Insperity Inc

NYSE:NSP

Earnings Call Transcript 2018-Q1

[Operator]

Good morning. My name is Beth, and I will be your conference operator today. I would like to welcome everyone to the Insperity First Quarter 2018 Earnings Conference 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 would like to turn the call over to Douglas Sharp. Mr. Sharp, please go ahead.

[Douglas Sharp, SVP, Finance, CFO & Treasurer]

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 behind our record first quarter 2018 financial results. Paul will then comment on the key drivers behind our Q1 results and our plans for the remainder of the year. I will return to provide our financial guidance for the second quarter and an update to the full year 2018 guidance. 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 8K filed today, which are available on our website.

Now, let's discuss the details behind our strong first quarter results, in which we achieved record highs of $1.41 in adjusted EPS, a 53% increase over Q1 of 2017, and adjusted EBITDA of $84 million, an increase of 34%. These better-than-expected results were driven by outperformance in both worksite employee and gross profit growth. Average paid worksite employees increased 12.2% over Q1 of 2017, above the high end of our forecasted range.

This quarter's growth was driven by both the high level of client retention during our heavy Q1 client renewal period and continuing strong sales. Client attrition totaled only 8% during the quarter and an improvement over Q1 of the prior year and now our fourth year in a row where attrition has come in substantially lower than our previous historical first quarter trend of 11% to 13%.

Worksite employees paid from new sales increased by 23% over the first quarter of 2017 on a 15% increase in the average number of trained Business Performance Advisors. Additionally, net hiring by our client base improved over recent historical trends.

An increase of 25% in gross profit over Q1 of 2017 was driven by the 12% worksite employee growth and favorable results achieved in each of our direct cost areas, particularly in the benefits area in which costs per covered employee declined slightly from Q1 of 2017 compared to a budgeted increase of approximately 2%.

As per our first quarter operating expenses, we continued to make planned investments in our growth, including growth in the number of Business Performance Advisors and new sales offices; our high-touch, high-tech service offering; and our technology infrastructure, security and development. We managed these investments and other G&A costs below budgeted levels. We additionally paid out the onetime tax reform bonuses to employees and accrued for additional incentive compensation tied to our outperformance.

Our effective tax rate in Q1 came in at 23% and, as expected, was favorably impacted by the recent Tax Reform Act. Also, keep in mind that our Q1 tax rate is typically lower than our full year rate due to the tax benefit associated with divesting of long-term incentive stock awards. For the remaining quarters, we are estimating a tax rate of 28%, which then equates to a full year rate of 26%.

As for our balance sheet and cash flow, we ended the quarter with $87.5 million of adjusted cash and have $245 million available under our line of credit.

During the quarter, we repurchased 131,000 shares of stock at a cost of $8.6 million and paid $8.4 million in cash dividends.

Now, at this time, I'd like to turn the call over to Paul.

[Paul Sarvadi, Chairman & CEO]

Thank you, Doug. Today, I'd like to provide some commentary on 3 topics, including, number one, our substantial outperformance in Q1 and the strong momentum we've established; number two, the key drivers of our growth acceleration, giving us confidence in our plan for the balance of the year; and number three, our strategic initiatives forming our new five-year plan.

This quarter was exceptional as nearly all the key metrics in our business model were positive. The first quarter of every year sets the foundation for the full year in our cumulative residual income business model. This incredibly strong Q1 in 2018 paves the way for a fourth consecutive year of growth in adjusted EBITDA at very impressive rates.

Adjusted EBITDA grew at 31%, 28% and 26% in 2015, '16 and '17, respectively, and our guidance for this year is now an increase to a range of 23% to 25% on this metric. This clearly demonstrates our capability to perform consistently as a high-growth company and capitalize on our dynamic market opportunity.

This strong quarter was the result of a very successful year-end transition in new and renewing accounts. This strength was evident in new sales, client retention and pricing and allowed us to start the year with tremendous momentum.

New sales in the first quarter came in at 118% of budget and 19% ahead of last year, filling the pipeline for paid worksite employee growth in Q2. Sales efficiency actually increased slightly in spite of accelerating our growth rate in the number of trained Business Performance Advisors to 15% over the same period. This is certainly a credit to our sales training, sales management and marketing efforts.

As Doug mentioned, client retention was exceptional in Q1 as we came through the heavy renewal period at 8% attrition, below last year's level of 8.3%. This puts us on track for another excellent full year retention number in the range of the last few years of 84% to 86%.

The other major highlight of the first quarter was the gross profit outperformance due to solid pricing, coupled with all 3 primary direct costs coming in below expectation. The ongoing management of these programs provides cost stability for clients and a management fee contributing to Insperity's gross profit.

So we have the benefit of strong momentum, which we expect to translate into continued growth acceleration over the balance of the year. In our model, the front end of the ship is the number of trained BPAs. Historically, the growth rate in worksite employees follows the growth rate in trained Business Performance Advisors within a year or so, subject to a plus or minus from our mid-market division.

We finished the first quarter with 500 total BPAs and recent sales activity levels and efficiency rates give us confidence that the core sales engine is likely to continue to perform very well. Since attrition rates are typically less than 1% per month from April through the year-end, we would expect growth acceleration over this period.

Our mid-market division in our model is considered an opportunity for a premium to our growth rate, but on the flip side, the loss of large clients can also be a drag on the growth rate. You may recall that last year we had our largest client acquired by a larger company midyear, eliminating the need for our service, and this caused a drag on our growth rate of approximately 1.5% for 2017.

This year, we expect the opposite effect as we are seeing some real traction in our mid-market sales effort. Our pipeline of mid-market accounts already sold and, in the queue, to be paid in Q2 or Q3 is very strong. When you layer in these additions, we expect worksite employee growth rates of 14% to 15% over the last half of the year.

So for the full year, we're comfortable raising our guidance for worksite employee growth from a range of 11.5% to 13.5% to 13% to 14%, bracketing the high end of our previous range.

Another reason for our confidence is the market receptivity we have seen in the introduction of Insperity Premier, our HCM technology platform designed to facilitate the co-employment relationship. This industry-leading technology has been very well received by clients and prospects, helping to retain current clients and win new business. Now that the platform is in place, we'll be releasing new features and functionality to continue to set the bar in providing technology that drives desired outcomes when combined with our HR expertise and our software with the service model.

Our 2018 roadmap will highlight the power of our co-employment solution while delivering industry-leading HCM flexibility. Soon, we will introduce a series of usability improvements, making it faster and easier to accomplish key responsibilities, including a task box, bringing forward workflow notifications and approvals, collecting the most urgent and important tasks like to the default home dashboard. In addition to our recently rolled out fingerprint and facial recognition log in on the mobile app, we will also provide an expanded number of personnel preferences such as adding a photo to the profile and selecting a preferred landing page. We will also introduce self-service configuration capabilities and an interactive employee directory, leveraging our OrgPlus technology. This powerful data visualization engine will allow clients and managers to view a wide array of information within an organization chart from payroll and time and attendance data to performance and benefits information.

The point is Insperity Premier is already an amazing HCM platform, but with our development capability, combined with the collaborative client and worksite employee interactions, our customer experience will only get better and better over time, cementing our client relationships. These technology advancements are strategic investments that not only improve the customer experience, but also play a key role in our efforts to gain efficiency in serving clients and controlling operating expenses.

Last quarter, I mentioned we completed a five-year plan over three years from 2015 to '17 and formulated a new plan late last year. This quarter, we have communicated this plan to leadership across the company and we are aligned around our theme of one Insperity.

Our five major initiatives, which we expect to drive our desired results over this period, are growth acceleration, operational excellence, technology leadership, risk optimization and talent development. As you can tell from our first quarter results and our revised guidance, we are well underway on these stated priorities, especially growth acceleration, operational excellence and technology development. What's less apparent is the progress we are making on the last two initiatives.

A major element in our five-year plan is our expansion into the traditional employment solution space. We intend to offer Workforce Administration as the most comprehensive traditional employment solution in the marketplace, mirroring what we have accomplished in the co-employment space. We believe offering Workforce Administration side-by-side with our Workforce Optimization offering and right upfront in the sales process will be a growth accelerator for Insperity.

As we continue to ramp up our efforts in this area, we believe our business model will be enhanced in several ways, including increased sales efficiency, greater contribution to gross profit and higher client retention. In addition, traditional employment solution sales will not come with the same type and level of risk as our co-employment offering. This is central to our risk optimization strategy within our five-year plan.

The most critical initiative in our five-year plan is to continue the recruiting, development and retention of top talent to support our substantial growth. We will continue to focus on leveraging our dynamic corporate culture, which drives our resiliency to overcome obstacles, and the strong execution we have seen over recent years.

Over the last three years, we've returned nearly $400 million to shareholders through dividends and share repurchases and our ranking in total shareholder return among our peer group is number one. Our primary objective in our new five-year plan is to continue this pattern of success into an extended period of outstanding results and exceptional total shareholder returns.

At this time, I'd like to pass the call back to Doug.

[Douglas Sharp, SVP, Finance, CFO & Treasurer]

Thanks, Paul. Now, before we open up the call for questions, I'd like to provide our financial guidance for the second quarter and an update to our full year 2018 forecast, which includes top and bottom line growth significantly above our initial budget. As Paul just mentioned, we are now forecasting full year growth of average paid worksite employees in a range of 13% to 14%. This is up from our initial guidance of 11.5% to 13.5% due to the strong start to 2018 and continuing sales momentum. We are forecasting Q2 worksite employee growth in a range of 12% to 13% and continued acceleration over the remainder of the year based on the number and sales efficiency of our trained Business Performance Advisors and continued success in our mid-market area.

We are increasing our earnings guidance based upon the outperformance in Q1 and an improvement in our outlook over the remainder of 2018 driven by the higher worksite employee growth rate. While the first quarter's results included some upside from favorable direct cost trends, we intend to take our typical approach to conservatively forecasting our benefit and workers' compensation costs over the remainder of the year. Our forecasted operating expenses include those costs associated with our initial 2018 operating plan, along with incremental costs tied to being ahead of our plan, which include a higher number of Business Performance Advisors, higher sales commissions on more paid worksite employees and higher incentive compensation costs tied to our outperformance.

We are now forecasting full year 2018 adjusted EBITDA in a range of $218 million to $223 million, an increase of 23% to 25% over 2017 and up approximately $20 million over our initial guidance. As for Q2, we are forecasting adjusted EBITDA of $41 million to $43 million, which, as expected, is down sequentially from Q1 due to the typical seasonality in our gross profit. We are forecasting full year 2018 adjusted EPS of $3.36 to $3.44, a 37% to 40% increase over 2017. Q2 adjusted EPS is projected in a range of $0.59 to $0.63, an increase of 44% to 54% over Q2 of the prior year.

In conclusion, we are very encouraged by a strong start to our year and we look forward to updating you on our progress throughout the year.

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

[Operator]

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

[James MacDonald, First Analysis Securities]

So just trying to get a feel. It sounded like, Doug, that your increased guidance is mostly related to the strength in hiring, not assuming the direct cost programs will continue at the rate that they did in the first quarter?

[Douglas Sharp, SVP, Finance, CFO & Treasurer]

That's correct. Yes. I just mentioned in my prepared remarks the -- yes, the updated guidance and some increase for the remainder of the year over our initial budget is driven by the worksite employee growth. We have gone back to our typical approach of conservatively forecasting the benefits in the workers' comp areas.

[James MacDonald, First Analysis Securities]

So are you assuming that benefits cost growth is going to go back to, like, 2% then for the rest of the year and...

[Paul Sarvadi, Chairman & CEO]

Yes.

[Douglas Sharp, SVP, Finance, CFO & Treasurer]

Yes. Yes, generally speaking. Correct.

[James MacDonald, First Analysis Securities]

And then, could you give us a little more on what the workers' comp release was in the first quarter? And you talked about your pricing initiatives. Maybe in those 2 areas, that will be helpful.

[Richard Rawson, President & Director]

Yes. So we actually had a really good quarter as it relates to our workers' compensation. The claims were obviously -- our reserves and everything are recorded through the -- our actuary. And when the quarter ends up where the claims experience was actually lower than what they forecasted the settlement of claims to be, it always picks up. And in this particular case, it was about $5.7 million for the quarter.

[James MacDonald, First Analysis Securities]

And the pricing initiatives?

[Richard Rawson, President & Director]

Yes. On the pricing side, we saw strength in -- and obviously, our allocations for our markup component of our gross profit. Also, our benefits allocations were strong as well.

[James MacDonald, First Analysis Securities]

Great. And, I guess, one more for me. I'll get off here. You talked about some wins already in the mid-market that are coming online. Any view of the timing of when some of the bigger ones are coming -- going to be feathered in?

[Paul Sarvadi, Chairman & CEO]

Yes. We have a few coming in -- of the smaller mid-market ones coming in, in the second quarter here, but we expect the bulk of which in the queue now to be early in Q3.

[Operator]

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

[Jeffrey Martin, Roth Capital Partners]

I was curious if you could elaborate on the Workforce Administration side. It seems like that's taking a little bit more prominent role versus historically. Maybe give us some perspective on where it is today and where you see this a couple years down the road.

[Paul Sarvadi, Chairman & CEO]

Yes. It's really exciting for us and it is a central element of our next five-year plan. However, we are very carefully implementing this because you have this fabulous growth engine that's in place in [indiscernible] and you don't want to do anything to upset that apple cart. So we are continuing to improve the actual infrastructure within Workforce Administration. Sometime over this next quarter, we will roll out kind of the new and improved version, if you will, that's been the result of all the research and the market testing we've done over the past 6 to 9 months.

So once we get that out there, we'll start really pressing the accelerator down, but it's kind of already has a life of its own. Since we got the sales team out there, the BPAs have the ability to present both side-by-side, that's really honing in the co-employment discussion really nicely. And we are bringing -- we had like a 200% increase in the number of sales at Workforce Administration and that's without us pushing the hammer on it yet.

So we're kind of gingerly moving forward, but we're about to get to that point where we will accelerate that implementation. And our hope is that, that raises all the ships there on the water, co-employment sales go up. Other solutions are added to either one of the two bundles. And giving the customer the option, whichever is the right starting point that we would recommend for that given customer, really opens up our target market even larger and we think that's going to be a nice accelerator for the business.

[Jeffrey Martin, Roth Capital Partners]

And as that model evolves, how do you plan to talk about it or disclose it or give metrics? Is there going to be elaboration on that front? Will you break it out? How will you shape it with investors and analysts?

[Paul Sarvadi, Chairman & CEO]

Yes. It remains to be seen right this second. We are talking about that now and we always like to make sure we have exactly the right metrics that we can provide you so that you guys can build your models and be on the same page we are. So we need another quarter or two before we really hone in on that. And we'll be introducing some new things as we go forward on that front as it becomes more significant to the model.

[Jeffrey Martin, Roth Capital Partners]

Okay. And then, my other question is around the Business Performance Advisors. Am I understanding this correctly that you are further accelerating the ramp in hires there? Because you've been accelerating it for the past couple of years. I just want to make sure I frame that perspective correctly.

[Paul Sarvadi, Chairman & CEO]

Yes. Again, we're -- I've been talking about this for a couple years now about modulating, moving this up and trying to optimize the rate of growth in Business Performance Advisors. And it was -- when we came to the first quarter, not only were we ahead at year-end, but a lot of times, our biggest turnover time of the year for BPAs is typically the -- when we have the sales convention and you kind of make that decision -- people, are they -- are they making it? Are they coming in for the convention, et cetera? And you -- so you kind of have a little bit of more turnover in the first quarter than you do the rest of the year.

But this year, we're just -- the team out there, the sales management's doing a fabulous job and people are succeeding. Success breeds success. It's momentum. And we just didn't have much of a fall off in trained BPAs or not as much as you would normally have in a first quarter. So that, again, gives us -- the lower that turnover is for the right reasons, then your sales efficiency can keep moving. It's always amazing. It moves sales efficiency up when you're growing, when you're accelerating the growth in the number of your BPAs.

So we're going to keep moving that number up little by little, making sure that all the other elements that make that really profitable are in place. The marketing programs. You have enough marketing going on to support the sales team and having the right number of managers and offices open and all that kind of stuff. So it's a lot of items, a lot of drivers within that growth model. And so we're just, like I said, just kind of tweaking them along and continuing to move up a little bit.

[Richard Rawson, President & Director]

Yes. I was going to say it's really -- it starts with the sales training programs that we have refined and improved over the last several years. And as Paul said, having Business Performance Advisors being able to become more successful earlier on demonstrates that those training and development programs actually work. And we're seeing the fruit of all that effort that's been going on for quite some time.

[Operator]

Your next question comes from the line of Mark Marcon, R.W. Baird.

[Mark Marcon, Robert W. Baird & Co.]

I was wondering if you could talk a little bit more about the Workforce Administration just in terms of how you envision that being sold relative to, say, Workforce Optimization and the full PEO model. Would you -- is it going to be an alternative? Are you going to present them side-by-side? How do you envision that working as it relates to what the BPAs would lead with?

[Paul Sarvadi, Chairman & CEO]

Right. We intend to -- we are, right now, our BPAs are out there. Our first -- what we call our first call brochure or discovery call brochure has both bundles in the graphic side-by-side. So we do introduce the options right upfront. However, our Business Performance Advisor, once they gather information, they're going to go back and make one recommendation, one bundle, and then further customize that bundle with other business performance solutions that we provide that make it even a better fit for an individual client. So they will go back with the recommendation that they feel is right for the customer.

And so, over time, what we will be doing is growing both of those. And like I've been saying, the -- when you put them side-by-side and discuss it, then you're able to talk to what are the advantages of one or the other and what stage is that company at right now and what level of support do they need to start with. And over time, we think there will be a channel between people coming on in Workforce Administration and us working with them in that model for a while and then migrating to Workforce Optimization. So we think it -- we're hoping that it will not only increase Workforce Optimization sales over time, but also you'll get -- out of every 10 we see, maybe you'll get 2 or 3 Workforce Administration sales that will roll in next year into optimization. So that's the game plan.

[Mark Marcon, Robert W. Baird & Co.]

That's great. And then, from a margin perspective, how should we think about the implications of Workforce Administration becoming a bigger portion of the mix?

[Paul Sarvadi, Chairman & CEO]

Sure. Sure. The way we've designed the offering to work, we've kind of positioned it in the marketplace strategically based on what we put into the bundle based on what the market demand is and then we price it in a way so that it mirrors what we're doing in Workforce Optimization, the co-employment model. We wanted it to be the most comprehensive business solution in the traditional employment space.

But how it compares between the two, we've tried to position it where it's approximately 40% of the value to Insperity to sell a Workforce Administration deal compared to a Workforce Optimization deal. And we've tried to make the same, like, for example, the benefit to a BPA in terms of their commission, how valuable is the sale of WA for them. We also wanted to be around 40% so that the emphasis remains on Workforce Optimization, but you're not going to pass up a Workforce Administration sale.

So I think we've got that right now. We do need enough repetitions and enough volume to see how that's going to come out and that's why it will be a little while before we have all that pinned down. And we'll be telling you more about that.

[Mark Marcon, Robert W. Baird & Co.]

But it sounds like...

[Richard Rawson, President & Director]

Sorry. I was going to say the good news is that, from a risk perspective, that's just -- there is no risk associated with those -- with that margin.

[Mark Marcon, Robert W. Baird & Co.]

Yes. And then, it sounds like, I mean, from a sales commission perspective and I would imagine also just from a workflow perspective, if you -- if I'm hearing you correctly, it should be margin neutral. Is that a correct assumption?

[Paul Sarvadi, Chairman & CEO]

I think it's too early to tell.

[Richard Rawson, President & Director]

Yes.

[Paul Sarvadi, Chairman & CEO]

It's too early to tell, but we're -- it's additive. If it changes -- we look at everything as a per worksite employee basis and we'll be looking at that as well as how -- right now, how we roll all those numbers together, but we think it's really significant in a lot of ways. I'm not going to call it a silver bullet, but it is one initiative that affects a lot of different things, sales efficiency, your profitability in the model, your retention. There's just a lot of things that it can help move along.

[Mark Marcon, Robert W. Baird & Co.]

Great. And then, with regards to just the sales efficiency, can you talk a little bit about that to the extent that you've got a good feel for it in terms of how that should end up changing with the increased emphasis on Workforce Administration? Because it's a pretty significant arrow to add to the quiver.

[Paul Sarvadi, Chairman & CEO]

Right. It's a good question. And this is why we're carefully implementing here. And you have other factors going on with the high growth of that organization, which normally is a drag on your sales efficiency if you weren't trying to do something new. So we're being careful about that. And as we reported here for Q1 and for last year, we maintained the same level of sales efficiency we had the year prior, even though you ramped up the number of BPAs. Then we get to the first quarter, not only did it -- you ramped up a little faster, but your sales efficiency was slightly higher. So that's just a really good sign that we're --- all those other pieces that make that happen, which are the DMs, the district managers doing their thing really well; along with the sales training, really equipping the BPAs to be successful, like Richard was talking about earlier, and faster; and then also having the marketing programs that are serving up qualified leads so that the way people are using their time is more efficient. So all those factors' a part of it.

Now, you will start to weigh in another one, which is how we have brought in this new offering and creating the option for both the BPA and the customer as to which bundle to start with. So we like the way that's going now, but it's really hard to predict. How much more sales efficiency will we be get out of it? Not sure yet. It just will take a little time.

[Operator]

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

[Tobey Sommer, SunTrust Robinson Humphrey]

Paul, I was wondering if you could talk about the expected cadence of sales throughout the quarters now that you've had a little bit of time to live with the IRS changes with respect to double taxation payroll. In the context of these mid-market sales of size, they're going to accelerate growth. I'm wondering if any of those changes were influential in pushing them across the finish line at kind of the mid part of the year.

[Paul Sarvadi, Chairman & CEO]

Yes. I don't have specific cases where I can say, yes, that made the difference, but I got to tell you, as we've been looking around here, we've always had -- you talked about the cadence in sales. We've always had the really strong fall campaign selling season. We just had a district managers' meeting here. In several of the discussions, it was like -- we just rolled from fall campaign into the new year and it still feels like fall campaign.

So this issue of does this even out over the year because of the no double taxation, there may be some of that behind it, but I don't really have specific mid-market accounts where we see that made the difference.

[Tobey Sommer, SunTrust Robinson Humphrey]

Okay. In terms of the BPA acceleration, in part because of that success you're having and, of course, sticking around to keep at it, what kind of rate of growth do you have in the BPAs year-over-year at this point? And what might you be targeting for the fall selling season in September?

[Paul Sarvadi, Chairman & CEO]

Yes. Trained BPAs were up like 15% for the quarter and total is at just a little higher than that, like 16%. And just tweak it up as we can and as it -- it's in an opportunistic fashion. We're not saying it has to be 18% by such -- or whatever. We just know that when you -- this time, it's creeping up more because of retention. And so we'll continue the hiring rate and we can -- as long as we can bring on BPAs, really have them trained up well, have them reach a level of efficiency in about the right time frame and we can provide enough leads for everybody, well, then it makes sense. Well, as you know, you run on your service capacity, but we're not anywhere near that. We got to be -- we are also paying close attention to that because you really have to make all those pieces fit. There's a balance to that.

We're not trying to grow 25%. We're just saying that we're in a really nice range now where you can modulate up a little bit and get a lot of benefit at the bottom line. This quarter was an example of how when you have -- across the metrics, if everything is -- comes in near the higher end of the range, it really all -- glows out the numbers at the bottom. So they don't always work that way, but nicely done.

[Tobey Sommer, SunTrust Robinson Humphrey]

Right. I wanted to say one thing to Richard then I'll ask the last question. Just Richard, congratulations on a heck of a career. And they say the most important shuffling off is the next one, so good luck with yours.

[Richard Rawson, President & Director]

Thanks, Tobey. I'll miss this part.

[Tobey Sommer, SunTrust Robinson Humphrey]

And I would love to get your comments on the -- on where you are in terms of market share, do you think you're gaining share based on these rates of growth? And any thoughts or color that you could put on what the expansion in the Workforce Administration means in terms of the company's total addressable market in terms of increasing it?

[Paul Sarvadi, Chairman & CEO]

Right. We look at our total addressable market of about 70 million worksite employees out there when you basically size companies from 5 or 10 employees up to about a couple 3,000, maybe 5,000 employees. And what I think we're doing with Workforce Administration is just creating another option and entry point for more of that market to come in earlier than they may be otherwise would have. I think we can really well serve a much larger portion of that addressable market with the approach that we're taking. And so it's both -- it doesn't make the addressable market that will be responsive to us. I think it really increases that. And so it flows into the pace of our growth. We've always balanced growth and profitability. But when you are growing and can kind of be on the top end of your range or a little at -- a little above that range on growth, a little extra growth really adds a lot to the model.

[Operator]

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

[Michael Baker, Raymond James & Associates]

I was wondering. You quantified the workers' comp benefit in the quarter. Could you please quantify the health care one? And then, I had a follow-on for Paul.

[Paul Sarvadi, Chairman & CEO]

Yes. So this quarter, our -- we actually ended up at -- with about, I guess it was -- we're about $13 million?

[Douglas Sharp, SVP, Finance, CFO & Treasurer]

Right. I mean, the way I'd answer that is the larger piece of the upside in the gross profit area was in the benefits area. And we had -- again, we had budgeted about a 2% increase as our health care trend. It came in as a decline of about 1.5% or so. And so that was outside of the growth in the worksite employees within the gross profit area. The biggest contribution was out of the benefits area.

[Michael Baker, Raymond James & Associates]

That's helpful. And then, Paul, maybe give us a little bit of a historical perspective on the co-employment where you've used to see interest by an employer top out in terms of employee size and maybe how you've seen that potentially recently change and give us a little bit of feel for why? And how do you think that can go? I mean, do you still see that notion of employers, at some certain size, thinking that they can still take on some of this benefits responsibility so that, when you're talking about the 3,000 to 5,000, that's ultimately going to be Workforce Administration? Or have there been underlying changes or the way you deliver your model that's increased comfort for a larger size, so to speak?

[Paul Sarvadi, Chairman & CEO]

Yes. That's a great question. I do think that, just in the big picture of market receptivity and kind of the adoption curve, if you will, even though it's taking a long time to get to this point, I believe that the combination of the federal law being passed and just the growth of the industry, I really think that we're in a kind of across the chasm, if you will, if you're familiar with that concept of market adoption and receptivity, but we have definitely crossed the chasm. I think we're getting -- mid-market is a good place to look at the receptivity and how it's changed. I also think when you look at awareness and actual preference to do businesses away from folks like private equity firms where you're able to start to have some real productive channels to bring business on. So a lot of things we're working there, that I think, can help with the momentum. This is really what I'm talking about, about momentum and we have that. It really gets to be fun now.

On the issue of large customers and whether they prefer co-employment or traditional, we have found ways to have our co-employment model provide more flexibility than we used to. And large customers used to feel pretty restricted or constrained in that model, but our folks have done a great job on the service model. The feeling as a customer now, as a mid-market customer, is very customized, very -- they've -- we know they're unique. They know we know they're unique and we fit the service model to really help them. And so we have large customers choosing co-employment. So it's kind of the same kind of dialogue. So it's not -- I don't look at it as the bigger you are, the less likely you will choose co-employment. That's not what the numbers tell us today.

[Operator]

Our last question comes from the line of Mark Marcon, R.W. Baird.

[Mark Marcon, Robert W. Baird & Co.]

I just had a couple of quick follow-ups with regards to the benefits cost and the gross profit for worksite employee. In terms of the health care benefits costs actually declining by 1.5%, can you talk a little bit about why that occurred? Is it just lower number of incidents, lesser severity? Just what specifically drove that? And then, secondly, how should we think about the gross profit per worksite employee for the balance of the year as it relates to the guidance?

[Richard Rawson, President & Director]

Okay. Well, first of all, if we go back to the fall of last year, there was a lot of discussion and dialogue with our primary care, UnitedHealthcare, talking about that they were expecting a rather difficult flu season. And so we, taking their guide, lead to try to forecast some of that into our experience for the first quarter. And as they reported a week or so ago, it didn't happen for them. So obviously, we were kind of in that same boat and so we didn't have near the utilization.

We are seeing, when we look at their detailed metrics in the plan, the medical side, our trend was actually negative this quarter. The pharmacy utilization was actually lower than what we had forecasted as well. So both of those fronts were good. When we look at all the detailed metrics like the -- what -- hospital days and stays and all that kind of stuff, which we use all that to help our own forecasting, it's all positive. And so it's just across the board.

But it is what it is. And when you think about that going forward, you can't bake that into a future quarter because you just -- you don't necessarily know how the utilization is going to play out. So we maintained a conservative approach, as Doug said, by forecasting that at the levels that we had previously. When we started this year's budget, we just left those in place for our forecast at the gross profit line for the balance of the year. And if it turns out better, then great.

[Douglas Sharp, SVP, Finance, CFO & Treasurer]

Yes. You wouldn't expect the negative trend for a whole year.

[Richard Rawson, President & Director]

No. No. That would -- no. You can't bake that in.

[Operator]

I will now turn the call back to Mr. Sarvadi for closing remarks.

[Paul Sarvadi, Chairman & CEO]

Once again, we just want to thank everybody for joining us today and appreciate your interest. And we look forward to continuing to produce some exceptional results. And hopefully, we'll see you out on the road. Thank you very much. Have a great day.

[Operator]

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