Good morning. My name is Regina, and I will be your conference operator today. I would like to welcome everyone to the Insperity Fourth Quarter 2011 Earnings Conference Call. After the speakers' remarks, there will be a question-and-answer session. [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 fourth quarter and full year 2011 financial results. Richard will discuss expected trends in our direct costs, including benefits, workers' compensation and payroll taxes and the impact of such trends on our pricing. Paul will recap the 2011 year and then discuss the major initiatives of our 2012 operating plan. I will provide our financial guidance for the first quarter and full year 2012. We will then end the call with a question-and-answer session. Now let me begin today's call by discussing our fourth quarter results. Today, we reported fourth quarter earnings at $0.42 per share, a 40% increase over Q4 of the prior year. As for our Q4 key metric results, paid worksite employees averaged 122,065 for the quarter. This was above the high end of our forecasted range and an increase of 10% over Q4 of 2010. Gross profit per worksite employee per month averaged $246 for the quarter, which was below our forecasted range of $249 and $252. Operating expenses totaled $73.3…

Thank you, Doug. I will begin my remarks this morning by providing you with the details of our fourth quarter and full year 2011 gross profit results, and then I will spend most of my time discussing our gross profit outlook for 2012 and specifically Q1. Our gross profit historically came from the service fee component of our markup, along with the surplus that is generated when the direct cost pricing allocation components of our markup exceed the corresponding direct cost. Now we've added a third component to gross profit, which comes from our adjacent businesses that was developed through a build by or partner strategy. As Doug just reported, our fourth quarter gross profit per worksite employee per month was $246, which was below our expected range. The service fee of our component -- of our markup averaged $192 per worksite employee per month. The surplus component was $43 per worksite employee per month, and the adjacent businesses contributed $11 per worksite employee per month to the gross profit. Now let me give you the details of each component. The $246 of gross profit per worksite employee per month was $5 below our forecast. Our markup was right on target, while the surplus was $4 per worksite employee per month lower than our forecast, and the adjacent businesses contribution was $1 per worksite employee per month below our forecast. Looking at the details of the surplus, we find that the payroll tax cost center produced a $7 per worksite employee per month better than forecasted surplus. The workers' compensation cost center surplus was $6 per worksite employee per month better than expected, and the benefits cost center deficit was $19 per worksite employee per month worse than expected. Now the $7 per worksite employee per month surplus in the…

Thank you, Richard. This morning, I will comment on our excellent financial results in 2011 and the tremendous progress we made throughout the year, setting a new course for future value creation for Insperity. I will also discuss the fall campaign and year-end transition factors that have positioned the company for a solid start to the new year. The balance of my remarks will address our key initiatives and our outlook for 2012. We were very pleased with our reported EPS for 2011 of $1.16, which represents $1.33 per share on an adjusted basis, as Doug mentioned earlier. This 55% increase over the prior year was achieved in the midst of a business transformation we have been implementing. 2011 began with a considerable level of execution risk around transforming our business from 25 years managing one business, delivering one comprehensive solution, to our new strategy to align multiple synergistic businesses alongside our industry-leading Workforce Optimization solution. This strategy is focused on leveraging the strength of our organization to accelerate our growth. This will be accomplished by offering a strategic selection of business performance solutions to close more new accounts, cross and up-sell current customers and grow our core Workforce Optimization business faster. The 3 major elements of this new strategy that were implemented last year are the new Insperity brand, bundle plus selling through our Business Performance Advisors and development of adjacent business offering. In 2011, we made great strides in each of these areas. Insperity was launched on March 4 and has taken a leading position among business services brands in a matter of months. Our first survey results measuring the brand awareness and positioning were received in the fourth quarter, and the findings are very promising. Our standard of comparison was the awareness among our target small to…

Thanks, Paul. Now before we open up the call for questions, I'd like to provide our 2012 financial guidance, beginning with the full year. As Paul just discussed, our forecasted unit growth takes into account an expected improvement in sales efficiency and client retention in net hiring in our client base at levels consistent with 2011. Although worksite employees were down slightly through the year-end sales and renewal cycle, we expect average worksite employees in Q1 to be at the same level as Q4 of 2011. Thereafter, we expect sequential growth between 3% and 3.5% for the remaining quarters of 2012. This results in average paid worksite employees in the range of 127,500 to 128,500 for the full year or a 9% to 10% increase over 2011. As for gross profit per worksite employee per month, based upon Richard's earlier comments, we expect to be in a range of $249 to $253 for the full year. This is generally consistent with the $251 achieved in 2011. An increase in our service fees and higher contribution from adjacent businesses is expected to offset a lower payroll tax surplus than last year. In addition, we expect improvements in our benefits cost. This is offset by beginning the year with what we feel is a conservative workers' compensation estimate similar to how we had budget this item in previous years. As for our operating expenses, we are forecasting total operating expenses in a range of $312 million to $316 million or a 6% to 7% increase over 2011. As for some of the details, we expect salaries and wages to increase about 10.5%, largely driven off of costs associated with 2011's acquisitions and investments in our adjacent businesses and incentive compensation back up to targeted levels that were not achieved last year. As…

[Operator Instructions] Our first question comes from the line of Jim MacDonald with First Analysis.

Could we talk a little bit about what your plans are to -- for your sales force and whether you're planning to increase that now that the efficiency is improving?

Sure. Let me address that. As I mentioned in my script, we're kind of in the middle of a 3-phase retraining for our sales staff to introduce bundle plus selling. We are seeing efficiency gain, I believe, related to the brand change from last year. And I expect that to continue, and we're budgeting some additional improvement. But as you know, getting to 0.85% to 0.9% sales per sales per month efficiency is still not back up to our normal pre-recession levels of 1.0%. So we do not intend to grow the sales force dramatically over 2012 but rather keep the total number of Business Performance Advisors around the 300 level and have our trained rep count move up from about the 245 or 247 or so we have now, move that up closer to 270, 280 range. So as we get toward the latter part of the year, if we're doing well on the retraining and things are really doing well, we might start adding a few more then. But for this year, that's what we anticipate on sales headcount growth.

And regarding the adjacent business units, it sounds like you're projecting a 30% increase. That, I presume, means you had some success with your new strategy or maybe you could talk to that. But on the other hand, in the quarter, the adjacent businesses were below our expectations. So how does that kind of square out?

Yes, sure. As you know, the adjacent businesses are small and newer businesses. They'll be driven primarily by channel strategy alongside their own specific growth plans outside the Workforce Optimization channel, but we're making great progress there. We are growing in those business units and expect as we again further train on bundle plus selling, and we'll see that increase even more so. But as I said, these are new businesses, so there's a little more bouncing us around and your expectations on them. So -- but in total, I think, we're looking at about 30% growth on the revenue side, which is great, even though that percentage on smaller numbers is not that hard to achieve. But we expect around that 30% and not much additional drag this year, only a couple of cents, so I like the way that's progressing. As we round out, the key here is to have the right offerings and have the experience that prospects are going to in these adjacent businesses to have that line up well with the Insperity brand and be a contributor toward building trust and confidence, so that we ultimately not only sell the adjacent business offering that the customer is interested in, but also moved toward selling other adjacent business offerings and especially more Workforce Optimization.

If I can just sneak in a clarification, I didn't get -- catch the share count and the repose you did in the quarter, your kind of thoughts on share repurchases.

Yes, we did 1 million -- a little over 1 million shares for the full year. We're forecasting 25.8 million average same shares in 2012. For the quarter, I don't know if I have that number. Yes, we did a smaller amount there in the fourth quarter but again, a little over 1 million for the full year.

As far as going forward, we expect to be opportunistic on that front. And as is our history, we've always pretty much bought back shares to offset any shares granted to manage dilution on behalf of our shareholder.

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

Wanted to ask you a question about the markup assumption for 2012. Given the gross profit guidance, what sort of increase are you assuming for the markup portion?

Tobey, this is Richard. We ended the fourth quarter was right at $191. And we see that increasing about $1 each quarter for the whole book, on average for the book each quarter throughout the year, probably ending up at $193, maybe $194 for the full year or by the end of the year.

Richard, can I assume that the bulk of that overall increase will be driven by a larger increase in new customer signings?

Yes, I think so. That's kind of the way we're seeing it at this point.

And just to continue along the pricing theme. When you have experienced some pricing increases in the past, has that cycle kind of been durable and lasted for a period of time or has it ebbed and flowed in shorter intervals?

No, it's been fairly consistent as we -- over the years, as we -- especially for renewing business, it's a more consistent, predictable number. And on new business sold, it -- the current economic environment and what's going on at different periods, it does effect that group starting price a little bit more.

Yes, I think it's important to note, I mean, that was a very significant increase in the markup component on new sales in the fourth quarter, $16 over the year prior. So we feel pretty good about that going into the new year, and that should continue maybe at that high level.

A broader question for you. You undertook some investments headed out of the recession, including the name change and rebranding. Where do you -- and you talked some more investments in training in the Business Performance Advisors, et cetera. Where do you feel like we are in the overall kind of stepped-up level of investment and transition? Are we kind of like more than halfway through? How do you feel about that?

Yes, I know exactly where we are. We are in -- coming in at the end of the fourth phase of the 6-phase transition.

And would that correspond with the level of investment kind of 2/3 of the way through?

I think so. I think you're -- we have used some more investment coming this year as you can see a drag of about, I guess, $0.17 or so. A lot of that had to do with this purchase price amortization that you have on some of these acquisitions. But we expect this year, again, this investment relates to getting those businesses growing at the right rate, getting them connected properly to -- in the overall strategy. And then as you look into '13, '14, '15, those businesses not only will grow, but then we'll start to see lower losses on each business and then turn into profit in those businesses. So we're on the right track on that front, and we've got 2 phases left to go. We're hopeful to accomplish both of those in 2012, and that should position us in great shape for '13.

Okay. And what is the time frame for the amortization in that drag to moderate? I presume they're on a relatively compressed schedule.

Yes. It's about 5 to 7 years amortization on those purchase prices.

Does it fall off a little bit next year or does it take 5 years and then it just falls off like a cliff?

Well, that came in over a period of time. We did a couple in the middle of 2010. We did another one at the beginning of 2011. So there will be some -- it won't be a cliff, but there will be some falloff relative to the 2010 acquisition.

Your next question comes from the line of Jeff Martin with Roth Capital Partners.

I'm calling in to comment about commissions paid to sales force being down 5%, and that's being a mixed signal relative to overtime. I was just wondering if you could expand on what you think is going on there and if you've seen any change in that experience in the first 5, 6 weeks of the year?

Yes, we've -- we're monitoring closely what's going on, on that front. And it is like I mentioned, it's kind of a mixed bag out there. I think people want things to be better. They're trying of be encouraged. The overtime, of course, indicates being at 9.5% means we're almost at that 10% number, where companies are operating at a pretty full capacity. And it makes more sense when you get in that range to hire new people if your outlook for new business is strong. And so what we have right now is they're operating at capacity, but the commissions we paid to the sales staff of our customers, which is our visibility into their pipeline for new business, is not very strong. And so that's why we're kind of saying, "Hey, look, let's kind of go steady as we go on what our expectations are from net new hiring in the client base." I also, though, mentioned in the script to have some caution simply around the fact that it's an election year, and that introduces another set of considerations in business owners to kind of factor that in as well. So hiring is based so directly upon business owner and business leader sentiment that you have to weigh some of those factors into the outlook, and it's a tough one because you're dealing with kind of trying to gauge how people might be thinking about some of the major things that are going on. But I think a measure of caution about that is the safe bet, it's the way that we should be planning. And you know what, I think we'd all be happy if the economy starts growing faster and people feeling good start hiring more. Then we will all be able to handle the upside of that.

And then in terms of your guidance, refresh my memory. What do you make in terms of assumptions for adjustments to prior year workers' compensation claims? You had $11 million that helped out in 2011. Do you model that or do you model it to a certain level?

Well, we just, I mean, we look at it more overall. And obviously, we start very low on any expectation of adjustments to loss reserves, so it's not a big component of what we look at. It's the overall forecast for workers' comp going into a year. So you can see for the full year, I think we're in the 0.60% range, 0.62% range for our forecast for 2012 relative to where we ended up back then in 2011, more like 5.5%, 4.55% range. So it's -- I mean, that's typically how we go about forecasting it. Richard?

Yes, I was going to say you can't predetermine how claims are going to settle out compared to the outside actuaries' loss estimates. So I mean, historically, we have been conservative in our forecast, and we haven't changed that view at all. We hope that there is more upside as the year goes by but that really relates to how we manage safety in the workplace every day on existing clients and how we're able to settle claims on previously determined losses or previously determined costs by our outside actuaries.

So are you accruing at that 0.6% to 0.63% rate?

Well, that's our forecasted rate. Each quarter, we're looking at how the claims rolled in. Now that we have an outside actuary and looked at claims and the development of those claims so -- and even the older claims and how those have been settled out, so all that goes into the equation as to how much we're accruing at each quarter.

Your next question comes from the line of Mark Marcon with Robert W Baird.

I was wondering, as it relates to the adjacencies, what is the actual amortization amount that's being factored into the guidance? In other words, you mentioned $0.17 in terms of the drag for this coming year. How much -- what's the drag on a pure economic cash flow basis?

Yes, as Paul mentioned in his script, about $0.09 of the $0.17 is amortization-related cost in those adjacent businesses for 2012.

Okay. And when would you expect that to go cash flow breakeven?

Well, I'm hoping 2013. But again, let's remember -- I still think this $0.08 is incidental to a faster growth rate, and that's what we're just targeting out of this strategy in terms of a faster growth rate in the Workforce Optimization business. So I definitely want to get to breakeven as soon as I can, but the priority is to make sure that we execute the strategy in a way that it helps us grow our core business faster.

Great. And with regards to that, when you're talking about the improvement in the sales efficiency, which is quite encouraging, how are you factoring in the adjacencies into those quotas? How should we think about that?

It's still incidental to that, so I'm not -- again, what I said in my script and I think is the right approach to take, we're not factoring in into the improvement in sales efficiency from 0.77% to between 0.85% and 0.90%. We aren't factoring in some dramatic change in effectiveness on bundle plus selling. We believe this year, we have 2 more phases of training to go through before we see that level of efficiency gains coming out of the strategy as we go into next year. So the efficiency gains we're looking at for this year from 0.77% to a range of 0.85% to 0.90%, it simply reflects moving forward on the gains we had in the last half of last year. And the percentage of our core Business Performance Advisors that have more than 18 months experience, and that's tracking all well and properly and should equate to some recovery -- further recovery in 2012.

Well, I mean, when you consider the fact that you removed the 46% of the prospect base wouldn't even take a call from us before the name change, and it's completely done 100% or 360-degree reversal, where people are wanting to call us. That's a pretty significant contributor to how efficiencies will be generated or improved in 2012.

And so when we think about the gross profit for the guidance for the first quarter, how much of that is from the adjacencies versus the surplus versus the markup?

Say that again. I'm sorry, I missed that.

When I just try to break down the gross profit guidance, how much of that is coming from the adjacencies relative to the surplus?

Well, that's about -- yes, I said we're forecasting that to be about -- it was $11 for 2011, and we think that will be up about $2 in 2012, so about $13.

For the adjacencies?

Yes, for the full year 2012. But the beginning of the year, more at the $11 level.

Okay, and then continuing to ramp-up. And then the surplus that's being anticipated?

Let's see, $43 to $47, I believe, is what we were talking about in the -- yes, $43 to $47 of surplus.

And that starts out high early in the year because of payroll taxes.

And the effect of so many people in the high deductible health plans.

Great. And then, obviously, there's potential upside there just in terms of workers' comp.

Sure, Right.

Great. And what's -- the last question, and I'll jump up the call. Any tweaks that you're doing to the marketing campaign? What's the learning spin from the campaign? What's being fine-tuned and what sort of results are you seeing from the fine-tuning?

Well, the actual survey results from the rebranding, from the advertising were absolutely off the charts. We nailed it when it comes to the impression we're making on a prospect and the way the door is open. We're starting at a different point now with the prospect. And frankly, I think, this -- I'm really excited about next week's sales convention because I don't think our Business Performance Advisors realize how dramatic that change is. And I think we're going to be able to demonstrate that to them with the results of the survey in our convention next week. And that should be very encouraging for them to know that there's a much more open door. Prospects that have seen and heard our advertising, they want to contact us. Now a lot of them won't because they're busy, but that means their mindset, when we call them, is completely different than it used to be. Like Richard was mentioning, with 46% or 47% that wouldn't even take a call, there are 50% of our prospects, the ones that have head our advertising, would like to call us. And if we call them, believe me, they're going to take your call and they're going to set up a meeting. So we think there's tremendous upside yet. We're not going to change a lot in the actual advertising message because the takeaway from prospects was that we provide business performance solutions and strategic insight that can help their business. That's exactly the impression we want to make, and now we want our whole selling process and the Business Performance Advisors to be able to deliver on that promise. We're making the right promise. We know that when we provide our service to the customer, this also came out in the survey, that the degree at which we deliver on that very significant promise of being a trustworthy innovator, industry leader, that's a big promise. And fortunately, from the results we see, a great confirmation among the client base that we, in fact, deliver on that. That's what sets the company up for a dramatic, competitive success, when you make a substantial promise that you're able to exceed the expectation in delivery. And so we're very excited about where we are. We think we've got the right message, and we're going to carry that out as we go forward this year.

Your next question comes from the line of Michael Baker with Raymond James.

I was wondering if there were any plans at this point to add to the portfolio of adjacent businesses?

Yes. I mentioned we have a couple of things that we're going to pilot early this year and what we've made. It's all included in the investment dollars we've been talking about here. And as those pilots play out with the right level of effectiveness, then we'll make the decision to launch them more formally this fall. So we do have some tricks up our sleeve and excited about how those will contribute.

So is it safe to assume at this point, it will largely be internal build versus M&A?

Yes, we'll keep on...

Okay. And then with the fall campaign, obviously, being behind you now, can you give us a sense of which of your adjacent businesses kind of resonated the most with folks?

Well, certainly, I think our Time and Attendance solution has -- we've had the fastest growth there, and even to the point where we've had to work diligently on implementations and how to handle that kind of influx. We have -- we've been making good progress on the Expense Management side, so a lot of our -- in the whole SaaS offering and cloud strategy, very excited about that, a lot of receptivity. We've got a going-forward plans that, that should take advantage of that clear trend of small and mid-sized companies wanting to have their technology in the cloud as opposed to managing all the assets internally. And so we're making good progress on those fronts. We think we have a couple of other things to kind of plug in later this year that help to round out the cloud offerings from an HR standpoint, and we think that's going to be very helpful.

And then you indicated when you made this push to kind of the adjacent business offering that one of the potential benefits would be if you had a customer that no longer kind of wanted the PEO-type relationship or outgrew it, that you would still potentially have a hook. And I was just wondering kind of given the attrition that you saw whether or not you're seeing some evidence of that happening.

Just a little, and the reason is because most of the customers that went away are customers that didn't come on to a bundle plus selling approach. So they weren't -- they were introduced still as a one-product solution company when they first came on. There's education to do there. There's upside there. But we also -- we do have customers now in each of these business units, some of which are former customers from the Workforce Optimization business. So that's a good sign. And that will be -- that is a part of the strategy, and we expect that to be substantial one day.

That's all the time we have today for questions. I would like to turn the call back over to Mr. Sarvadi.

Well, once again, thank all of you for participating today, and we look forward to a strong 2012. Thank you very much.

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