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…

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…

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…

[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…

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.