Good morning. My name is Carol, and I will be your conference operator today. I would like to welcome everyone to the Insperity First 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 first quarter 2017 financial results. Paul will then comment on the key drivers behind our Q1 results and our plans for the remainder of the year. I will return to provide our financial guidance for the second quarter with an update to the full year 2017 guidance. We will then end the call with a question-and-answer session, where Paul, Richard and I will be available. Now before I 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 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 website. Now let’s discuss the details behind our first quarter results, where we achieved a record high $1.84 in adjusted EPS on continued double-digit worksite employee growth. Average paid worksite employees increased 10% over Q1 of 2016, driven by both the high level of client retention during our heavy Q1 client renewal period and continuing strong sales. Client attrition totaled only 8.3% for the quarter. This is now our third year in a row where attrition has come in lower than our previous historical first quarter trend of 11% to 13%. On the other hand, net hiring by the client base, which is the uncontrollable component of our growth, continued to be weak, declining by 30% from the first…

Thank you, Doug. We are pleased to report the solid first quarter results, which demonstrate the strength of our unique business model and the long-term potential for consistent, predictable growth and profitability. We’re also pleased to announce a substantial increase in our dividend today, reflecting our confidence in the future and our continuing commitment to exceptional shareholder returns. Today, I will provide some details behind the successful completion of our year-end transition, which set the stage for continuing double-digit growth and profitability in 2017. I will also discuss volume and price considerations coming out of Q1 that caused us to slightly adjust some of the inputs to our 2017 plan for the balance of the year. Then I will discuss continuing progress on our key initiatives that we expect to extend our competitive advantage in the years ahead. Client retention through the year-end was excellent and validated an encouraging trend for the future. This is the third year in a row that the year-end attrition, which rolls into the worksite employee count in January and February, was below our historical levels of 10% to 12%. In 2015, this metric fell below 10% for the first time, coming in at 9.5%. In 2016, we set another record at 6.8%. And this year, we ended up, as indicated on our last call, between these 2 numbers, at 7.9%. This systemic improvement in client retention is the result of a multifaceted Customer for Life strategy that has taken hold inside the company. Another important outcome of the year-end transition is the pricing of the new and renewed book of business, including all of the allocations related to our direct costs and the markup for our HR services. Our Customer for Life strategy has also paid dividends in this area as pricing on the…

Now before we open up the call for questions, I’d like to provide our financial guidance for the second quarter and an update to our full year 2017 forecast. As Paul just mentioned, we are now forecasting full year growth of average paid worksite employees in a range of 11% to 12%. This is near the low end of our initial guidance due primarily to ongoing weakness in net hiring by our clients and a slight shift in the timing of enrollment of the two large mid-market accounts. We are forecasting Q2 worksite employee growth in a range of 9.5% to 10.5%, consistent with first quarter’s growth. As for our gross profit area, we expect the favorable trends experienced during Q1 in our pricing, worker’s compensation program and payroll tax area to continue over the remainder of the year. Our Q1 benefit cost came in higher than expected, our analysis of Q1 claims data did not indicate any systemic issues, and we continue to experience favorable health plan migration in demographic trends. We have updated our forecast to include a slightly more conservative estimate of Q2 benefit costs, which results in a modest increase over our initial full year budgeted cost. This updated worksite employee in gross profit outlook, combined with our operating plan, results in a level of 2017 adjusted EBITDA that is consistent with our initial guidance. With Q1 now behind us, we have narrowed our full year guidance, projecting adjusted EBITDA in a range of $162 million to $166 million, a 15% to 18% increase over 2016. As for Q2, we are forecasting adjusted EBITDA of $27 million to $29 million, which, as expected, is down sequentially from Q1 due to the typical seasonality in our gross profit. We’re now forecasting full year 2017 adjusted EPS of $4.30 to $4.44, a 20% to 24% increase over 2016. Q2 adjusted EPS is projected in a range of $0.65 to $0.71, an increase of 8% to 18% over Q2 of the prior year. In conclusion, we are encouraged by another strong start to our year, and we look forward to updating you on our progress throughout the year. Now at this time, I’d like to open up the call for questions.

[Operator Instructions] And your first question today comes from Tobey Sommer from SunTrust. Please go ahead.

Thank you. My first question is, what is the impact on worksite employee growth from net hiring? I think in prior quarters, you talked about it being about 1 percentage point. So with the lower contribution, is that 0.3% or 0.4% less from net hiring? Thanks.

Thank you, Tobey. Appreciate it. Yes, net hiring typically is like 1% to 2% of the annual growth. And yes, what we’ve incorporated into the going forward is the weak net hiring that we’ve seen so far in the year. Hopefully, that’ll turn around. But it’s been weeks so far this year, so we baked that in.

So could you describe what it is right now, whether it’s the 1% or 2%?

Well, obviously, in our forecasting, for the – up to this point of the year, keep in mind, we have the benefit of even seeing through April, and there’s basically been, instead of a net gain of about 3,000 we had last year, we had a net gain of flat, 100 or 200. So with that kind of four months under the belt, that really takes the full – we don’t think it’s going to stay that way all year, but it’s between 1% and 2% that comes out of full year.

Okay, got it. And wanted to ask you kind of a strategic question, how you look at the business with the changes that you’ve implemented, and as we’ve seen the performance coalesce around those changes, when you prepare into your stress testing for sort of the next economic downturn in recession, how do you see worksite employee – how do you see those performing in an economic downturn? When we look back at the 2007 and 2009 recession, from kind of peak to trough, worksite employees fell approximately 14% over seven or eight quarters. How do you see it occurring next go around? Thanks.

Yes. Thank you, Tobey. That’s a great question. We spent quite a bit of time on that actually. One of our management team, retreat camp-type meetings we had last fall. And we ran a couple of different models and scenarios and one of the great things about the new model we have here is there’s many more ways to get to where we want to go than we used to have. And that was the whole idea, was to have more ways, more options, more things that you can goose to try to keep things on track and even moving ahead when things don’t go as well. And frankly, this quarter’s a good example of that. You have – what we just talked about on the unit growth, you can see us still maintain double-digit growth in spite of no net gain from the client base. Now when you get into a recession case, the ones that we ran, as opposed to losing those numbers, well the main thing we do differently than we did last time is we would continue to grow the BPA base and accept the fact that there’s a little bit lower conversion rate and sales efficiency numbers to that downtime. But we’ve run the numbers, and you come out much better to keep on track. And you end up with mid-single digit growth, even through a recession case. So – and then we have other levers and things that we can do on the operating side of the business that we probably would do sooner than we did last time around. And we found that we can continue to do very well through a recession, at least, a – let’s call it a normal recession. We didn’t really model a cataclysmic collapse or a breaking of the whole financial system, like we saw in, I guess, the whole eight period. But also, back then, we had other issues with COBRA and so forth that played a role. So anyway, we’re in good shape, and the new model is even better positioned for whenever recession comes.

Thank you. If I could speak one last one in, could you update us on the opportunity and time line to get rid of the double taxation of payroll taxes? Thank you.

Good question. We have been continuing to communicate with the Internal Revenue Service, and they are making progress. Although until you have the letter, you don’t have the letter. We have – we know that everything that we’re supposed to provide, we provide it. We know it’s been reviewed. They ask whatever questions they want to ask. We’re – as far as we know, we’re in the Q4 letter as soon as they start sending out any letters. And so I can’t give you any more detailed than that, but it’s the federal government.

Your next question today comes from Jim MacDonald from First Analysis. Please go ahead.

Yes. Good morning, guys.

Hi, Jim.

Good morning, Jim.

Hi. Could you guys a little more on the benefits, were the large claims all related to Q1? Or did you have some spill over from last year, which sometimes happens in Q1? And any impact of the ACA in being able to get COBRA people off your books. And then, on the other side, how much workers’ comp did you release in the quarter?

Okay. Well, first of all, the large claims were actually the biggest portion of them, were in this quarter – in the first quarter. So it’s not like we had a bunch of catch-up from a prior quarter. And from all the data and analytics that we’ve run, there doesn’t seem to be anything systemic in that, so it just kind of one of those deals. That’s all I can say. As far as the Affordable Care Act is concerned and how that’s affecting us on the COBRA side, we monitor the COBRA enrolments monthly, and we haven’t seen anything that would cause us an alarm or concern about increases in COBRA participation. They’re really kind of flat from where they’ve been for almost 1 year now. So – and it’s a small – it’s a less percentage than it was, even 5 or 6 years ago. So it’s kind of business as usual. On the workers’ comp side, obviously, we always forecast our policy year is October 1 through September 30 of each year. And what we do is we start the beginning of the policy year and we forecast what’s a reasonable expectation of costs, and then we allow throughout the year as our folks that work on settling claims and managing the risk do their job. We usually, typically end up in a lot better than what we forecast. And of course, this quarter, there is no different. I think it was – I don’t know, about $3 million or so.

$3.5 million

$3.5 million positive adjustments. And so the program is running real well, and we look forward to seeing more of it.

Okay. So just following up and adding another one. So the $3.5 million, how does that compare? I know you typically have several million dollar releases each quarter. But how does that compare?

Yes. It’s kind of in the middle. I mean, we’ve had some big ones in the past, but it’s kind of – it’s just business as usual. It’s no big deal.

Yes, nothing out of the ordinary there.

Okay. And then on the BPAs, could you tell us your trade to BPAs for the March quarter? And the 470 number at the end of the year, is that trained or total?

For the end of the year, that’s the total count. And you can use always about 90% or so as that trained rep count. I think for Q1…

Q1 average trained was 424. There was about a 12% increase over the Q1 of 2016 number.

Okay, great, thanks.

Thank you

Your next question comes from Mark Marcon from RW Baird. Please go ahead.

Hi, Good morning. Thanks for taking my question. Just with regards to the net hiring that you ended up seeing in terms of the lower-than-normal net hiring, was that specific to any particular region? Or is that very broad-based?

Well, that’s obviously will be the first thing we’d look at, and I appreciate the question. Now it was really broad-based across the country. Industry growth, we broke it down every possible way. And all I can say is, from what I’m seeing, it’s somewhat of a positive step. I mean, if I think about the mentality of our client base, right now, over time, it’s running right at 10%. That’s right at the threshold of what usually causes hiring. Commissions paid to the sales staff of our clients, which is our visibility into their pipeline for new business, was like at 5.9%, just barely at the 6% threshold that usually indicates hiring. And then, business owner sentiment is the third factor that usually, if you get the trifecta, you get some robust hiring. And so those 2 measures are right at the little threshold. With those sentiment being strong, you’d think we would be seeing more hiring. But if I get the mind-set of the client owners, I mean, they’re pretty much – they want to see things happen before they do things. And I can’t help but think that, maybe, tax reform’s been discussed, but not moved very far yet, kind of a surprise delay on the health reform. So I really think some of the Washington activities may be weighing in on the timing of when business owners really start to push forward.

It certainly seems consistent with a lot that we’re hearing out there. With regards to the healthcare claims, was it just 1 or 2 really big ones? Or was it a little bit more spread out in terms of those claims?

Yes. I mean, it was – yes, it was spread out as a group. The large claims were up about, I don’t know, tune of 15% over the same period last year. And when we look at a large claim, we’re evaluating claims that are – we’ve always used this as our base. We always look at claims that are over 15,000. So that way, we keep the consistent reporting to an analysis to so we know what’s going on. But that was across the board, and wasn’t in any particular area of the country. And it wasn’t any particular kind of illness or disease. So it’s just one of the randomness of how health – how people use their healthcare

Okay. But I mean the underwriting standards haven’t changed at all or anything?

No. No, not a bit.

No, and in fact, we always review all the demographic and the other factors that affect where your trend is actually going. And we do that every quarter, sitting down with our outside advisers as well. And actually, all those factors are pointing to a better trend. So but again, healthcare claims is not something generally measured quarter-to-quarter. It’s an annual plan. And as you know, our history of being able to precisely estimate the annual trend has really been very good for a long time.

[Indiscernible]

And as you know, a quarter’s claims, you can have a lot of stuff in there and not much we can do much about.

Okay. And then with regards to just the new solutions and what you’re seeing there, if you take a look at like Workforce Administration, take a look at all of the single point solutions that were signed, can you give us a little more color with regards to what you’re seeing in terms of the ability to sell that through? And how that’s coming along?

Yes. So this first quarter was our first time to extend a Workforce Administration bundle to the entire sales force. And it was – January was when we actually did the introduction, middle of the month or so. And so the goal for this quarter was accomplished, which was to get a sufficient amount of volume to the pipeline, so that we could kind of test everything that happens in the pilot period with a small group earlier. And all those factors, so far, has been validated of in terms of prospects that convert to a bid and bids that close. So we’re real happy with that, but we did flush out, and this is – why we do it this way. We flushed out some low hanging fruit on how to improve things, how to communicate things, how to better train the BPAs to be more effective. It’s what you have when you do something and you have a learning curve associated with it. So we’re going to put together the complete long-term plan during this quarter and we’re going to go full steam ahead because it has a really nice opportunity impact, expanding our customer base to like-minded customers that will be positioned for Workforce Optimization, probably a year after they sign on with Workforce Administration. It also creates a very clear path for someone departing the Workforce Optimization solution. And one of the upsides we saw over this year and it was that, we had quite a few customers that were thinking of leaving, going to a traditional employment solution. We introduced Workforce Administration. They understood it, saw what it was and better understood what they were gaining with Workforce Optimization. And they decided not to leave. So that’s another great advantage of having that in place.

[Operator Instructions] And your next question comes from Jeff Martin from Roth Capital Partners. Please go ahead.

Thanks, good morning guys.

Hi, Jeff.

Paul, could you comment on the mid-market sales activity? And specifically to that, how the balance of Workforce Optimization and Workforce Administration played out in the renewal this year, now that the first quarter is complete?

Sure. The mid-market did well getting through the transition. Obviously, that’s a big part of us, having a successful year in transition. Because as you know, our customers grow. The people – we get mid-market customers both from selling new ones, but also from our small customers growing into that space. And so being able to retain them more effectively really solved a long-term issue around, what I’d called, are success penalty. So we had a good transition this year, kind of like the overall. It was slightly higher than the year prior. We had a few more that were purchased. When they get integrated into a larger company, sometimes, there’s really nothing you can do about that. We had a couple of nice wins last year where we had customers that were acquired, and we were able to bring on the acquirer along with keeping the current one. So those kind of things are new and really demonstrate that our service model for mid- market is really strong. I really think as this technology that’s coming out this year can really have a dramatic effect on our mid-market business, especially when the HCM experience will be really state-of-the-art, really leapfrogging some of the things that are out there. So in good shape on that front, and it had a good conversion.

Okay. And then as you transition the entire addressable market for you to get more flexible offering with Workforce Administration, would you expect client retention over the next two, three, four years to further improve? And can you see levels that are similar or below last year in your opinion?

I believe that some of the things we’re doing, these two major initiatives really, again, positions us even better with our current prospect, current customers as well as our prospects. And so I could see it getting better. It’s already very good. We’ve had a step-up from previous levels. And you never want to sit still, you always want to make sure you’re doing things that help you stay at that kind of level. But some of these things we’re doing now are really also transformational in terms of how customers will have options when it’s time for a renewal. And having more options at renewal that are good, valid options for them, we have found really is a benefit. And so hopefully, we can improve it. I don’t know how much, can’t wait to see it.

Okay. And then final question. Could you compare this year’s degree of operating leverage in the business versus your expectation after you get through this year? Because you are – it is somewhat of an investment year, somewhat of a catch-up year on some of the general administrative relative to the past couple of years. So curious to get your outlook on future operating leverage.

Yes. I think you’re reading that correctly. We do have some investment going on that we had a lot of great operating leverage last couple of years. We did some things that right sized the operation in – back in 2015. And in 2016, that some of those of things extended into the first half of that year. And we – I would expect as we – now we’ve had some decent margin improvement through that period, were actually, really strong margin improvement, and I expect that to continue. Typically, 50% of our expenses are fixed and other is variable. So you get that. We actually have some semi-variable that’s kind of go up with inflation and so forth. But generally speaking, we would normally have more leverage than you’re seeing this year at this kind of growth rate.

I think the other side of that equation, as we mentioned in the scripts, is that the pricing, we’re seeing favorable pricing, pricing going up in our components. And then so we spent a particularly focused on that aspect of things. So as far as margin impact, you got to consider both of those factors.

Got it. Thank you guys, appreciate it.

Your next question comes from Tobey Sommer from SunTrust. Please go ahead.

Thanks. Wanted to follow up about the hiring environment and ask you what you’re seeing in your recruiting service in terms of demand and how that may have changed correspondingly with the reduced level of net hiring in your customer base.

that’s a good question. We have – it’s actually been going well. I think it could be better. We do our recruiting for both our client base and our outside recruiting. And we have a decent pipeline there, but similarly, it could definitely do better.

So is it nearing or is it performing a little bit better maybe because of other dynamics in that business?

Yes. I would say it’s slightly better but it’s because that whole business is in different level, and pipeline for new business, it’s – you get new business that’s compared to a smaller base. It’s been well and fine, but…

And we also do recruiting for non-Workforce Optimization customers.

That’s what you’re seeing it.

Yes, that’s where you’re seeing it.

Okay. Great. Thanks for the clarification. Have a good day.

Thank you.

And your next question comes from Mark Marcon from RW Baird. Please go ahead.

A couple more follow-up questions. One would be, can you just give us a little more color with regards to the guidance in terms of expectations for gross profit for worksite employee?

Well, as I mentioned, we’re looking at continuing favorable impact relative to our pricing in our workers’ comp and payroll tax areas. On the benefit cost side of things, we are coming off of the first quarter. We’ve taken a conservative approach relative to our initial budget on benefit cost in the second quarter, and then therefore, for the full year, have a modest increase in that number. And so that gives you a little bit more information on how we’re looking at gross profit for the full year.

So I mean, you’d expect it to be flat up, down for the full year.

I mean, I think if at the end of it, you put all the pieces together, if you’re looking at that on a per employee base, it’s fairly consistent with the initial budget that we put together.

Okay. And can you remind us on the initial budget then?

Well, we don’t – again, I think as we’ve discussed, we don’t give that specific guidance on the gross profit per employee, but I think that gives you some flavor as to the different moving components and where we are now forecasting versus our budget.

Okay. So I mean, are the positives in terms of the pricing greater than the more conservative nature with regards to the higher benefits costs, put it that way?

That was what I’m glad you kind of brought us back to this point, Mark, because the message in my remarks today was the resiliency of our model in terms of having some – a little bit of a headwind on growth coming from the net change in existing client. And then also, overcoming a headwind from the benefit plan. So obviously, some pressure at the gross profit line, but both offset by the pricing and the management of our operating expenses, et cetera. You put out the whole picture together, this is the whole point of this model is to have more ways to get where we’re trying to go. And really exciting to see, and it sets us up for a strong balance of the year based on, again, the pricing, et cetera, offsetting the volume-related increases.

Great. And then with regards to the two mid-market clients that are coming on in the third quarter, how big are those going to be, roughly speaking?

There’s – in total, I think it’s about 1,200 or somewhere in that range. And there’s a pipeline of other ones coming on that didn’t move also, but were already scheduled in the third quarter. So we have that together, it’s just a couple of thousand plus.

And then on the Workforce Administration, you’re putting in place the new learnings. How quickly are you able to implement those new learnings? And what sort of incremental bump would you expect from Workforce Administration?

Yes. This – we’re going to put the whole conference and plan together. And as you know, some parts of it will be really low-hanging fruit that can’t get implemented pretty quickly. Other aspects will be further developed, like for our fall selling campaign will – I’m sure, that it’ll be component with that. And then there are some parts that are seriously longer-term. And so it takes a little while, but it’s on a good track. And I expect it will be significant eventually.

Great, thank you.

And we have no further questions in queue at this time. I’ll turn the call back to Mr. Sarvadi for closing remarks.

Once again, thank you all for joining us today and for your interest in Insperity. And we look forward the continuing solid performance and our excellent return to shareholders. Thank you for joining us. We’ll see you next quarter.

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