executed our plan for double-digit unit growth, optimized pricing, management of direct cost and risk, and continued operating leverage. This recipe for success was repeated over the last three years in a row resulting in year-over-year growth in adjusted EBITDA of 31%, 28% and 26% while more than doubling over this period from 84 million to 178 million. There are six major highlights worth noting from 2017 that demonstrate this strong execution of our plan across the company. First, we’ve validated our sales system for consistent, predicable growth by successfully increasing the average number of trained Business Performance Advisors by 13% while maintaining nearly the same level of sales efficiency as the prior year. This resulted in total new sales for the full year at 99% of our aggressive budget, the key sales funnel metrics proved our competence in training BPAs to reach targeted levels of sales efficiency, discovery calls increased 12% and business profiles increased 11% and our closing rate of sales to business profiles was constant at 23% in both of the last two years. Our marketing results were also a key highlight validating our capability to provide a sufficient number of qualified leads to support this BPA growth rate. Total corporate leads increased 58% and resulted in 56% of the worksite employees sold in 2017, up from 45% in 2016. Another major achievement in 2017 was our 85% client retention rate which was our second best year ever in this key metric. This follows 86% in 2016 and 84% in 2015 validating a systemic change from historical annual retention rates of approximately 80%. This trend is key to continuing both growth and profitability going forward. Another highlight last year was the major move forward for Insperity deploying leading technology in both traditional and co-employment offering. Insperity Premier has been a tremendous success as the only true HCM system designed for the co-employment relationship and service model. All clients have been moved to the upgraded platform on schedule along with over 300,000 user accounts. 2017 was also critical in laying the groundwork for expansion into the traditional employment solutions space through our new workforce administration bundle. During the year, we upgraded technology, formed a new division and redesigned the offering and price point to meet our objectives. I’ll have more to say on this subject in a few minutes as we look ahead to 2018 and beyond. The final highlight to discuss is our pricing and direct cost management which resulted in the highest surplus or management fee in our history, over 5% of collected allocations. This is the fee we earned for managing risk such as healthcare, workers’ compensation and employment practices liability. The combination of strong pricing reflecting demand for our offerings and careful risk management and mitigation more than offset lower than expected unit growth caused by the loss of our largest client due to an acquisition, weaker than historical net hiring in our client base and Hurricane Harvey. So across the company, we had an excellent year but the icing on the cake was a very successful fall sales and retention campaign. This is always critical for the company for two important reasons. First, the combination of new sales and renewal rates during our heavy year end renewal period determines the starting point for paid worksite employees for January. This year-over-year growth rate in January typically determines the low end of our annual growth rate for the coming year. Secondly, the volume of new clients coming on, current accounts being renewed and terminating clients departing the relationship at year end means that approximately 45% of our client base in January is new or re-priced. So the snapshot of our pricing of the client base in January, including new and renewed business, also sets the foundation for profitability for the year ahead. This year’s fall sales campaign was outstanding achieving 97% of our goal selling 23,700 worksite employees. This was an 18% increase over the same period in 2016 reflecting strong momentum in our sales organization. Our client retention through the campaign was also outstanding with January attrition near a record low. We still have February to go to be fully through the year-end transition and we will provide some more detail on retention next quarter. However, we know our starting point in paid worksite employees in January is a step up from year-end and provides the basis for our expected unit growth acceleration for 2018 to a range of 11.5% to 13.5%. We also have a first look at pricing of new and renewing accounts from the fall campaign and we are confident we have successfully matched pricing to current trends in direct cost. This puts us in a position to follow our historical practice to be conservative on our direct cost expectations at the beginning of the year and allow for our efforts to manage these areas to produce some upside as the year unfolds. Now as we look at our plan for 2018, we have the wind at our back in several ways, most importantly with being ahead of plan on the number of Business Performance Advisors. We ended the year with a 16% increase in total hired BPAs which is the strongest position we’ve ever been in going into the new year. In addition, we just completed our annual sales convention celebrating an outstanding year last year coupled with three days of intensive training. This event was exceptional and the Insperity sales organization is aligned and focused to meet expectations for 2018. We also are in a new position with our leading technology helping to win workforce optimization sales in the marketplace. Conducting demos of our technology is adding energy to the sales process like never before, which we believe can contribute towards sales efficiency going forward. We expect further development in 2018 to enhance and leverage Insperity Premier. We are also coming into this year with a very different dynamic within our client base from last year. Tax reform could certainly accelerate hiring within our client base and further the competition for employees. This environment makes our flagship workforce optimization offering even more appealing with big company benefits providing a competitive advantage for our clients, improving their ability to hire key employees. This dynamic can improve sales and retention in addition to the automatic benefit to Insperity from more robust employment growth within our client base. Our major initiative for 2018 is the full implementation of our workforce administration solution which will be offered side-by-side our workforce optimization offering for the first time. We will also be offering this option right upfront in the sales process after testing this approach during the recent fall campaign. We have determined this methodology positions our Business Performance Advisors in a more consultative role and actually allows for a greater contrast between co-employment and traditional employment. This results in greater clarity and emphasis on the advantages of workforce optimization while providing an Insperity option for traditional employment if preferred. We are also applying our deep experience and expertise from across Insperity to ensure Insperity workforce administration becomes the most comprehensive traditional employment solution in the marketplace mirroring the longstanding positioning of Insperity workforce optimization in the co-employment space. Workforce administration clients will experience the same competitive distinction of breadth and depth of services and level of care that has made Insperity a category of one in our space for more than 30 years. Our full commitment to this complementary traditional employment option is central to our going-forward plan as a catalyst for growth acceleration. When we are successful with this implementation, we believe our business model will be enhanced in several ways including increased sales efficiency, greater contribution to gross profit and higher client retention. At Insperity, we continually operate and benchmark against the specific detailed five-year plan. Due to our strong execution since 2015, we outperformed and completed our five-year plan in three years. So in November, as we were closing in on the end of the year, we conducted a management and board retreat to set the course for the next five-year plan. The theme that emerged from this strategic plan was moving ahead as “One Insperity” leveraging our unique breadth, depth and level of care of our services across all our offerings to earn each customer for life. We will be forming teams around each of these key success factors for this plan which are growth acceleration, operational excellence, technology leadership, risk optimization and talent development. In addition, we have made an investment in our employees made possible by the recent tax reform legislation to reward recent performance but also to gain alignment and a focus on achievement of our new five-year plan. Over the last three years, we have returned $389.3 million to shareholders through dividends and share repurchases and rank number one in total shareholder return among our peer group. As we are successful implementing this new plan, our goal is to continue the extraordinary shareholder returns we have delivered in recent years. One last comment I would like to add concerns the recent announcement of our President, Richard Rawson’s upcoming retirement in May. Many of you have gotten to know Richard over his exemplary career at Insperity extending over 29 years. Richard’s contribution and commitment to Insperity and actually the entire PEO industry cannot be overstated. His work ethic, sense of humor and unique insights have been an essential part of the personality of Insperity and contributed to our knack for overcoming any challenge that came our way of which there were many. He will be greatly missed on a day-to-day basis; however, will continue to contribute greatly to the company as he remains on our Board of Directors. This will also benefit the company extending his well developed key vendor relationships into the future. I hope you have an opportunity to see Richard on the road before his retirement’s official and have an opportunity to congratulate him on a stellar career. At this time, I’d like to pass the call back to Doug.

Thanks, Paul. Now let me provide our 2018 guidance beginning with the full year. As Paul just mentioned, we are forecasting 11.5% to 13.5% increase in average paid worksite employees over 2017 resulting in a range of 203,700 to 207,400 for 2018. Our forecast is based upon the January starting point of paid worksite employees, followed by accelerated growth over the remainder of the year in line with the increasing number of trained Business Performance Advisors. For the full year 2018, we are forecasting client retention and net hiring in our client base consistent with 2017. As for our gross profit area, we have gone through our usual budget process of analyzing client mix, pricing and direct cost, including healthcare and workers’ compensation claim trends. Our budget process is intended to begin the year with a conservative forecast for direct cost trends and leave the upside to favorable developments as we manage pricing and direct cost over the course of the year. Our operating plan includes further investment in our growth including the hiring of Business Performance Advisors, opening five new sales offices and additional channel in marketing programs. Also, as we execute our long-term growth plan, we will continue to invest in our high-touch, high-tech service model with personnel and technology infrastructure, security and development. Our operating plan also includes investment in the new workforce administration bundle, our traditional employment offering. The combination of improved worksite employee growth, stable gross profit and continued investment in operating leverage leads to our forecast of an 11% to 15% increase in adjusted EBITDA from $178 million in 2017 to a range of $197 million to $204 million for 2018. We are forecasting a 21% to 26% increase in adjusted EPS from $2.45 in 2017 to a range of $2.96 to $3.08. This forecast assumes 42 million average outstanding shares and a full year effective tax rate of 27% after considering the impact of tax reform. Both our full year 2018 and first quarter guidance for adjusted EPS and adjusted EBITDA excludes the recently announced one-time tax reform bonuses to be paid to our non-management personnel. Now as for the first quarter, we are forecasting an 11% to 12% increase in average paid worksite employees over Q1 of 2017 resulting in a range of 193,500 to 195,300. We are forecasting Q1 adjusted EBITDA in a range of $69 million to $71 million, an increase of 10% to 13% over Q1 of 2017 and forecasting Q1 adjusted EPS from $1.12 to $1.16, an increase of 22% to 26%. Our Q1 adjusted EPS guidance includes an effective tax rate of 25% which is lower than our forecasted full year tax rate due to the tax benefit associated with the vesting of performance-based shares which occur during the first quarter of each year. As for our quarterly earnings pattern, keep in mind that our Q1 earnings results are typically higher than subsequent quarters. And in particular, we are on a higher level of payroll tax surplus prior to worksite employees reaching their taxable wage limits and benefit costs are lower in Q1 and step up over the remainder of the year as deductibles are met. In conclusion, we are pleased with our strong top line and bottom line growth in 2017 and are expecting another great year in 2018. Now, at this time, I’d like to open up the call for questions.

[Operator Instructions]. Your first question comes from the line of Jim Macdonald with First Analysis. Please go ahead. Your line is open.

Good morning, guys. Just want to get a little bit more into your assumptions for 2018, maybe a little more on the number of BPAs you had in Q4 and your growth plans for BPAs in 2018?

Sure. We ended the year right at our number – close to our number of 500 that we kind of accelerated the plan in the last half of the year. We ended the year at 16% increase over the year prior. We’re looking at over the course of the year since we’re kind of ahead, we don’t really feel we have to add that many new. The training will continue on and we’re kind of looking at about a 14% average trained number year-over-year over the course of year. So that’s the game plan.

Okay. And on benefit trend, maybe you could talk a little bit about how your benefits trended in the fourth quarter and what you’re sort of expecting in 2018?

Sure. Yes, Jim, we – obviously our fourth quarter’s results were the best quarter of the year in terms of the trend was down to about 0.5% in Q4. And for the full year, it ended up on the total benefits, which includes just all the medical, dental, vision, disability, all that other stuff was about 1.2% for the year. And what we’re seeing this year is we’re seeing a really good trend on the medical side but the pharmacy trend is actually going to be up. And so when we put all that together along with the – there is some ACA taxes that went away in '17 that are coming back in '18. So when we put it all together, we’re looking in kind of the low 3% range for 2018.

That’s helpful. I’ve got one more and I’ll let someone else ask. So you said you’re assuming similar net hiring in the base as last year and if I remember right, last year was pretty low. So are you still assuming not very much net hiring in your plan?

Yes, I think – one of the things we want to be cautious about is even though we think demand for employees is going up, the supply is pretty low. And so the question is, will people be able to find people for the jobs that are open? Now our customers have an advantage. They have big company benefits and they’re able to attract and retain people and we’ll have our recruiting division fully ready to rock and roll and help our customers bring on people. But those are the kind of things that we don’t control to a large degree. And so we’ve kind of said until we see it, we’ll kind of keep it where it’s been for forecasting purposes.

Your next question comes from the line of Tobey Sommer with SunTrust. Please go ahead. Your line is open.

Hi. This is Kwan Kim on for Tobey. Thank you for taking my questions. First off, could you update us on your strategy to retain more of your larger customers as they may outgrow existing services? Are you able to retain more of the large customers today versus a year ago? Thank you.

Thank you, Kwan, for the question. Yes, we – our midmarket division continues to develop nicely. As you know with these large clients, the timing of when they come and when they go, it’s a little more choppy but we had a good year in midmarket. Last year, we met our threshold goal of selling enough to offset any that left, because we had our largest client leave last year because they were acquired. But I really see some nice upside for 2018 in that area as we’ve really gotten a nice lift from the way we’ve integrated with our core sales team in the marketplace and now have really a nice pipeline for midmarket customers coming into our midmarket division. Retention was strong for midmarket at year end other than of course you do have again companies get acquired and that’s kind of something we don’t have much control over. But I almost put them as the seventh highlight for last year but I figured six was enough and they’re going to have a great year in '18, they’ll be a highlight for next year.

That’s helpful. And could you tell us what you’re seeing on the healthcare cost front and give us some insight on your outlook on healthcare cost for the markets and Insperity?

Sure. I mentioned just a minute ago that we had an excellent trend for the year 2017. It was well below 2%. And what we’re seeing is a little bit of a step up, including plan migration and mix of business for 2018. But we’re seeing something in the 3 to 3.5 kind of worst case scenario right now. We think that there’s enough going on in the marketplace that with the – the ACA taxes are one of the big factors that are driving some of that this year. So we still think a 3% trend would be great in the marketplace but we just have to see how it works out as we go through the year.

Yes, and I think as far as how we’re comparing to the marketplace at large, I think we’re continuing to validate the group buying advantage we have built into our workforce optimization model and how that benefits our clients, worksite employees and their families.

Thank you very much.

Your next question comes from the line of Jeff Martin with ROTH Capital Partners. Please go ahead. Your line is open.

Thanks. Good morning, guys. How are you?

Good. Hi, Jeff.

Hi, Jeff.

I was wondering if you could comment on your expectation for gross profit per worksite employee per month for the year. It sounds to me based on your commentary that you expect it to be similar to 2017. Is that a correct interpretation?

Yes, when you put all the pieces together, obviously there’s a bunch of moving parts in all that. And at the beginning of each year we like to try to be somewhat conservative in that range. So we’re – it’s kind of in the range of last year but slightly down from that to start the year. And then of course we’re hoping to outperform that through managing the gross profit areas.

It’s definitely up from what we budgeted for 2017.

Yes, absolutely.

Right. Based on my numbers, it’s the highest it’s been in at least five years.

Yes.

Paul, could you comment more regarding the workforce administration offering and taking that outside the midmarket? Is this something that you’ve been testing and playing around with for the past year and you’re ready to transition to it full-fledged?

Yes, absolutely. We spent the whole year last year testing a variety of elements that are important to a rollout strategy. And the last one that we tested in the fall we created a new what we call discovery call brochure that kind of revised some of the talk track and some of the dialogue and then literally on a foldout page puts workforce optimization, workforce administration side-by-side and right up front. I’m meaning side-by-side so you can compare the two and right up front in the sales process on the discovery call. And what we have found there is really exciting because of how it puts our BPA in such a consultative role to describe the differences. Of course most prospects we’re calling on are already in traditional employment and our workforce administration is a great step up in having a comprehensive, cohesive solution to upgrade a traditional employment solution. But we’re able to discuss traditional employment right next to co-employment and really hone in and describe the advantages, the group buying advantage of being in co-employment, the lowering of the risk of being an employer that comes along with it. So many advantages of co-employment we’re able to really identify side-by-side and have contrast. And of course in selling, it’s always true you’re better off if you’re offering prospect options. And we have found that when you have the two options there, you’re able to discuss both of them more fully without trying to force somebody into one solution. And we just think that’s going to be awesome in two ways. We think we’ll get every workforce optimization customer that we’ve ever gotten plus some that we’re now able to have a more full discussion about it without kind of the fear of co-employment and some of the myths that go along with that. And then we’re also going to we believe be able to bring customers into our family, if you will, in workforce administration if they opt to – for an upgrade in their traditional employment world as opposed to co-employment. We’re so confident about that, we’ve actually built that into budgets and for our Business Performance Advisors and the management to shoot for, for this year more of balanced scorecard among all of business performance solutions and that kind of ties in with this whole concept of moving forward as one Insperity. The other thing we did is we did a lot of work with the marketplace and customer base to determine what is the best comprehensive traditional employment services bundle that meets the need of the target market and also can be priced at a price point that puts us in a really strong competitive position to bracket our competition between our co-employment solutions offering which is the premium service in the marketplace and then our traditional employment services offering that comes in typically just underneath competitive co-employment offerings. And many of those we actually think are more traditional employment solutions because of how limited their co-employment structure is. So we think we’ve also created a nice competitive advantage out in the marketplace and we’re excited about getting out there and executing this plan.

That’s helpful. Thank you.

Your next question comes from the line of Michael Baker with Raymond James. Please go ahead. Your line is open.

Thanks a lot. Paul, I was wondering if you could give some color or shed some light on your thoughts of the push for association health plans. I know obviously PEOs for a very long time have offered a very broad-based approach to what small midsized companies need. And so I was just trying to get a sense for what you think in terms of opportunity and risk on that front as well as the industry association in enhancing the visibility of PEOs as a solution to the trouble of exchange, if you will?

Thank you. That’s a good question. We obviously are watching that closely and some of the changes from a regulatory standpoint have kind of opened up some opportunities there. Kind of the way we look at that is we’re a 30-year-old proven solution in our structure and the way we manage benefits. And even though I think it does open up some opportunities for associations across state lines, et cetera, and there are successful association plans state by state, it’s quite a trick to manage a national benefit program. And these association plans are still going to have the common issue that these type of multi-employer plans have always had. When people come to you for one reason, health insurance, you naturally have potential for adverse election. And those plans can get very unwieldy. Now when – one of the advantage we have is that the health plan benefits is definitely a very desirable aspect of what we do but it’s only one component. People come to us for the comprehensive solution and how it affects their business. So they’re not just coming with that one reason to be in or out. That way when people – price has changed, et cetera, they’re in for the one reason, price goes up, they’re out of here. They can get lower price somewhere. That doesn’t happen for us in our plan and that’s why we’re able to have over many, many years the small increases compared to the marketplace at large and I just don’t see anybody being able to complete with that for a long time.

That’s helpful, Paul. And thanks Richard for your insights over the years.

You’re welcome. It’s been fun.

Your next question comes from the line of Greg Mendez with Baird. Please go ahead. Your line is open.

Hi. Thanks for taking my question. This is Greg one for Mark Marcon and congratulations on a good year. My first question was just, could you just give a little bit more color on the discussions you’re having with clients and what you’re seeing when we think about the regulatory environment? Obviously the federal is trying to reduce, but change is good for you. And the state and municipal level, there’s some states that are going to – or cities going to great lengths to change things. I’m just wondering are there pockets or regions of the country where you’re seeing stronger growth because of – just for lack of a better term it’s just harder to do business with some of the changes happening at the state and municipal levels.

Yes, it’s a good question, Greg. What’s happening out there, you’re right, there’s some loosening of regulations at the federal level and that’s kind of started a cascading out to the states for states trying to adjust. And of course we’ve always had this whole multistate regulatory environment to content with. But our team of government affairs folks have a full plate because we’re always monitoring what’s going on state by state and have to stay on top of any regulatory changes that are going on out there. So we do see that as a risk going forward. What kind of states ramping up while the federal regulation is kind of being reduced, if you will, at least not growing as fast. And we’re ready for that. We’re kind of in place to go fight fires where fires come up in different jurisdictions.

When we think about a place like California, for example, with some of the changes you’re making, doesn’t that – wouldn’t that increase the appeal for what you’re able to provide?

Yes, it’s always the double-edge sword for us. More regulation is more burden for employers. They start looking for a solution. So we do use that to grow the business. At the same time, we have to comply and we have to deal with the changes and so that adds a little bit of cost. But it’s what we do, it’s what we know how to do. We’re good at it. And it’s part of what we’re delivering to our client.

Okay. And then also you touched on this a little bit in your prepared remarks, but just wondering the worksite employee growth, not only the digital channel but also customer loyalty program that you’ve been running. How do we think about both of those dragging the recent growth in worksite employees?

Yes, I mentioned in our marketing efforts produced 56% of our paid worksite employees this year. It was a 58% increase over last year. And that’s been driven by three primary programs; the loyalty program which are leads that come from current customers or worksite employees of the customer or even close advisors to our customers. Those are kind of our best leads and they close at the highest rate. And we continue to have a corporate sponsored methodology of localized meetings where we – that we provide a benefit to the customers but we’re also very focused on leaning opportunities out of those meetings. And that’s gone very well. The second component is a channel program. We have some excellent channels, different types of channel relationships that we’ve developed; some with the insurance community, some with the banking community, other types of relationships. And we constantly have programs and channel managers that are responsible for delivering up certain number of qualified prospects for our BPA channel. And then we also have – so you got the channel programs, you’ve got the – so what’s the third one? It’s our digital program. Our digital effort is just going fantastic. We have made a significant investment there and we have excellent people across our company that have blogs that they write on various subjects and we have quite a following out there. And our digital activities generate a good number of opportunities as well.

Great. Thank you.

Your next question comes from the line of Jim Macdonald with First Analysis. Please go ahead. Your line is open.

Hi, guys, just a couple of quick technical follow-ups. Do you see any changes in seasonality this year with the certified PEO in place for a full year? And then secondly I’d just ask it upfront. Your tax rate’s a little higher than some of the other companies we’ve seen with the new federal tax rate. Any comments on that?

Let’s hit the tax rate first.

Yes, regarding the tax rate, so the 21% bridging up to the 27% level, the big piece there is the state in income taxes. We’ve also got the – they’re no longer allowing a qualified transportation deduction. Some of that we’re still trying to get clarification on but that’s one aspect of it that may lead you to believe it’s a little bit higher than probably what you expected sort of in – if that does stick, it’s probably an additional 2% or so – 1%, 2% on our effective tax rate.

Okay. And the seasonality, any change --?

Yes, what we’ve done, we’re not anticipating any great change. However, we essentially now have set up in our sales and marketing team kind of three campaigns. So there’s a spring, summer, fall. Obviously, fall is up. It will continue to be our most dramatic and biggest investment in the campaign. But we are moving toward kind of a more evened out approach because we think there’s really not any limiting factor about wait until the end of the year or wait until the end of the quarter or whatever. So we’re going to work that this year and see if that produces a change.

Okay. Thanks very much.

[Operator Instructions]. There are no further questions at this time. I’d like to turn the call back over to Mr. Sarvadi for closing remarks.

Once again, thank you everybody for joining us today. We had an excellent year, off to a great start this year and we look forward to seeing you out on the road over the course of the spring. Thanks for joining us.

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