Paul Sarvadi – Chairman & CEO Richard Rawson – President Douglas Sharp – SVP, Finance, CFO & Treasurer.

Tobey Sommer – SunTrust Robinson Humphrey Jim Macdonald – First Analysis Securities Mark Marcon – Robert W. Baird.

Good morning, ladies and gentlemen. My name is Ryan and I will be your conference operator today. At this time, I would like to welcome everyone to the Insperity First Quarter 2014 Earnings Call. (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 joined 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 and considered to be forward-looking statements within the meaning of the Federal Securities Laws, words such as expects, could, should, 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 first quarter 2014 financial results.

Richard will discuss the Q1 gross profit results and our expectation for the remainder of the 2014. Paul will then add his comments about the quarter and our plans for the remainder of 2014. I will return to provide our financial guidance for the second quarter and then update to our full year 2014 guidance.

We will then end the call with the question and answer session. Now let me begin today’s call by discussing our first quarter results. Today we reported first quarter earnings of $0.37 per share.

These results were $0.03 per share by the midpoint of our forecasted range as higher gross profit per worksite employee and lower operating expenses more than offset a slight shortfall in paid worksite employees.

As for our key metrics, paid worksite employees averaged 126,289 for the quarter, an increase of 2.3% over Q1 of 2013 however below low end of our forecasted range of 127,000.

Gross profit per worksite employee per month averaged $280, this was near the high end of our Q1 forecasted range of $274 to $281 and below the $292 reported in Q1 of 2013 due to the anticipated higher deficit in our benefits cost center.

Operating expenses totaled $89.6 million, approximately $1.5 million below our Q1 budget and just 4% increase over Q1 of 2013. We generated $24 million of adjusted EBITDA and ended the quarter with $123 million of working capital after repurchasing 469,000 shares at a cost of approximately $14 million.

Now let's review the details of our first quarter results. Revenues increased 4.1% over Q1 of 2013 to $637 million on a 2.3% increase in average paid worksite employees. As for the components of our worksite employee growth, client retention averaged approximately 87% for the quarter which was in line with our budget.

We experienced a low level of net hire in our client base throughout the quarter, slightly below our forecast and well below that experience in Q1 of the prior year. Worksite employees paid from sales for the quarter were below budget and Paul will update you on our recent sales results in a few minutes.

As you are probably aware, our key pricing metric is gross profit per worksite employee per month which came in at $280 or $3 above the mid-point of our forecasted range. Favorable results were achieved in our payroll tax and workers’ compensation cost centers, partially offset by slightly higher deficit in our benefit cost centers.

Gross profit results were below the $292 report in Q1 of 2013 due primarily to an anticipated higher deficit in the benefit cost center. Benefit cost increased 5.3% over Q1 of the prior year and included a combination of higher than expected runoff from 2013 claims offset by lower first quarter 2014 healthcare claim activity.

Worker’s compensation cost totaled 0.65% of non-bonus payrolls below our forecasted Q1 cost of 0.68%. Payroll taxes as a percentage of total payroll were 8.8% a decline from the 9.4% reported in Q1 of 2013 due primarily to lower SUTA rates.

Richard will provide further details behind our Q1 gross profit results and expected trends over the remainder of the year in a few minutes. So now let’s move on to Q1 operating expenses which totaled $89.6 million. As I mentioned earlier this is about $1.5 million below our Q1 budget due primarily to savings in G&A area.

The increase in operating expenses over Q1 of 2013 was just 4% even when considering the run rate associated with the significant investments made over the course of the prior year including the ramp up in a number of business performance advisers, implementation of our health care reforms strategy and investments in our technology.

Our effective income tax rate increased from 40% in Q1 of 2013 to the forecasted rate of 42% this year and included the impact of Congress allowing the R&D tax credit to expire at the end of 2013.

As for our cash flow, adjusted EBITDA totaled approximately $24.3 million; cash outlays included the repurchase of 469,000 shares at a cost of $13.9 million, cash dividends of $4.4 million and capital expenditures of $2.4 million. At this time, I'd like to turn the call over to Richard..

Thanks, Doug. This morning, I will comment briefly on the details of our first quarter gross profit results and then I will give you our gross profit outlook for the balance of 2014. Doug just reported that our gross profit per worksite employee per month of the first quarter was $280 which was $2 above the mid-point of our forecasted range.

Gross profit consisted of $188 of average markup, $77 of direct cost surplus and $15 from our adjacent businesses. Now let me give you the details of each component. The $2 per worksite employee per month improvement in gross profit came from an increase in our direct cost center surplus.

The $2 per worksite employee per month improvement in our surplus came from the combination of a $2 per worksite employee per month increase in the surplus in the payroll tax cost center, a $1 increase in the workers' compensation cost center surplus and reduced by $1 increase in the benefits cost center deficit.

Better-than-expected surplus in the payroll tax cost center was the result of the 2014 state unemployment tax rates in several states coming in lower than originally forecasted. The better-than-expected surplus in the worker’s compensation cost center was the result of slightly better than expected clients’ activity.

As for the benefits cost center, the increased deficit was primarily driven by a significantly higher than expected fourth quarter healthcare claims that were paid during the first quarter offset by a lower than expected first quarter year over year claims range of 2.1% in the United Healthcare Plan.

The gross profit contribution from our adjacent business services came in on budget at $15 per worksite employee per month which is $2 per worksite employee per month better than Q1 of 2013 which further supports our long term strategy of reducing gross profit volatility and enhancing our cross-selling opportunities.

In summary, we are pleased with first quarter gross profit results and they gave some good inside to our gross profit outlook for the balance of the year beginning with markup.

Based on our first quarter’s markup which reflects the combination of year-end renewal pricing, the amount of new business sold and the lower price, lower cost co-employment offering that only midmarket prospects and clients can choose, we believe that it is prudent to forecast a $188 to $189 per worksite employee for month average markup for the balance of the year.

Now let’s discuss surplus component of gross profit beginning with payroll tax cost center. The better than expected surplus in Q1 resulting from lower rates than are originally budgeted should continue to produce a slightly better than expected surplus for the balance of 2014 but with the shift in the timing between the quarters.

Quarterly pattern of the payroll tax surplus decreases throughout the year as employees reached the limit on wages subject to payroll taxes thus reducing our gross profit for worksite employee for month.

However, when our unit growth accelerates from one quarter to the next, the payroll tax expense on those new worksite employees increases while the allocations remain constant. This means we do not get a full benefit of the annual budgeted surplus of those specific employees until the following year.

Therefore we shifts the surplus in the payroll tax cost center in the same range as originally forecasted. Switching to worker’s compensation cost center, we begin our new policy here on October 1st. Historically, we have forecasted a slightly higher cost trend in the recently completed policy period.

Then as we see how the incident rates and severity rate change based on delivery of safety services and effective claims management we refine those estimate each quarter. As I mentioned last quarter, we increased our reserve slightly more than usual because of a severe worker’s compensation plan.

This reserve adjustment cause our first quarter expense to be 0.65% of non-bonus payroll. Excluding that claim, our current incident and severity rates improved from Q4 of last year.

Assuming that future incidents and severity rates remain constant with Q1, we would expect our worker’s compensation cost to be in the range of 0.61% to 0.63% of non-bonus payroll for the reminder of the year.

As per the allocation side of this cost center, we are seeing slight increases for worker’s compensation insurance premiums in the marketplace. Therefore, we will continue to budget a nominal increase in our allocation for new and renewing business throughout the year.

Now let me tell what we anticipate happening in the benefit cost center for the balance of 2014. Obamacare is still creating massive disruption in the marketplace for employers with less than 50 employees.

In fact since the administration keep changing the rules, where insurers, employers and employees it makes it more difficult to predict healthcare utilization in 2014 and beyond. On the expense side of the cost center, we did see a favorable 2.1% claim trend in our United Healthcare plan during this quarter.

Even when you add in the new 1.4% cost of Obamacare taxes and fees, the results compare very favorably to the small business marketplace. You may recall from our last quarterly earnings call, we explained how much money a COBRA participant cost our client.

We also mentioned the launch of the communication plan design to inform current COBRA participants and any new eligible COBRA participants that there were now lower cost options for them to evaluate. I am pleased to report that this strategy has resulted in a 21% drop in the number of COBRA participants from Q4 of last year.

Additionally, we continued to see for participants enroll in lower cost, higher deductible plans which also helps to lower our overall claim cost. However, our quarterly expense increases as participants co-pays and deductibles are satisfied throughout the year.

Last quarter, we forecasted potential increase in total benefit expense ranging from 4.5% to 6% over 2013.

So assuming that COBRA participation, client utilization and large loss claims remain at their current levels and with one quarter of actual results behind this, we can narrow the benefit expense range to 4.6% to 5.8% for the full year over 2013.

On the pricing side of the benefits cost center and as previously predicted, we are beginning to see big increases for employers with young, healthy employees in ACA compliant claims. This should make our health plans look more favorable to prospects.

So from a pricing perspective, we plan to continue increasing our allocations at acceptable levels for both new and renewing business. When you combine all of the forecasted direct cost surpluses and the range of possible benefits expense outcomes, we should generate a net surplus of $48 to $50 for worksite employee per month for the year.

Our last contributed gross profit which comes from our adjacent businesses, some of which have a recurring revenue and gross profit stream. These are improving and we are beginning to see success from our channel opportunities. Additionally, we continue to have a nice backlog in few of these businesses.

Therefore, we could see gross profit contribution of which is currently $15 per worksite employee per month growing to $18 per worksite employee per month by Q4 of this year.

To summarize our outlook for 2014 when you combine the service fee markup, the surplus and the adjacent business contribution, our gross profit per worksite employee per month will be in a range of $253 to $257 for the full year slightly better than our original budget. This time I will turn the call over to Paul..

Thank you, Richard. Today my comments will cover three important topics for Insperity shareholders. First, I will update our financial guidance for 2014 and corresponding changes to our operating plans since last quarter.

Second, I will provide a progress report on the key initiatives we expect to drive our growth in profitability for the balance of the year and into 2015. Then I will finish my comment addressing our long-term strategy for the company and our view of where we are in the execution of our plan.

In our last conference call, we outlined a range of key metrics that implied a range of expectation for earnings per share of $0.96 to $1.31 with the midpoint of the range at $1.11. We also provided guidance for the first quarter in the similar fashion with the midpoint of $0.34.

Now instead of building up from each metric to the expected guidance, I want to provide the bottom-line first and then explain how we got there. Doug will provide the specific metrics in a few minutes. So the bottom line is our key metrics now imply a tighter range for EPS of $0.98 to $1.18 with the $1.08 as the midpoint.

This is after our first quarter coming in ahead of expectations by $0.03 due in part to the timing of certain operating expenses.

Now on the surface, this update may appear to be some tweaking and refining of the same growth in operating plan for the year, but in reality our current forecast includes a worksite employee shortfall coming out in Q1 and a quick response by management to better align operating expenses with our projected growth over the balance of the year.

Our revised operating plan keeps us in the same ballpark for this year's EPS results and positions us well for 2015 and beyond.

The adjustments we made to our operating plans also demonstrates our commitment to react quickly and decisively to macro and marketplace changes as they occur including a weaker than expected economy in labor market and continual healthcare reforms delays and changes.

Earlier this week, as we reported that first quarter of 2014 was the weakest in the past five years and we saw this reflected in some of the hiring patterns we follow.

In the first quarter of each of the last two years, the substantial percentage of the net change in the existing clients flow in from a combination of newly enrolled clients from the fall campaign ramping up and the initiation of current client hiring plans for the new year. This year this does not occur.

We also had a pretty good backlog of accounts in Q4 orientation and enrolment to further support our expectations for growth during this period. However, we experienced a lower enrolment of these accounts than we expected.

So the weakest in hiring is lower than expected enrolment from new accounts were contributing factors to our shortfall of about 2500 in worksite employees from our expected Q1 ending number which of course is the starting point for Q2. Although April hiring was better and hopefully it points to a positive trend.

This volume variance early in the year has a dramatic effect on the current year profitability due to the recurring revenue nature of the business. This of course has been the factored into the guidance.

You may also recall on the day up and almost immediately following our earnings release conference call in February, the administration announced the delay of substantial modifications in the employer mandate within the Affordable Care Act.

On March 5th, the administration pushed back the deadline by two years that requires health insurers to cancel plan that are not compliance with ACA mandate. We have also included in our revised guidance for the year a change in the timing of our expectations for growth driven by health care reform.

The frequent and unpredictable changes to the implementation of the ACA have created the moving target. Although, all of the provisions of the ACA are eventually supposed to be implemented, the (inaudible) delays in modifications had cost some reduction in the sense of urgency and a great deal of confusion.

The administration has provided last minute relief related to many issues which has caused a wait-and-see attitude in some cases, to be sure applicable provisions in the law really go into effect.

We are still seeing more opportunities to engage prospects due to healthcare reform and we believe this will be more of a driver for growth each quarter over the next several years. However, it’s prudent to adjust our near-term expectations related to the small business segment due to the recent ACA changes.

So our guidance we are providing today for 2014 is similar to that provided earlier in the year in EPS but our operating plans to achieve this range is different. The paid worksite employee shortfall and healthcare reforms delay shifts the growth plan by a full quarter.

So we have taken actions to align our operating expenses until the growth occurs to offset the 2014 EPS effect. This revised operating plan also puts us in a better position as growth accelerates in the 2015.

We will end the year with the lower operating cost structure, providing the leverage increase earnings substantially in various scenarios with a wider range of possible growth rates. In my view our outlook for growth and profitability of 2015 remains positive as we see serious momentum in our key drivers for future growth.

This includes the development of our core market business performance adviser sales team and our bid market offerings in sales process. Sales in the first quarter were 112% of budget, however the first quarter is a period in which we typically rebuild our pipeline following the completion of our fall campaign.

So at this point in the year we need to look deeper into other metrics that lead the sales as well to see if we are on track. In line with our strategy throughout last year, we increased the number of trained business performance advisers and in Q1 of this year we have its 307 in total.

This number is 33% higher than the 231 BPAs, the average for same period last year. Now the key metric to be watching for this year is not just the total trained BPAs but the number of trained BPAs with 12 months experience.

This is because with 12 months experience in the field as a trained BPA, we typically reach a critical point of increased productivity and generate workforce optimization sales. In the first quarter of this year, the number of BPAs with more than 12 months of experience started to reflect the ramp-up of BPAs from early last year an increase of 5%.

We expect this metric to increase to a range of 18% to 22% in Q2, 20% to 24% in Q3 and 22% to 26% in Q4 and as the number of BPAs with 12 months experience goes up we expect sales results will follow.

Other sales activity that ramps up before actual sale include the number of discovery calls which are initial face-to-face business with prospects and business profile which represents the gathering of information which is good to account.

In Q1 discovery calls were up 27% tracking with the increase in business performance advisers and business profiles were up 13% consistent with the expectations for the experience levels these new additions to the sales team.

Another indicator of increasing momentum is the activity of bundle plus selling of other business performance solution from our strategic business units. These offerings are easier to sale for the BPA and easy to buy for the prospect in a wholesale change to workforce optimization.

As a new BPAs, ramp-up we should see an increase in this activity as a leading indicator before we see the results in workforce optimization.

In Q1, the new leads from BPAs for these business performance solutions increased 139% and the number of demos for these solutions nearly tripled with the 280% increase over the same period last year and sales from BPAs for these business performance solutions were up 142% year-over-year.

Our strategy for early success with these offerings was also intended to help reduce turn-over of BPAs during the 12 to 18 month period for BPA through each optimal efficiency. So far turn-over is down 30% which is maintained will be very beneficial through our long term growth plan for the core sales organization.

Now our midmarket sales activity is also ramping up substantially as a result of recent organizational and operational improvement. Since the first of the year, we have completed the combination of midmarket sales and service personnel from across the company into a new division.

Very quickly we have seen increased activity and momentum due to re-organizing the sales team, establishing new sales management and providing a new level of senior management support. The sales team for mid market has been formed to mirror other successful midmarket sales organization.

This includes a relationship manager in the form of our business performance consultant and the team of product and subject matter experts brought in as needed to meet the specific needs of the customer.

The midmarket sales operation is now managed within the strategic business development part of the organization which has been successful in improving sales results in our other strategic business unit.

We are applying the same sales process improvement methodology we applied in those businesses in order to achieve more consistent predictable sales results.

We have also formed the deal team of top level executives to oversee the pipeline of prospects in the proposal phase of the sale to accelerate decision making and provide support to close business faster.

In addition our executive team has utilized divide and conquer approach to these two major growth initiatives to demonstrate single management support which Richard Rawson and Jay Mincks are leading the core market growth plan and Steve Arizpe and I are leading the midmarket growth plan.

I am personally involved in midmarket sales effort and Steve is focused on the midmarket retention effort. We have already begun to see results from these changes. The pipeline is strong and growing and new team is energized and focus.

The number of bids in potential worksite employees from those bids are both up over 60% year-over-year in the first quarter. We are encouraged that our trading of these new advisers as well as the adoption of our Insperity selling system by the entire team is demonstrated in this recent increase activity in sales results.

This brings me to my last topic for the day which is to look at our long-term strategy for Insperity and comment on where we see ourselves in the execution of our plan.

In 2011 we embarked on a dynamic business transformation of Insperity from a singly focused company with one product sold to a perfect-fit client at just the right time to a more dynamic company with the wide range of business performance solution that fit just about any company we call on at any time.

Although the company was certainly successful in the first 25 years, this strategic plan was designed to leverage the many strengths of the company into a much broader opportunity for long term growth and profitability.

This business transformation included 6 major elements and phases including strategy in organization, adjacent business development, the Insperity brand, bundle plus selling, refinement and growth acceleration.

The strategy phase included developing, organizing and communicating the strategy to obtain volume from all constituencies for the amount and degree of change that would be acquired by this plan.

The adjacent business development phase included investing in ten new businesses using a build by partner strategy to expand our offerings to add a wide array of business performance solutions. This would allow us to leverage our 300 person sales team and over 20,000 face to face visits made each year in a small to medium sized business community.

The brand phase included rebranding as Insperity to eliminate confusion among perspective clients from the old brand into establish a positive, inspirational new identity with the broader appeal.

The bundle plus selling phase require completely rebuilding our sales motion in the marketplace introducing the role of the business performance advisor and adding cross-selling to the Insperity selling system.

The refinement phase included validating each element of the strategy and applying learnings from each iteration of execution of our plan that also included completing all the training necessary to replicate the model. The final phase is growth acceleration which is where we are today.

This includes the ramping up of the number and efficiency and business performance advisors, product and technology enhancements, improving execution in adjacent business units and channel development. I believe now more than ever before we are on a great path to show our results for a long period of time based on our new business model.

The strategy is working in the marketplace where it really counts with the customer. We have tremendous receptivity by prospects to our powerful of way of business performance solutions. Our brand has been well received in eliminated the confusion we use to experience.

More and more we are making a multi-product recommendation to prospects in selling additional solutions with workforce optimization. Year-to-date 58% of our workforce optimization sales included one or more additional business performance solutions.

Our technology is leading the way with the significant increase in demos I mentioned earlier validating our offerings and establishing new customers into the Insperity family.

Early positive experiences with our technology and strategic business performance solutions are casting wider net to bring in customers to up sale to our core service at a later day. Our original adjacent businesses were near cash flow breakeven last year and are expected to add to EBITDA this year.

Our capability to develop businesses and offerings to capitalize our market opportunities as developed quickly and effectively.

However, implementation of the far reaching business transformation was not without considerable challenges both internal and external, against the backdrop of lackluster recovery (inaudible) labor market and government policy creating an unfriendly and uncertain business environment is taking longer than expected to reinvigorate the growth engine in the company.

Internally, it also took longer than expected to get cross-selling into our DNA and change to a number of paradigms that were well entranced in the minds and behaviors of our team.

The sales motion change, proved to be the biggest challenge and led to the need to go through several iterations to get it right before replicating the selling system and ramping up the number of business performance advisers.

Allowing the number of advisers to decline from 350 down below 250 to reach the sales team before ramping back up, pushed out the growth plan. However, we are on the other side of that issue now and the reward for persistence with our long terms strategy is in view.

I believe we are in a powerful competitive position today with all the ingredients to achieve our long-term goals. We believe in our strategic plan and expect to see the fruits of our labor in the realization as the leading provider of business performance solutions to the small to midsize company marketplace.

We also believe the value we provide to customers is the inherent value in our business and will translate it into tremendous value to shareholders in the years ahead. At this time I would like to pass the call back to Doug to provide the details behind our revised guidance for the year..

Thanks, Paul. Now before we open up the call for questions, I’ll like to provide our financial guidance for the second quarter and an update to our full year 2014 forecast. As Paul mentioned our updated guidance imply the EPS range of $0.98 to $1.18.

In general, this updated 2014 guidance reflects our plan to hold down the growth in operating cost until we experience acceleration in unit growth which is now expected to begin in the latter half of 2014 and continue throughout 2015.

This operating plan combined with the forecast of slightly higher gross profit per worksite employee is expected to largely offset the impact of lower worksite employees on our 2014 earnings.

As per our quarterly earnings pattern with the impact of Q1 sales of renewals on our client mix now behind us, we are now able to refine the seasonal pattern in gross profit over the balance of the year. This resulted in some tweaking of gross profit forecast between the quarters.

So as far as our key metric guidance, we are forecasting average paid worksite employees in a range of 128,000 to 128,500 for Q2 and above stated our full year guidance to a range of 131,000 to 133,000.

As Richard mentioned, we expect gross profit for worksite employee per month to be in the range of $254 to $257 for the full year which is slightly higher than our initial guidance. As for the second quarter, we expect gross profit for worksite employee per month to be in a range of $248 to $250.

We expect this step down from Q1 to Q2 and the seasonality over the remaining quarters largely reflects the impact of payroll wage basis on our payroll tax surplus and increased participation in high deductible plan on our benefit planning cost.

We now expect sequential increase of $7 for worksite employee per month from Q2 to Q3 followed by decline of about $15 from Q3 to Q4. As for our operating expenses, we are now forecasting Full Year 2014 to be in a range $356.5 million to $358.5 million or about $7.5 million reduction from our initial budget.

This reduction largely impacts limiting our corporate headcount growth, the business performance advisors in our ACM initiative, lowering sales commission in line with slower unit growth, reducing certain marketing costs and lowering various G&A cost.

Further cost reductions associated with incentive compensation will go into effect if certain unit growth, operating expense, savings and operating income targets are not achieved since our cash incentive plan adheres to a strict pay per performance standard.

Now as for the second quarter, operating expenses are expected to be in a range of $90.25 million to $91.25 million. Taking into account some seasonality in our operating cost, we expect a sequential decline of approximately $2 million from Q2 to Q3 and the declines are approximately 800,000 from Q3 to Q4.

As for interest income, we are forecasting 100,000 to 150,000 for the full year. We are estimating an effective income tax rate a 42% in 25.5 million average outstanding shares for both Q2 and the full year. At this time I’d like to open up the call for questions..

(Operator Instructions) your first question comes from the line of Tobey Sommer from SunTrust. Your line is open..

Paul, I had a question for you about the iterative process that has taken a while to reinvigorate growth.

When you look at your strategy alternatives – when you have done that periodically over the last two or three years, have you found that, are you starting to choose slightly more radical choices and maybe that is wrong but maybe more aggressive choices or when you are confronted with two or three alternatives to implement your strategy, are you choosing the one that is in the middle.

Thank you..

Well, if I understand your question on the iterative process, it’s a learning process of saying what’s working and what’s not working and what can we tweak, most of it is really around getting the sales motion right for the sales team and going out with a wide array of business performance solutions, adding a more consultative approach and then offering a multi-product recommendation and then bringing those to closure.

And once we got that, where we thought like we had it right which was of course the fall of 2012, that's when we ramped up the number of business performance advisors, started the recruiting process and so now we are simply in the normal timeframe that it takes to ramp-up the sales team, bring them up to the right level of sales efficiency and have the efficiency turn into sold and then paid worksite employee.

We are on that track and it's going well in that respect, all of the signs that we look for in terms of ramping up the number of advisers with 12 months field experience, that's now just at a 5% positive number.

So we had a good results against that growth and the size of the sales force and we expect that to ramp up dramatically now just like the ramp-up was last year and the total number of hired business performance advisors.

But as far as the type of changes that we made in the decisions we made, I would say they were not – we are not throwing stumps against the wall by any stretch of imagination.

It's a very systematic approach and very deliberate approach because our goal is always to produce consistent predictable growth not just to have a big bang that happens to work one time. So I hope that answers your question, Tobey..

That does. Thank you. As a follow-up, I was wondering if you could talk about the adjacent business units that are driving, maybe experiencing the best growth, and therefore contributing to the enhanced gross margin contribution that you described..

There are goals for this area. It was very clear in the long-term strategy. This is key because it has a third contributors to the gross profit line and as Richard mentioned, over the long haul, we hope for that to reduce some of the volatility in our gross profit for worksite employee because there is really no limit to what that number can be.

Now that these businesses are in place, the selling systems are out there, now we can ramp-up sales team and those other organizations which are fed by the BPAs that are out in the marketplace, we can ramp that up we believe very successfully in the years ahead.

And what's key about that is because the whole idea was to cast a wider net, like I mentioned in my script and to aggregate a much larger customer base into our Insperity culture if you will and then have those prospects available to upsell into products that will make additional margin on, et cetera.

So, it makes for a much larger opportunity if you only have one product to sell to a single customer and you have nothing else to sell them later on, that's a limited future even if you have a wide, large greenfield opportunity for the one product.

But if you can imagine a matrix now with many products that we have and the different markets we are after and our ability to bring the customer in at any product or at any time and then have that large base of customers to continue to develop the relationship that really builds on itself and then we are able to have a nice third contributor to that gross profit line and really keep our margin intact going forward even if the business maybe becomes more competitive in our core service.

So we think it gives us more options in the future and we have had real good results in a variety of the businesses. Our standalone recruiting business is doing exceptionally well. Our time and attendance business is doing very well.

So all the way through the adjacent or strategic business units that we started pre-2012 that first portfolio of businesses that were launched together they were near cash flow break-even last year, they are going to contribute to the EBITDA line this year and we expect those to come out of water very nicely as we move ahead..

Thank you. Just to clarify, thank you for the color, that's helpful.

The two you referenced - the time and attendance and recruiting, are those among the faster growing ones?.

Yes, I would say they are kind of leading the pack right now but they are still small enough that you know, you have a good sales supported by one unit it can really come up and start competing more favorably and we have good momentum in each of those businesses..

Thank you very much. I will get back in the queue. .

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

Yeah good morning guys.

Could you talk a little bit more about this worksite employee growth rate? In your sequential gross in Q2 of a couple of thousand is below what I can remember even when you had a significantly smaller sales force and weren’t positioned, meaning normally you would be growing 4,000 or 5,000 sequentially into Q2 and I mean this is just seems like a very-very low growth for that quarter..

Essentially you are starting with that much lower starting point of 2500 employees and kind of takes it out of the plan going forward and it has got a pushed up as well as the quarter like I mentioned in my script.

But we are trying to be conservative at this point on that number and we think that's the right thing to do especially with the healthcare reform changes that is taking place. And a little bit of wait-and-see attitude we are seeing with those, with that customer set in small business division. So we thought that was the appropriate avenue to take..

It's – thinking about other possible explanation, I mean how about competitive pricing and have your competitive losses or retention been as good as it's normally been and things like that, anything else impacting it..

Our retention actually was good in the quarter. It was on what we expected it to be. Now obviously over the last, I would say nine months or so, we certainly and I mentioned this last quarter, we certainly had a new level of competitive pricing pressure.

I think, you can, when you have a company going public out there that wants to really kind of grow at any cost approach which is the spine and that what's folks want to do. So that's definitely a change in the competitive landscape that I discussed last quarter.

And again our gross rate is more driven by that number of BPAs and as they ramp-up in their experience and closing those as deal is out there. So I think we have responded well on the competitive side especially in the first quarter we had our sales convention, we had an opportunity to hit that pretty heavy.

And our goal is to continue to be able to be competitive and sell these deals against the competition but sell them at a higher price and be the premium service provider and not see a diminutive effect in that gross profit area. So that's our strategy there..

And just another thing I noticed and maybe it's just -- your average salary was actually down slightly year-over-year although the bonus was up large, is there some fundamental I mean normally your average customer salary, worksite employee salary goes up pretty consistently, is there any fundamental change in mix or something that's happening?.

Well of course, every year there is a mix change, at the beginning of the year that kind of resets a lot of that total book of business metric but no fundamental change in the type of customer or anything like that..

Okay. Thank a lot..

(Operator Instructions) Your next question comes from the line of Mark Marcon from Robert W. Baird. Your line is open..

Good morning.

As we look at – would you anticipate that kind of the rate of growth that we are seeing with regards to the worksite employees that’s been projected for the balance of this year, it doesn't seem like competitive environment is going to change? So would you anticipate maintaining the pricing discipline that this kind of the new range that we are kind of in?.

No, no. I certainly think that we are going to see accelerating unit growth as the BPAs reach their level of sales efficiency and the volume will continue run up. Now, we are, we acting at the pricing pressure and because we do certainly believe that we need to be within a range that you can sell the value to the customer.

But we are also aggressively working the operating expense plan so that we can make sure we can maintain the operating margins we want to have as the business goes on.

So we will look at the whole picture and we are definitely responding to be more competitive in the marketplace and the big change for us even in the mid market size business is the offering of the variety of options some that Richard mentioned we have had despite of nice uptake on our lower cost and lower price, and lower price for customers and lower cost basis for us to match in our co-employment offering.

So we are taking steps to have a more competitive offerings in that respect and we also as you know from last quarter we have got investment in our technology this year that we expect will really tie all these pieces together more effectively and give a more cohesive experience to the prospect and the customer as they review our offerings and see how they all fit together and I think that's kind of a another nice element as that comes together also we will gain some good attraction..

So what specifically would be – are you doing? I know about the pricing changes, service level changes that you made earlier this year which would be reflective in some of the reactions to that would be reflective in the WSC growth that we are currently seeing.

Are you doing additional changes above and beyond of what we have already discussed?.

No, I think the only other thing I mentioned to the deal team that we have now for mid-market customers to be more responsive during the pricing phase of these prospects and so we are able to look at each deal and be more – if we need to be more competitive we can do in – almost some value engineering to see how we can have help the customers to make some changes that will make it more affordable for them and continue to maintain a good margin for us in the long run and so those are kind of things that we are doing to really be responsive with the customer need to maintain their cost structure going forward..

Is that on – is that for all client segments or just mid market?.

We will get into that more as we get in to the larger customers, the mid market customers starting around150 and certainly on occasion, the 150 isn’t just the automatic line in the sand. If we have got 100 and it growing , we are obviously working with them in that manner also. .

Okay.

And longer term beyond this year, are there opportunities to further enhance the efficiencies with regards to the operating expenses?.

Yes. We definitely think we are –we have worked in an effective plans, aligned operating expenses with our--to track more closely with the unit growth coming.

Then also I think there is good opportunity as we come out this year with lower cost structure that growth is coming out of water right behind us and you really get incredible leverage as that comes about.

So I mean we are very excited about our 2015 plan as we are sitting here today because we see all that stuff lining up to be a very exciting year in 2015..

Great. Thank you. .

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

Well, thank you all very much for being with us today. We appreciate your support and we are looking forward to continuing with that game plans going forward and looking forward to speaking with you next quarter. Thank you very much..

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