Richard Rawson - President Paul Sarvadi - Chief Executive Officer Douglas Sharp - Chief Financial Officer.

Tobey Sommer - SunTrust Robinson Humphrey Michael Baker - Raymond James & Associates Jim Macdonald - First Analysis Mark Marcon - R. W. Baird.

Good morning. My name is Michelle, and I will be your conference operator today. I would like to welcome everyone to the Insperity Third Quarter 2016 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] 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 would 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 strong third quarter 2016 financial results.

Paul will then comment on the key drivers behind our Q3 results and how we are positioned entering our fall selling season and year-end renewal period. Richard will then join us for this call to comment on the recent trends in our gross profit area as we approach 2017.

I will return to provide our financial guidance for the fourth quarter 2016 and some comments on our operating cost structure and general outlook as we enter next year. 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 discussions may include non-GAAP financial measures.

For a more detailed discussion of the risks and uncertainties that 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 included in the Form 8-K filed today, which are available on our Web site.

Now let me begin today's call by discussing our record high third quarter and year-to-date results. Adjusted EPS increased 37% over Q3 of 2015 to $0.78 and adjusted EBITDA increased 11% to $31.3 million, both above the midpoint of our forecasted ranges.

Through the nine months of 2016, we remain ahead of our initial budget, having generated a 62% increase in adjusted EPS over 2015, to $3.01 and a 27% increase in adjusted EBITDA to $118 million. As for the details, average paid worksite employees increased by 13.3% during the quarter, to approximately 168,900.

This was below our forecasted range of 14% to 14.5% worksite employee growth due to lower than expected hiring within our client base. Surprisingly, net hiring by our clients declined sequentially from the first half of this year and by just over 50% from Q3 of 2015.

However, our double-digit worksite employee growth continues to be driven by a high level of client retention which averaged over 99% for the quarter and an increase in sales driven by continued growth in the number of trained business performance advisors and improvement in their sales efficiency.

Gross profit increased by 10% over Q3 of 2015, and has always included positives and negatives within the components of pricing cost.

This quarter included a positive impact of effectively managing our workers compensation program, including closing out claims at lower than expected cost, which offset a higher than expected levels of large healthcare claims.

Q3 adjusted operating expenses were in line with our operating plan, increasing 9% over the third quarter of 2015 and included the continued growth in the number of business performance advisors while producing operating leverage in other areas of the business.

This is demonstrated by a decrease in adjusted operating expense per employee per month from $194 in Q3 of 2015 to $187 in Q3 of this year, inclusive of the increase in Business Performance Advisors.

For the nine months ended September 30, on a 14% increase in the average paid worksite employees, adjusted operating expenses increased by just 6% over 2015. Putting all the pieces together, adjusted EBITDA for worksite employee per month increased to $80 for the nine months ended September 30, 2016 from $72 in the 2015 period.

As for our balance sheet and cash flow we ended the quarter with approximately $68 million of available cash. In addition, we continue to have $95 million available under our line of credit.

During Q3, we repurchased 136,000 shares bringing the year-to-date total to just over 3.2 million shares with a majority of the shares acquired through our Dutch Auction Tender Offer in January. We have also paid out approximately $15 million in cash dividends so far this year. Now at this time, I would like to turn the call over to Paul..

Thank you, Doug. Today I would like to update investors on three important areas driving value creation at Insperity. First, I will discuss the recent excellent execution of our growth plan and the key drivers of our success.

Second, I will explain how we are set up to reach our goals over the next few months, as we conduct our fall selling and retention campaign. And third, I will highlight the key factors that we are driving to set up another strong growth year in 2017.

The solid execution and financial performance we are experiencing at Insperity is the result of an intense focus on sales, retention, risk management and service excellence with the customer for life philosophy.

This philosophy enables us to start a relationship with a new client where ever they need us the most and continually and pro-actively meet changing client needs over time.

Our industry-leading workforce optimization solution and our wide array of business performance solution, combined with our service , culture and clear mission, provides a powerful growth opportunity today and for years to come.

This quarter's results provide a good example of strong execution of our controllable factors in the face of a tepid economic climate and weaker than expected labor market. During this period our retention continued at record levels and our sales engine continued on a solid base.

The combination over 99% retention and 10% increase in paid worksite employees from sales over the same period last year, drove our 13% increase in worksite employee in spite of the weakness Doug mentioned in the hiring within our client base.

In the third quarter business profiles which represent opportunities to quote our services were up 12% over 2015. From this activity we experienced a 19% increase in new workforce optimization clients sold, representing a 12% increase in worksite employees sold.

Margins increased slightly, up 2% and sales efficiency is measured by the number of sales per business performance advisor per month, also increased 4% which is excellent considering we are growing the sales force substantially.

In addition, sales orders for additional business performance solutions packaged with our workforce optimization offering or sold on a standalone basis, were up 20% over Q3 of last year. This activity contributes at the gross profit line and provides new clients to up sell to workforce optimization in the future.

Now at this time of the year, it's important to take a little closer look at the month of September as a proxy for what may ensue in our fall sales and retention campaign. In September, we set a record in the number of business performance advisors in the field and the number of business profile, and we exceeded our monthly internal budget for sales.

Although it is only the first month of the fall campaign, we are off to an excellent start with the sales up 20% over last year, driven by an increase in the sales efficiency of 13%. Our marketing activity has been very productive year-to-date which also provides some confidence for this fall.

Corporate provided leads are up 53% over last year as we expanded our loyalty and channel programs and increased our digital marketing efforts. The leads provided by these marketing programs led to a 40% of the worksite employees sold year-to-date.

Providing more quality leads is also playing a key role in driving sales efficiency even as we growth the sales force. Our digital footprint is also expanding and creating sales opportunity. Unique visitors to insperity.com were up 71% in the recent quarter while social media followers were also up over 76%.

Worksite employees sold from digital marketing leads followed this activity leading to a 58% increase over the same period last year. Another key factor to consider for this fall is the stability in pricing and plan design we are able to offer our prospects and current clients.

In the face of the horror stories of Obamacare increases and the lack of access to insurers and providers, our plans stand in stark contrast as a stable, cost effective, high quality alternative.

Our success in this area offers tremendous benefit to our clients by providing stability in cost in networks and ultimately in the ability to hire and retain employees. This year we have few plan design changes and modest price increases which typically support our year-end client retention effort.

There is one factor that has been and may continue to be a bit of a headwind through the fall campaign. There is a considerable level of uncertainty connected with the unusual election cycle we are experiencing. This may have been a factor in recent weakness in hiring within our client base and has caused some delay in signing mid-market clients.

So as we look for a strong fall campaign at year-end transition, it's not without risk from the macro environment.

So in spite of the election related uncertainty our confidence for this year -- for this year end transition, continues to be high based on our strong start to the fall selling campaign and activity and results, our recent marketing success and the growth of our sales staff.

The key metric as we look ahead to our growth prospects for 2017, is the number of business performance advisors in the pipeline to add to the trained business performance advisor count early next year. During the third quarter we had a significant emphasis on recruiting and entered the fourth quarter with over 430 business performance advisors.

We expect to continue the emphasis on recruiting and training of business performance advisors as we move into next year. We also expect to continue to refine our marketing efforts to support the sales team with substantial lead flow.

With this focus, we expect to continue double digit growth in worksite employees, like we have had the last two years which led to the excellent financial performance that follow.

In 2017, we also expect to continue our technology development efforts to improve the client and worksite employee experience and continue efficiency gains for both our clients and in spare. We expect an upgrade to both our workforce optimization co-employment platform and our workforce administration traditional employment platform next year.

We are in an excellent position to capitalize on our market opportunity and our competitive advantages. We are ready, willing and able to grow our business, lead our industry and extend our success. I would also like to mention another announcement we made today, adding Tim Clifford to our board of directors.

Tim has a strong entrepreneurial and CEO background including business, technology and HR services, which makes him uniquely qualified to help continue our success. We welcome him to the Insperity board of directors.

So with our fall campaign off to a good start, our early outlook for double digit growth next year, we have asked Richard to provide his early read on gross profit for 2017. We plan to have Richard comment from time to time to add some color on long-term trends that maybe of interest to investors.

After Richard comments on our gross profit outlook, Doug will provide guidance for Q4 and his thoughts about 2017 operating expense trends completing the picture of our early outlook for 2017. At this point, I would like to pass the call on to Richard..

Thank you, Paul. This mornings, I have some prepared remarks on historical trends in the gross profit area and our outlook as we look ahead into 2017.

As you know, our gross profit comes from a combination of number one, the pricing of our service fees, number two, the net surplus we earn from managing our direct cost, and number three, the gross profit contribution from our business performance solution products.

Looking back over the last five years, our gross profit per worksite employee per month has been quite predictable, considering the number and complexity of the components involved. During this time, the range has only varied a few dollars per worksite employee per month, while the absolute dollars has growth almost 130%, approaching $500 million.

Examining each major component of our gross profit on a worksite employee per month basis reveals the following.

Number one, our service fee has declined as a result of the mix of business moving from our workforce optimization offering to the lower priced, lower cost workforce synchronization offering, and to a lesser degree, general marketplace conditions.

Number two, the net surplus component of gross profit on a per worksite employee per month basis has increased as we continue to effectively manage the price and cost of payroll taxes, workers compensation insurance, healthcare and other benefits.

And number three, the gross profit per worksite employee per month from our business performance solutions has also increased more than 60% over the past five years, adding a new contributor to gross profit that does not have employer related insurance risk.

Now as we look forward to 2017, we see a very similar story but with a few potential bright spots beginning with improvements in our direct cost. This morning, we announced an amendment to our UnitedHealthcare contract.

The contract which extends through 2019, was amended in recognition of our sustained growth exceeding previous buying target sooner than expected and it gives us a significant reduction to our administrative fees beginning in January of 2017.

The long awaited Small Business Efficiency Act, which is scheduled to start in 2017, eliminates the double payment of federal payroll taxes on new clients added later in the year. Additionally, state unemployment payroll taxes are expected to decline again in 2017.

After a couple of policy years that had a few very large workers compensation claims, this most recent year has been much better as severity rates have returned to historical levels.

All of these factors are expected to cause nominal direct cost trend increases, therefore we will be passing along nominal pricing allocation increases which should be well received in the marketplace and therefore continue to support our growth and profitability.

Due to some operational improvements coupled with product enhancements to a few of our business performance solutions, we should also seek further contribution to our gross profit dollars in 2017 from this contributor.

And finally, the service fee component of gross profit appears to be stabilizing as both new and renewing customers see the ongoing value of our suite of services and what it provides to them and their employees.

In summary, our ability to effectively manage and forecast our pricing and direct cost trends should allow us to see a comparable level of gross profit per worksite employee per month for 2017 and a double-digit increase in the total gross profit dollars. At this point I would like to turn the call back over to Doug..

Thanks, Richard. Now before we open up the call for questions, I would like to provide our financial guidance for the fourth quarter of 2016 and some comments on our cost structure and general outlook as we look ahead to 2017. As for Q4 worksite employee growth, we continue to expect strong sales in client retention.

However, we believe the weakness in net hiring by our clients may continue throughout the fourth quarter. Therefore, we have factored in the weakness in this non-controllable component of our growth.

When combined with the positive trends in sales and client retention, we expect fourth quarter average paid worksite employee growth to be in a range of 13% to 13.5%. This would result in full year growth of 14% which is in line with our initial 2016 budget in spite of the weak labor market.

We are reiterating our full year adjusted EPS guidance and tightening our range as we approach year-end. We are now forecasting an increase of 61% to 63% and adjusted EPS for the full year 2016 over 2015 to a range of $3.53 to $3.58. Q4 adjusted EPS is projected in a range of $0.52 to $0.57, an increase of 58% to 73% over Q4 2015.

As for adjusted EBITDA, we are forecasting a range of $22.5 million to $24.5 million for the fourth quarter, which is a 34% to 46% increase over Q4 2015. This puts us on target for a 28% to 30% increase in full year 2016 adjusted EBITDA to a range of $141 million to $143 million.

And this equates to adjusted EBITDA per worksite employee per month of approximately $71, a 13% increase over 2015.

Now adjusted EBITDA per worksite employee per month is a key metric for our business as it is a measure of our ability to effectively manage pricing, direct cost, operating expenses and risk while growing worksite employees at targeted levels.

We are projecting a 31% improvement in this metric from $54 in 2014, to $63 in 2015, to 2016 forecast of $71. This demonstrates the successful management of gross profit and leverage of our cost structure while achieving double-digit worksite employee growth in the past couple of years.

The operating leverage is demonstrated by decline in adjusted operating expense per employee per month from $225 in 2014 to $206 in 2015 to a 2016 forecast of $194.

As we look forward beyond 2016 and continue to execute on our strategic plan, our goal will be to continue double digit worksite employee growth, comparable gross profit per worksite employee from effectively managing price and direct cost, and continued operating leverage to drive adjusted EBITDA per worksite employee.

In conclusion, we are pleased with our strong growth and profitability in 2016 and are now focused on closing out a successful fall sales campaign and year-end renewal period to position us for a strong 2017. We will be providing detailed 2017 guidance on our next earnings call and look forward to talking to you then.

So at this time I would like to open up the call for questions..

[Operator Instructions] The first question comes from Tobey Sommer from SunTrust. Your line is open..

You talked about your early read on worksite employee growth for 2017 and September trends. Couple of questions about that. Did the positive September trends continue into October and do you have an early read on the gross sales to mid-market customers that maybe buoy your confidence in being able to extrapolate for a full year. Thanks..

Thanks, Tobey for your question. We are feeling confident about our fall campaign and its driven, certainly our recently result and activity levels etcetera. However, this is not time to be reporting on October, October has just ended and we will be gathering information about what occurred in the month soon.

But as I mentioned in my remarks, we have been off to a great start in September and what you look for at this point of the year, is you look for high enough activity levels. So you have enough potential business in the [hopper] [ph] to reach your fall campaign goal. And you look for, is the sales force confident and effective in closing business.

And so when you see the sales efficiency going up and the activity up, strong 20% increase in the month of September over the year prior, that puts us in a great position. We have a strong pipeline for business in mid-market as well.

I did mention, however, I think the election and a little uncertainty coming out of that environment has kind of put a pause in some of the business leaders sentiment but we think that’s going to wane pretty soon. And so that’s kind of all in the sales side of the house.

On the retention side, we are also entering the campaign with the fantastic results year-to-date with processes that have been proven to be effective in retaining accounts. And on top of that, we have modest increases in some of the direct cost components and very few plan design changes and that normally leads to effective client retention.

So when you weigh all that together, we feel good about this year-end transition although the macro-environment is always kind of a wild card. But in spite of that, when you are growing the sales team like we are growing, you know the 430 business performance advisors as we enter this quarter, we are in a position to drive that unit growth next year.

We feel comfortable enough to talk about unit growth next year being double digit again, third year in a row..

Could you talk about what the elimination of the double payment next year means for the business in terms of smoothing out and being able to more effectively sell probably throughout the year as well as what it may mean to your own P&L in terms of gross profit, dollar savings or any other impacts. Thanks..

Sure. There's two elements there that you are hitting on that are both very important. One is that our history as a company, we have always had quite an emphasis on year-end sales which is a good thing in a lot of ways, but it also would be nice to spread that out more throughout the year.

Part of the reason that you have a concentration for the year-end has to do with the double payment of taxes that comes from the co-employment relationship and how that fits under the law.

Now with the Small Business Efficiency Act that was passed in December 2014, now finally going into effect next year, that should put us in a position to where we will not have that double payment of tax.

That will allow us, first of all, to eliminate an explanation of something that’s very confusing to people and unique to the co-employment relationship. Secondly, it will allow us to actually price more competitively throughout the year since we don’t have to make that double payment.

And then also to a degree that we take this savings that comes from this regulatory change, we can pass some of it on into lower pricing. We can also have some of that possibly stay in the house to add to the bottom line or to the gross profit.

And that’s part of what, as Richard mentioned, gives us confidence that we will have gross profit for worksite employee at comparable levels. Maybe with a slight bias to the upside for next year..

If I could just ask a detailed question, I will get back in the queue.

In terms of the double payment, how much of that historically has been born by the company or perhaps also did the customer share some?.

Yes. That’s a good question. About two-thirds of it has been born by the company and a third we have been able to build into the price and customers have been willing to come on board midyear, even though they recognize that there is additional payroll tax dollars being paid out..

Your next question comes from Michael Baker from Raymond James. Your line is open..

Doug, as we think about next year, obviously you guys outlined some tailwinds and some headwinds. On the tailwind side we have the United agreement and we have end of double taxation. We obviously have a growth in sales advisors.

And on the headwind side we have slower hirings, still remain to be seen, whether that’s temporary and not around the election, and slower decision making.

Are there any others worth pointing out as we start to kind of have a sharper focus of 2017 in advance of you giving the sharp guidance that you typically do?.

No, I think we have outlined basic, what we are seeing at this point. And I think you are pretty accurate on where you are seeing some positives and negatives. You know as Paul mentioned, the early signs in the fall campaign are strong for us and growing the sales, that’s where we need to be at this point in time.

Just to drive through the sales piece of it. And so that’s sort of where we sit today..

Okay. And then Richard, I may have missed it, but in the press release you kind of outlined workers comp benefit offsetting the healthcare cost.

Maybe just a little bit more color on the details there and then on the healthcare cost side, give us some sense of how it trended in the quarter? Does it seem like it's abating or did you factor in the fourth quarter, a higher level of healthcare cost?.

Yes. So on the workers compensation side, as I mentioned, we have had a couple of years that we had some pretty significant large loss claims. And as we have come through this policy year which started in October of 2015 and ended up September 30, 2016, we have seen a lot less of that and it's just random kind of stuff that happens.

It's nothing about the kind of plans that we are bringing on or anything like that, it's just very random things.

So anyway, long story short is that as we have progressed through this policy year in terms of how we manage the whole claim activity and also safety in the workplace, we have seen some real positives in that regard and as a result our actuaries when they look at this on a quarterly basis, they see the trends going down and so we are able to factor that in with our lower cost for the third quarter.

On the healthcare side of the fence, we did see a pretty significant step up in some large loss claims. I would say that characterizing them is random as well. And they are the kinds of things that just pretty much come out of [less feel] [ph] from time to time.

We factor in and are forecasting because of the migration of participants to the lower cost or the higher deductible lower cost plans over 2015 and into '16.

We always factor in an element in the fourth quarter whereby those deductibles and co-pays have been satisfied in the latter half of the year and we do expect to see a fairly significant increase in our benefits cost for the fourth quarter.

Now, what's really interesting about this is, when we look at the whole year of 2016, it looks like our trend of total benefits cost is going to be somewhere in 3% to 3.5%. And of course that’s exactly the way we saw it at the beginning of the year, that’s the way we are thinking about it for next year.

We don’t see anything that would cause it to go significantly higher..

And then in terms of -- just a follow up on that, in terms of how those two factors developed relative to your original expectation. Did one come in a little bit -- in other words did one outweigh the other by a little bit or were they roughly equal..

No. I would say that -- if you are talking about specifically for the third quarter....

Yes..

The workers comp was actually better than, on the positive side, than medical was on the other side..

Okay. That’s helpful.

And then how did the workers' comp benefit compare to the previous year?.

It's actually quite a bit better than the previous year simply because of the fact that we have had in the two prior policy years, we had several large, really large claims that factor into the higher cost trend as a result. So when you don’t have those claims, your trend is obviously going to be lower..

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

A quick one and then a longer one.

The quick ones are, can you give us the trained business performance advisor level and also have to formally been approved under the SPEA as a co-employer?.

Yes. Our application is in and we have got delivered that has to be delivered but to our knowledge no one's approved yet and we are neither..

Okay.

And the trained and BPA?.

Yes. We were just around 360 for the quarter. That number will be ramping up substantially as we go through this quarter. We have got a lot of training programs in effect obviously. We have over 430 on staff. So we are really in a good position to have a nice step up as we go into next year..

Great. And we haven't talked about the adjacent business units yet today.

Give us a little more color there? What's working and what's growing the fastest? It sounds like that’s starting to contribute?.

Yes. We had continued growth in our time and attendance business. We have actually had a decent year in our recruiting business which is within our client base on a standalone basis. And also our retirement services business in terms of being able to provide the record-keeping services. That’s a nice add-on to our workforce optimization unit.

So those have all been positive and we seek some continued opportunities as we look in the next year with some better packaging of offerings together. We are expecting a nice bundled solution, workforce administration, with a nice upgrade in the technology, we will be delivering that that early in the year.

So we are very optimistic about that contributor to our gross profit line and how that can be a part of the theme going forward..

And you mentioned that gross profit is expected to be flat to maybe trending up. I am sort of surprised that more significantly up, given all the positive you mentioned. You know the UnitedHealth contract and relatively good healthcare pricing situation..

Yes. Well, Jim, look we are always -- you know you have always got the medical and the workers comp that we always -- when we start looking at a new policy year for both of those -- we are always conservative and kind of let the results of take care of themselves. And so it's just our conservative nature..

The next question comes from Mark Marcon from Baird. Your line is open..

Just wondering if you could talk just a little bit more about what you ended up seeing with regards to the hiring trends within your existing client base? Like how materially did it defer relative to what your expectations were? Like were you expecting hiring to go up by 2% and it went up by 1%? And then is there any sort of like regional difference that was clearly denoted? And then I have got a couple of other follow-ups..

Sure, Mark. Thank you for the questions. As Doug mentioned in his comments, we had already kind of built in a fairly low level of worksite employee growth from net change in existing clients. But we didn’t expect it to be half of what it was last year. Which is what happened in the quarter.

And so that trimmed 1% off of our growth rate in the fourth quarter. So we would have been in the 14.5% range or so if we have gotten what we expected. We had 13.5% instead, 13.3%. So there is the impact and the quantification of that.

And so we have kind of baked that into the fourth quarter, hopefully that will move up as you go into next year, usually does. But election years are like that. As far as the geography, we did look more deeply at both geographic distribution and also by industry category, just trying to dig in there to see if there is more to it.

And, frankly, with pretty much across the board there wasn’t anything that really jumped out at you. Of course, Houston is a little being driven by the oil business. Of course we only have now about 12% of our -- less than 12% of our business in the Houston market.

And out of that we only have a small amount that’s directly related to the oil and gas business. But you do have kind of that emanating out from there and it was a little lighter there but not like you could point to that as a big deal. So it was pretty much across the board and more of a speed bump, if you will, or hesitation. It's best we can tell.

We felt like that was more just business leader sentiment because the actual, two other things that I look at in the quarter is the overtime as a percentage of base pay which is a good indicator about capacity and it remained over 10% in the quarter.

Typically, if you have more than 10% overtime utilization and you have prospects or new businesses pretty good, then you should be hiring because it's going to be lower cost for you going forward. The commissions paid to the sales staff of our customers gives us some insight into the pipeline for new business for our customers.

And it was lower than last quarter, around 5% but still there have been times historically where a 5% increase in commission and 10% overtime pay, would combine to have some pretty decent net gain in hiring in client base.

That was not the case this quarter and so you are just looking at a factor related to business-owner sentiment that says, hey, look, I have to pull the trigger alone, let me see what is going on here with this -- you know with more the macro issues.

So that’s kind of where we are at today but the good news is, we've really got the growth in the sales staff and the sales efficiency. Our marketing efforts to where we are in good shape to muscle our way through that and leave that as upside..

Great.

And so you are not assuming any sort of reacceleration in terms of the hiring trends within your existing clients as it relates to the fourth quarter guidance, are you?.

That is correct. We are not..

Okay. Great. And then can I ask a little bit about just the optimization versus synchronization mix. How much of a change has there been? Like what percentage of the clients are now going for the full optimization and, Richard, you have talked about in your comments about that shift.

What would your expectation be, roughly speaking, for how that trend -- certainly anticipate that there is going to be more optimization but how much of a magnitude in terms of the ratio?.

So what's been interesting, before you go on the direct cost side then [turn over] [ph] gross profit side, but it's interesting that we have had -- you know when we first introduced it, you had a bigger impact.

And then of course in the second year which was last call that was less, but a good way to continue to grow to have other options for mid-market customers. But as far as converting was lower and that we expect same thing to happen this year using a lower amounts of good mix between the two, between optimization and synchronization.

And so that’s why you are seeing the flattening out of the effect on the -- the mix effect on your service fee component has really flattened out because you are kind of growing those at a more equal pace right now.

In fact, if you look at our mid-market segment, they are running -- there are still more optimizations then there are synchronization but it's evened afterwards, more like a 60:40, and that’s probably kind of where things will stay..

Great. And then can you talk a little bit about the, just the color in terms of what you heard from clients as it relates to the October sales trends and the impact on the election.

Like exactly, I am sure you talked to a few sales people and what -- did they just say that clients just decided, hey, I am not going to make a decision yet and I am just pulling back a little bit until it settles out or exactly how did they phase things?.

Yes. We saw a difference between our core, small business side of the house and our mid-market side. In the small business you are dealing directly with the owner, maybe one other influencer or two possibly. And in that style we have been able to say that we have kind of kept plugging along there.

In our business performance advisors, we kicked off campaign in early September. We have got, people are really charged up with what we are offering out there and our competitive position is really great as we are going into this fall. So all of the attitudes and activity levels are right where you want.

The one thing we saw was more in the mid-market where it's big decision, there is usually, four, five, six people involved in making that decision. You are kind of looking for an excuse not to make it and election is pretty good one.

And I expect that to wane and we have got a nice upside in mid-market sales if that continues to, if it actually ramps up. So we have made sales in mid-market and we are expecting to continue to make them.

But we did see some hesitancy and that was one of the factors along with the net change in existing clients in terms of net hiring that we saw in the quarter and thought would be important for investors to be aware of..

[Operator Instructions] Your next question comes from Tobey Sommer from SunTrust. Your line is open..

Just a couple of numerical questions, if I could. If you could give us the average compensation in the worksite employee base. The total number of customers you now serve as well as the average customer size by employees. Even in ballpark would be fine..

Well, if you add the total customers, that’s the question because we have co-employment customers, we have customers in each of the divisions. We actually have over 100,000 businesses that use one or more of our product. So that number is not a significant model although obviously it's grown and will continue to grow. As far as the average pay.....

The average pay per employee, it's between $75,000-$80,000 annually..

Okay.

And what's the average customer size in the core product?.

Average customer size is about 27, 28..

Is that up about a handful in kind of the last handful seven years?.

Yes. As we have grown the mid-market business, that number has moved up..

Your next question is from Mark Marcon from Baird. Your line is open..

Just two quick follow-ups.

Can you talk to us about what you think the -- you know all the news about the Obamacare premiums going up is going to do -- I know that’s not necessarily the same clients or that it's directly apples to apples, but this comparing and contrasting your health offering and the rate of increase relative to what's widely been disseminated in the press.

And then on a separate note, can you just talk a little bit about capital allocation going forward and how you are thinking about buybacks..

Richard, you want to take the...?.

So the situation with Obamacare is -- has to do with this concept of the [indiscernible] in insurance and when you get to a point that you are bringing in people at such low cost in the early days, that experience is going to catch up at some point and that’s where you are running into the situation there in the exchanges.

So that’s why the significant increases that are going on. And now you have got healthy people that are saying, I would rather pay the tax than the premiums for the exchange insurance.

So that is completely -- it's 180 degrees different from our offering whereby we have got employees at client companies, average compensation is high, as Doug mentioned. And the client wants to provide a level of benefits for his or her employees to help them -- to be retained and keep those employees there.

So the employers, client companies are contributing as well as the employees are..

Richard, I get that. I just meant, simply from the standpoint of how much of a help is it going to be to be able to show that, hey, our rate of increase is going to be relatively low..

Yes. Mark, I would say, yes, we have a long history now of very low increases compared to the market price and that helps the profitability of our customers. So we will be emphasizing that significantly.

But I would add related to Obamacare that for the business community, there is still a lot of impact coming from -- that we expect to see even in December.

Where customers who deferred out the effect of community rating etcetera on their specific contract by renewing early last year, there is a good pipeline of customers in the queue now that we expect to convert.

So we are still seeing some tailwind from the way Obamacare is cascading down through state by state and carrier by carrier, and customer by customer.

And I also think the backdrop of these high increases, even if it is in the individual markets, is a great contrast in the way for us to open up the dialog, have a good discussion about how we have a stable, excellent plans that can help them recruit and retain employee..

Great.

And then capital allocation?.

On the capital allocation side, you can say we continue to build our cash position even after buying a lot of shares back in the Dutch Auction early in the year and increasing our dividend this year. I would say our priorities are similar. We obviously have a very cash efficient model that we are working with here.

And it's definitely highly accretive as we buy shares back. We have bought $19 million shares back since we started our buyback program years ago, we only have $21 million shares outstanding. So you can expect us to continue to be buyers of our shares, especially when there is opportunities to do so.

And that's probably the highest priority, we are looking at returning to shareholders. That as you know, Rich and I are large shareholders, so we believe in a high return to shareholder..

I have no further questions in queue. I will turn the call back over to Mr. Sarvadi for closing remarks..

Once again we would like to thank everyone for participating in today's call. And we are excited about where we are today and as we move into this fall campaign and we look forward to reporting on those results on our next call after the course of the year. So thanks again and we will see you next time..

Thank you. This concludes today's conference call. You may now disconnect..