沛齊 (PAYX) 2011 Q3 法說會逐字稿

Welcome, and thank you for standing by.

At this time all participants are in a listen-only mode.

(Operator Instructions).

Today's conference is being recorded.

If you have any objections, you may disconnect at this time.

Now I will turn the meeting over to Mr.

John Morphy, Senior Vice President and Chief Financial Officer.

Thank you for joining us today for our third-quarter earnings release.

Also with us is Marty Mucci, our President and CEO.

During the call, we will review our third-quarter 2011 financial results and guidance for full-year fiscal 2011.

Marty will then provide an overview, and we will conclude with a Q&A session.

Yesterday afternoon after the market closed, we released our financial results for the third quarter ended February 28, 2011.

We've also filed our Form 10-Q with the SEC which provides additional discussion and analysis of the results for the quarter.

These are available by accessing our investor relations page at Paychex.com.

In addition, this teleconference is being broadcast over the Internet and will be archived and available on our website for approximately one month.

The favorable results we experienced in the first half of this fiscal year have continued in the third quarter.

Some of the key indicators are as follows.

Checks per client, the number of checks issued during the period divided by our average client base, represents our most meaningful barometer of how the economy is doing.

Our checks per client reflect an increase of 2.8% for the third quarter and 2.1% for the nine months, compared to the same periods last year.

This compares to declines of 2.2% and 3.6% for the same periods in the prior year.

If you recall, it was the fourth quarter of last year when we experienced our first increase, 1.1%, since February of 2007.

On the bonus season, it was a good year-end as double-digit growth was seen in both bonus checks and dollars.

That compares to a year ago when checks were basically flat.

As of February 28, 2011, excluding SurePayroll, our client base declined 1.6% compared to February 28, 2010.

This compares to a decrease of 3.6% for the comparable period a year ago.

This is our first meaningful quarter-over-quarter improvement since the start of the recession, and we anticipate continued improvement in the fourth quarter.

The improvement relates primarily to better retention as weak new business starts continue to negatively affect selling new clients.

Sales of new units for the third quarter were close to the prior year.

On February 8, 2011, we completed the acquisition of SurePayroll Inc., a leading provider of software as a service payroll processing for small businesses.

The purchase price was approximately $115 million in cash.

SurePayroll serves approximately 30,000 small businesses, and revenue for SurePayroll for the 2010 calendar year was approximately $23 million.

Our financial results for the quarter include SurePayroll from the date of acquisition.

We do not anticipate that SurePayroll will have a material impact on our financial results for the fiscal year.

In summary, our third quarter was a good quarter, consistent with the first half of the year and consistent with our expectations for achieving fiscal 2011 results.

Looking forward to the remaining quarter of fiscal 2011, we expect it to trend quarter, which is -- trend lower, which is consistent with what we have experienced in recent years.

Some comments on the fourth quarter, which were considered when we developed our financial guidance last spring, are as follows.

Human resources services revenue growth is expected to be lower in the fourth quarter than what we have experienced for the first nine months.

PEO net service revenue is not as predictive as other revenue streams and tends to vary quarter to quarter due to fluctuations in adding and retaining client employees served and in workers' compensation revenue.

We expect fiscal 2011 PEO revenues will be stronger for the first nine months compared to the last three months, due to the timing of some of these fluctuations.

We will review our guidance for the full year in a few moments.

Operating income net of certain items is expected to grow at a lower rate than the fourth quarter, bringing the full-year growth rate down slightly from what we have experienced for the first nine months.

It is normal for our operating margins to be lower in the second half of the year due to the timing of price increases, the timing of additions to our sales force, year-end payroll revenue and expense in our third fiscal quarter, and higher levels of selling expense in the second half of the fiscal year.

Sequential earnings per share is not as applicable to our business as it may be for others.

While we do not experience significant seasonality, our quarters tend to match up better with the prior-year quarter versus the sequential quarter.

We'll now move on to talking about the third quarter and the nine months ended February 28, 2011.

Payroll service revenue increased 2% for both the third quarter and the nine months to $366 million and $1.1 billion.

The primary reason for the payroll service revenue growth is the aforementioned increase in checks per client.

Offsetting some of these positive factors was our lower client base compared to a year ago, with the decrease primarily occurring in the last quarter of fiscal 2010.

As I mentioned earlier, the client base was down 1.6% from a year ago, compared to an overall decline of 3.6% last year at this time.

The payroll client base as of February 28, 2011, excludes SurePayroll clients.

Human resource services revenue increased 13% for the third quarter and 11% for the nine months to $153 million and $444 million.

HRS revenue growth reflects modest improvements in economic conditions, client growth, and our annual price increase.

Some additional highlights of contributions to HRS revenue growth were Paychex HR Solutions client employees served increased 14% to 536,000 employees as of February 28, 2011.

We have seen positive results from increases in both clients and client employees.

Contributing to this growth in the clients and client employees is our new product offering, Paychex HR Essentials.

HR Essentials is an ASO product that provides support to our clients over the phone or online to help manage employee-related topics.

HRS revenue was also positively impacted by growth in certain products that primarily support MMS clients.

Health and benefit services revenue increased 27% to $10 million for the third quarter and 32% to $30 million for the nine months of fiscal 2011, driven primarily by a 26% increase in the number of applicants as of February 28, 2011, compared to a year ago.

Fluctuations in PEO workers' compensation positively impacted PEO net service revenue in the quarter.

As we mentioned, our workers' compensation costs frequently fluctuate from quarter to quarter.

Combined interest on funds held for clients and investment income decreased 13% for the third quarter and 10% year to date.

Yields available on high-quality securities continue to remain low.

Expenses decreased 2% for the quarter and were flat for the nine months.

However, during the prior-year third quarter, we recognized an expense charge of approximately $19 million to increase our litigation reserve.

Excluding this expense charge, expenses would've increased 4% for the quarter and 2% for the nine months, due to costs related to continued investment in our sales force, customer service, and technological infrastructure.

Improvements in operations productivity with related lower headcount have somewhat offset these increases.

Operating income increased 18% for the third quarter and 10% for the nine months to $199 million and $604 million.

Operating income, excluding interest on funds held for clients and the expense charge to increase the litigation reserve, increased 8% for the third quarter and 7% for the nine months to $187 million and $568 million.

We continue to manage expenses contributing to this growth.

We do anticipate that expenses in the last quarter of fiscal 2011 will be slightly higher, bringing our operating income net of certain items as a percent of service revenue down somewhat from the 37.2% seen during the first nine months of the year.

Net income increased 17% to $131 million for the third quarter, while diluted earnings per share increased 16% to $0.36 per share.

Net income increased 10% to $396 million for the nine months, while diluted earnings per share increased 9% to $1.09 per share.

We have maintained our conservative investment strategy and have not recognized or realized any impairment losses on our investments.

Our investments are high credit quality securities with AAA and AA ratings and short-term securities with A1/P1 ratings, with more than 90% of our portfolio rated AA or better.

We limit the amounts that can be invested in any single issuer.

Our priority has been and will be to ensure we can meet all of our cash commitments to clients that took place as we transferred cash balances from their accounts.

We refer you to our SEC filings for a more detailed disclosure on our investments.

Our financial position remains strong with cash and total corporate investments of $652 million as of February 28, 2011, and no debt.

Our cash flows from operations were $553 million for the nine months of 2011, up 10% from a year ago.

Funds held for clients as of the end of the quarter were $4.2 billion, compared to $3.5 billion as of May 31, 2010.

Funds held for clients vary widely on a day-to-day basis, and averaged $3.7 billion during the third quarter and $3.2 billion year to date.

This represents an increase of 6% and 4% over the prior-year periods.

This growth in balances was due to increases in state unemployment insurance rates and increases in checks per client, offset somewhat by the lingering effects of the difficult economic conditions.

Our total available for sale investments, including corporate investments and funds held for clients, reflected net unrealized gains of $46 million as of February 28, 2011, compared with net unrealized gains of $67 million as of May 31, 2010.

Our stockholders' equity increased to $1.5 billion as of February 28, 2011.

Our return on equity for the last 12 months was 35%.

Moving on to guidance.

Our outlook for fiscal 2011 is based upon current economic and interest rate conditions continuing with no significant changes.

Consistent with our policy regarding guidance, our projections do not anticipate or speculate on future changes to interest rates.

Our fiscal 2011 guidance reflects anticipated results from SurePayroll subsequent to the acquisition.

The anticipated revenue impact is less than 1% and the earnings dilution is expected to be less than $0.01 per share, partly due to amortization on acquired intangible assets.

As previously discussed, we expect human resource services revenue growth to be less than the growth for the first nine months due to fluctuations in PEO revenues.

Our 2011 guidance is as follows.

We project payroll service revenue to increase in the range of 1% to 2% compared to fiscal 2010.

Human resource services revenue growth is expected to be in the range of 10% to 11%.

Total service revenue is expected to be in the range of 3% to 5%.

Interest on funds held for clients is expected to decrease by 12% to 17%.

Investment income net is projected to increase by 29% to 32%.

Net income is expected to improve 4% to 6% over fiscal 2010.

Operating income net of certain items as a percentage of total service revenue is expected to be approximately 36% for fiscal 2011.

The effective income tax rate is expected to approximate 35% for fiscal 2011.

Growth on interest and funds held for clients and investment income for fiscal 2011 was impacted by the low interest-rate environment.

The average rate of return on our combined funds held for clients and corporate investment portfolios is expected to be 1.3% for fiscal 2011.

As of February 28, 2011, the long-term investment portfolio, which excludes variable-rate demand notes, had an average yield to maturity of 2.7% and an average duration of 2.4 years.

In the next 12 months, approximately 20% of this portfolio will mature, and it is currently anticipated that these proceeds will be reinvested at a lower average interest rate of approximately 1.1%.

Investment income is expected to benefit from ongoing investment of cash generated from operations.

To help you on looking at 2012 and knowing that interest rate calculations are difficult, we expect combined interest on funds held for clients and investment income in total to decrease approximately 8% for fiscal 2012, subject to future changes in investment rates of return.

Under normal financial market conditions, the impact to our earnings from a 25 basis-point increase or a decrease in short-term interest rates would be approximately $3.5 million after taxes for a 12-month period.

Such a basis point change may or may not be tied to changes in the federal funds rate.

It is not possible to quantify the after-tax effect of a 25 basis-point change in the current investment environment.

Purchases of property and equipment for fiscal 2011 are expected to be in the range of $95 million to $100 million (Sic-See press release), as we continue to invest in technology and infrastructure.

Fiscal 2011 depreciation expense is projected to be in the range of $65 million to $70 million, and we project amortization of intangible assets for fiscal 2011 to be approximately $20 million.

You should be aware that certain written and oral statements made by management constitute forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995.

These statements should be evaluated in light of certain risk factors which could cause actual results to differ materially from anticipated results.

Please review our Safe Harbor statement in the press release for a discussion of forward-looking statements and the related risk factors.

At this time, I'll turn the meeting over to Marty Mucci.

Thanks, John.

I'm pleased to join you today and talk about our results for third quarter.

Thank you for joining us.

Our focus continues to be on driving growth, growth in terms of clients, revenues, and profits, by continuing to provide great service and value to our clients and their employees.

As John has said, we are pleased with some of the major financial indicators in the first nine months of 2011.

Checks per client, revenue per check, client retention all demonstrated consistent and continued improvement.

Checks per client has improved now for four quarters and client retention for six.

Our improving client metrics and benefits from implementing our new core advanced payroll platform enable us to continue to drive productivity which is helping our profitability, and we take that -- many of those savings and pour it back into investing in our employees, our products, and our services.

I'm also pleased with the efforts of our employees on many fronts.

Our sales team, over 2,500 reps strong, selling in a very tough environment.

As John mentioned, in January we were roughly consistent with last year's performance.

It's a tough environment for new business formation, as I think John has mentioned before.

In many ways, we're showing improvement, but overall with the new business formations about flat, it is keeping our sales flat in the core payroll side, at least, where there is growth in other fronts.

Our client satisfaction results continue to be at the highest levels ever in both core and major market payroll services.

Our employees remain dedicated to our client satisfaction and being an essential partner with our clients, and we have completed another successful year-end for our clients, processing, printing, and distributing over 9.5 million W-2s in a very short timeframe beginning the end of December through the middle of January.

So I want to thank our employees on the sales and operations front for terrific performance in a continued tough environment, and we look forward to the work they continue to provide for us.

They're very dedicated to the Paychex mission.

Our technology releases with new enhancements continue about every six months.

Ever since getting done with the conversion to the core advanced platform, we are on the new Paychex next generation and we continue to have releases about every six months with new product and functionality.

In November, we released the online W-2s and pay stubs.

And we've also introduced a product enhancement with our new Smart Time clocks for our clients with less than 20 employees, and we're off to a great selling start with those clocks.

We just started selling, really, in the December timeframe.

Our major market business, now heading toward $400 million in annual revenue, offers a complete one-source solution for our mid-sized clients, including online HR, time and attendance, and benefit enrollment, and we are very competitive, we feel, in this space, having better integrated our user experience and the navigation between the applications, and we continue to make major investments in this product.

Our -- on the HR side, John mentioned already we introduced our HR Essentials product.

We're off to a very good start.

We introduced that just about a year ago, and it has had better growth than we expected.

This is where not only do you have the HR support, it is telephonic instead of our online -- or actual person who comes and visits you.

And as John mentioned, we completed the acquisition of SurePayroll.

With over 30,000 clients, we have an entry into the new segment of the payroll online market.

That's a segment we think is positioned to grow as the 5 million small businesses who calculate their payroll annually move to the Web.

Paychex already had an online input with over 40,000 clients using that.

But SurePayroll with its software as a service model really offers another alternative for clients looking for more self-service alternative.

Both companies offer great service, and from a client control standpoint, we now offer a full range.

So clients who want more control have SurePayroll.

Clients who have a higher level of personal interaction will have a dedicated payroll specialist under the Paychex model.

So we're excited to have SurePayroll -- the deal closed, the employee team at SurePayroll and talent and leadership in this marketplace now joining Paychex, and the leadership team that led SurePayroll really since its start back in 2000 essentially remain in place and focused on growing the business now within the Paychex family.

We are excited to have them.

During the first-quarter call, we discussed some of our core sales initiatives.

I wanted to give you an update on some of those.

At the time, we had introduced the new pricing and packaging of our core payroll products and we have since also introduced new training programs to expand the knowledge and selling skills of our sales reps, particularly our new ones.

And we have also made a number of changes to bolster the field sales management teams, and we are fully staffed in all sales positions and have completed the deployment of the latest technology in tablets in order to support our sales team and improve their efficiency and productivity.

So we have a number of things that we started and talked about a few quarters ago that are well underway.

We are also in the final stages of the new compensation plans for fiscal 2012 that have been designed with our sales leadership team to attract and retain the best sales candidates, simplify the calculation and payment of commissions, and focus on driving more revenue, so we feel very good about where we are.

As expected, we had planned to finish those, start communicating them to the reps for the start of our new fiscal year June 1.

I have also completed the hiring of two of the three initial executive positions that I've talked about on the last call.

Andy Childs has started in the role of Vice President of Marketing, approximately a month ago, and Laurie Zaucha has started in the role of Vice President of HR and Organizational Development.

Both are experienced, seasoned executives that have joined the team and are already adding value to the group, and I'm pleased to have them.

I continue to actively interview for the top sales executive position and expect to fill this shortly.

In the meantime, as I've described, all of our initiatives are underway with the vice presidents on that team involved with John and myself, and by separating the marketing function from sales and getting Andy started in this role and reporting directly to me, has allowed us to build on initiatives that capitalize on our brand strength and also accelerate the work with our channel partners in lead generation, which is a critical component for our sales team.

So, I'm very pleased in the first five to six months that I've been in the role with the great team I have, the front line and folks in both sales and ops that are working hard to get us to our goals, and we look forward to your questions.

This group is targeted to take Paychex to the next level of performance, and I'm proud to be with them.

So with that, John, I think we'll open it up for any questions or comments.

(Operator Instructions).

David Grossman, Stifel Nicolaus.

I was wondering, given the transformation over the past six months and we're running at probably elevated sales levels or, excuse me, expense levels and we've got flattish bookings in the selling season, and when you bundle that with pricing, does that kind of roll out to, at least in the current environment, flattish growth as we go into next year and a similar margin profile, or is it -- should we think differently about the headwinds/tailwinds, if you will, as we go into next year?

No, we expect growth next year.

We do not expect to be where we are.

I think the momentum in this year is we've gotten off the going backwards.

We've got to going forwards.

I think HRS revenues, we got a little bit of a blip here that we talked about.

We expect they'll come right back.

Payroll revenue growth should be stronger next year, and while you still got some headwinds, they're not all headwinds.

So, as you look at the sales for the selling season and all the changes that you're in the process of making, if the environment stays flattish, do you still think that you can drive sales growth next year?

Yes.

We are optimistic (multiple speakers)

Actually, I'm sorry.

Client growth, I (multiple speakers)

We're hoping to get client growth next year positive.

We were down 1.6% at the end of the third quarter.

I think we'll be down approximately 1%-ish when we go look at the year over year.

We did a little bit less acquisitions this year, but not that much, and we're optimistic these changes will help us.

But again, when you look at the following year, while client growth is important, it's going to be more important for the year after this.

And the 1.6% decrease that we show this quarter is really the -- an improvement.

It's turning around.

That's the best it's been in two years, so we definitely think that with the client growth coming back in, turning positive, as well as all of the checks per client and the revenue per check now pretty consistent, that we certainly will have growth next year.

And just on that last point, Marty, in terms of the revenue per client, should we -- some of the things that, again, you've been working out over the next six months, how do you expect that to play out in terms of impacting revenue per client over the next 12 to 24 months?

The key things we're working on right now would impact the sales.

A lot of the sales initiatives for the training, the compensation plans, the hiring and recruiting and so forth of the management team I think will help on the sales.

On the revenue, we continue to see that we're getting more revenue per check.

We're adding some product functionality, which I think adds value for our clients, and so I think they're also willing to pay a little bit more for that.

So, I think the revenue per check, while it changes not all that dramatically [out there], I certainly think we'll come up some.

But you've got the checks per client going up as well.

So, that drives revenue, obviously, per client on an average volume.

Just one last question on the portfolio.

John, was there something sequentially in terms of roll-off that we saw a bigger than, I guess, what I would have at least expected in sequential decline in yields on the client (multiple speakers)

There's been a little bit more, and the reason I gave you guidance on next year is I think these numbers are almost impossible to calculate, and rather than have you try to calculate them and be wrong, we made the decision we would give the guidance on 2012 assuming interest rates don't change, and we're usually pretty accurate.

Float income compared to our budget is very close to what we thought it was going to be, might even be a little bit better.

But things bounce off, sometimes, one period.

But it moves around, and float income is somewhat seasonal.

Joseph Foresi, Janney Montgomery Scott.

I was wondering, what was the -- if you could help us quantify, what was the impact on revenue from the bonus values being up 10%?

Is there any way to (multiple speakers)

It's not that big.

We get some checks -- it's not a big thing.

It's -- the more reason we disclosed that is to give you an indicator of what's going on out there.

Two years ago, checks were down 10% and money was down 5%, and last year they were flat, and this year they're up double digits.

Now the good news is when they're both up the same, that means these owners are willing to spread this money throughout the organization, which they didn't do a year ago, and it also means that their businesses were doing quite well and they were making more money again.

So those are all good signs.

But the actual dollars don't affect us that much.

Okay.

And then, on the pricing, could you give us some idea of just what kind of order of magnitude the price increases were this year, maybe (multiple speakers)

About 3%.

How did that compare to past years?

We used to historically do 4% all the time, but we didn't try to get 4%.

You've got to remember pricing is in two places.

It's in the base and it's in new sales.

The new sales can be different than the base only because you've got competition on the sale, and once you have a client in the base that they're happy with the service, they very rarely leave due to price.

Okay, and could you -- any change in either one of those pricing methods?

No.

Not anticipated.

I know you talked about the sales force and you're kind of progressing on some of the changes you made there.

I wonder if you could get, maybe, as much as you could, a little bit more specific on any change in comp structure and what you hope to kind of achieve through the organization.

I think the biggest thing there is it was very complicated.

We had a number of levels over the years that we built in for good reason to drive incentives, but it ends up so complicated that a lot of times the reps don't know exactly what they're going to get paid for, for what they're selling, and then they are checking on it and so forth.

We tried to simplify it a great deal.

We also wanted to raise it some to attract candidates coming in with a little bit more experience.

And I think those are probably the biggest changes.

But it's really important that you make it very simple and be able to drive up kind of the percentage of -- the real revenue that they bring in, they're going to get paid for it.

It's going to be very simple and clean for them.

They're going to know what they're getting paid and they're going to be very clear on what their total compensation can be when they succeed.

And I think probably the biggest things are making sure we're at a good base rate for how to bring people in, and then simplifying it on a go-forward basis.

Overall, we'd expect to be slightly higher than we've been paying, but not significant.

Okay, so no impact from margins for it being (multiple speakers)

No.

And then, just lastly, I think, it sounds like the changes are mostly behind you guys.

I think -- is it fair to say that the swing factor now would be a general improvement in the economy, because I know prior to this it was a sort of a half and half sort of situation?

Really just a general improvement in one area of the economy, new business.

(Multiple speakers).

I think the problem you have today is that the businesses that have weathered this recession, for the most part, are doing well, even on the small end.

You know what large corporate America is doing.

But you need to get to where people are confident enough to start some new businesses and they've got to have access to capital to do it.

That still remains a little mixed, and I think it's just because the environment is a little scary and it isn't as easy as it was five, six, seven years ago.

Rod Bourgeois, Bernstein.

Just wanted to talk on the pricing front real quick.

Did your year-over-year payroll revenue growth in the February quarter benefit from any net pricing increase?

It's just not clear in the revenue growth numbers whether there is a net price increase that's showing up in the growth rate.

Revenue per check went up.

That's normal.

I don't know that revenue per check has ever gone down, except when you lose enough checks, it can go down some, but not related to pricing.

Discounting is still, in the new sales environment, about like it was.

It hasn't gotten any worse.

But ADP is still there, and discounting in the base, and recovery of discounts given at the time of purchase has improved.

Okay.

And then, you've rolled out some new pricing strategies in recent months, and can you give an update on how that's being received in the market and to what extent that is helping you avoid the discounting activity and possibly even help on the sales front at all?

I think it's helped us -- this is what we introduced back in the October/ November timeframe, and then we have looked at tweaking it.

When you introduce anything, we're looking at adjusting things here and there, which I wouldn't get into too much detail, but I think it helped us from a standpoint of it was much simpler to sell.

Before, I think, what we talked about two quarters ago, John probably described where discounting was kind of quite variable all over, and there were bundles, and I think sometimes a lot of product in the bundle that clients didn't understand or sales people had a hard time selling.

We tried to clean that up a little bit, and we made the bundles simpler and then sold a la carte.

And I think that's been positive and negative.

I think it's been positive in the fact that some clients, it's easier to sell.

Other clients, when you sell a la carte, you have to sell a lot more to get to the full bundle of what a client needs.

So, we've been tweaking some of that.

I think it's been good.

Obviously, it didn't drive as much of the increase in growth of new clients that we wanted, but we still think a lot of that is the environment of new business starts.

The one thing that we just don't see yet is the new business formation, and that seems to be what's holding us back.

And then, just real quickly on that front, on the bookings front, do you see anything now starting to turn in your favor on the bookings front?

Are there any recent signs very lately that new business formation is improving or, now that you've had your new pricing sort of approach out there in the market, you kind of indicated there are some positives and some negatives attached to that.

Now that you've honed that process, will that start to help you in the bookings process at all and for things to turn in your favor now?

We certainly hope it's going to improve it, but I can't say we've seen it yet.

Yes, we're just making some of those changes.

So I think that could help.

The new business formation, I don't think we've seen a lot that would say, and there is always lagging indicators there.

I haven't seen a great indicator of that.

But it's hard to see that that has improved much.

Mostly, it's -- it still appears to be getting cash to start up their businesses, and the cash is still tight for brand-new businesses.

Those who are existing seem to be getting the cash.

Those who are new are not, and they don't have home equity that they used to use to start up some small businesses as well because a lot of that is still upside down.

So, haven't seen that indicator yet.

But sometimes you see that later after it's already happened.

Adam Frisch, Morgan Stanley.

Martin, you gave some details on the sales re-organization, but, because I think that is really the key swing factor going forward outside of the macro backdrop, maybe just give your top two or three things that you're working on that you think we should be tracking sequentially in the next couple of quarters to show the progress there in your initiatives, and how long you expect them to ultimately have an impact on sales results.

Yes, and I think the ultimate result that you want to track are actually, obviously, the sales.

I think the initiatives that we have been putting in place was, first, to revise some of the training to give -- to tighten up some of the training and give more selling skills as well as product knowledge, based on the products that we are selling.

We've tightened that up and already have been running that since November/December timeframe.

We completed deployment of new tablets, which gives them the tools that they need.

A faster tablet that allows them to connect with salesforce.com, which is all their lead generation and customer relationship management tools.

That has been completed now, just in the month of February.

And then, we're going through the comp plans, which we won't introduce until fiscal 2012, which is June 1, and that was always the goal so that we were -- start on a fresh year and introduce those.

And then, of course, there's leadership changes, which most have been made, the final one being the top executive that I'm interviewing for and hope to fill very shortly.

So you put all that together, and obviously the final scorecard is better improved sales, and you've always got the economic environment that you have to always kind of judge how much of that is that and how much is execution.

So, a lot of things going.

Everything pretty much on schedule as we wanted it to be, and now just putting it all together.

I guess if there was a time for the sales reorg to be going through some changes and upgrades, improvements, however you want to call it, now would be probably the best time that you could imagine for, given the weakness in the macro scene.

But going forward, how much do you think the improvement in sales will be related to Paychex-specific initiatives and how much to the macro backdrop, primarily the new business formations?

I don't know, John, what do you -- ?

I think it's hard to say.

I feel good about the initiatives that we've put in place and that they're all on track.

So -- but I think some of the payoff from some of that, when you have new comp plans that aren't starting until June, obviously that hasn't -- if that's going to kick in some improvement and execution, that hasn't done it yet because they're not out there.

I don't know.

It's hard to say.

I think whether you want to say 50-50 or more it's 60-40 now, the macro environment, because we are moving on these initiatives, maybe that's

Okay.

Okay.

And the last question I had -- thanks, Martin, for that -- is given your focus on growth, would you consider making acquisitions or investment in what some may view as ancillary businesses that may not be directly in your current footprint but somehow tangentially related?

I think we're always looking for whatever will drive growth, and right now we've tied -- the acquisitions in the past, the time and attendance, the benefit enrollment, everything is tied to payroll, and we are continuing to look outside that circle as well.

If there's things that we can benefit from because of our sales -- having over 2,500 reps on the street, if there's something that we can drive with those reps by acquiring something that fits small business between that employer and employee and is not directly tied to payroll, I'm -- we're still very interested in it.

Whatever can drive growth that ties to our small and medium-sized businesses getting more value, we're looking at it.

Ashwin Shirvaikar, Citi.

So, my question was the bonuses being up, is that historically a good forward indicator of checks per client going through the year (multiple speakers)

It really isn't an indicator of checks per client.

It really is an indicator of how well small business is doing.

I mean, it tells you what the profit (multiple speakers)

(Multiple speakers) businesses are doing well, but they go and hire more?

Is that how you look at it?

We still think that most hiring comes off new businesses.

We don't think it comes out of small business, per se.

We're seeing 2.6% range increase in checks per client.

We know a little bit of that increase is because we're not selling as many new small clients, so you don't get tremendous hiring.

When you start talking about creating jobs, it's got -- most of it is in the slow end has got to come out of new business formation.

A lot of these companies don't add employees.

They're successful and they learn to live without them.

When they get rid of them, they don't bring them back quickly.

Only time will tell.

I hope it would change in that, but the reason I say that is checks per client is usually pretty stable.

It has been the best over the last four quarters that we've probably seen in 15 or 16 years.

I think that's a combination of things got so bad and the combination of the new markets -- new business starts not coming quite back yet.

And as you see new business formation down the road, do you think it's more likely to come through on the SurePayroll platform?

Or is it more likely to come on the traditional payroll or (multiple speakers)

On both.

On both.

But the SurePayroll platform is the side we haven't been able to participate in.

And if you got more do-it-yourselfers, if it's really small stuff, that might happen.

But on the other side, when people don't want to spend time doing payroll, they want to focus on growing their business and getting them started, they are going to outsource.

Okay.

And I just had a last question on PEO, if you could sort of explain the PEO impact and why it is a one-quarter impact only?

Basically, most of the PEO impact is one quarter only.

We had two things happen.

Workers' comp is something we have to look at every quarter.

We have to look at the actuarial accidents and what people estimate the cost is going to be.

And going into a year, we're usually favorable for the year, but we don't know which quarter it's always going to get booked in.

And this time, we got a little bit extra in the third quarter, which made the growth a little bit higher, and we believe that that little bit extra we got, we're not going to get in the fourth quarter.

Now maybe we will, but we don't think we're going to.

And another factor that was to some extent, but not as big as that one, was the fact that healthcare rates in the PEO environment were raised substantially going into January, and we did lose some customers who are extremely sensitive to health care.

One of the problems of the PEO -- it's an advantage and a problem -- is PEOs versus our other full outsourcing channel are very interested in healthcare, and a lot of times they're simply shopping for the lowest healthcare they can get.

Rates went up, so we had some clients that decided to go elsewhere.

Now that part would carry over, but we're back selling.

The work site employee number went up strong still in the period, despite those losses.

So we don't think that's going to be significant going forward.

Grant Keeney, Northcoast Research.

Just going forward, how much, if any, cannibalization do you anticipate in your current business due to the acquisition of SurePayroll?

Don't really anticipate too much.

We've always seen in the marketplace that there is those who want full control of their payroll and there are those who don't.

They want the responsibility given to someone else and -- like us.

And so, when we looked at SurePayroll, we felt that that was a market that was really for those who want full control.

They want to do it themselves, take the full responsibility, and so we don't see a lot of overlap there at all, and we think that that's a pretty big untapped market when you have the businesses that are out there doing it on pen and paper and maybe spreadsheets moving more to the Web.

They will go to a SurePayroll.

Those who always want to outsource and just be out of it because it's not worth it to them to follow the rules and the changes and so forth, or import it themselves, come to us.

Okay.

So since it closed on February 8, you haven't noticed too much overlap in terms of the clients that are targeted?

No, no (multiple speakers)

Okay.

And then, just given the recent changes you mentioned for the sales force, has there been any impact on attrition for better or worse that you guys have noticed or anticipate?

Well, attrition is up a little bit from historical trends.

It's been pretty consistent in the past, and so it's been up a little bit.

I think that's a combination of just being a tough-selling environment right now for a period of time.

It probably wears on some, and so that's up a little bit.

And then, having some management changes drives it up.

It's not -- we think it will start to come back down now, back to normal levels.

But it was -- it's been up a little bit, slightly up from the past.

Last question here.

Just in terms of client acquisition, in the past, and correct me if I'm wrong, it seemed the Company usually says about one-third are from cold calls, one-third are from the CPA referrals, and about one-third are from the customer referrals.

Has there been any change in how you're acquiring the clients, just from a distribution standpoint?

Actually, it's one-third CPAs, one-third clients, and the other one-third is -- I wouldn't necessarily call it cold calling.

It's what I call the scramble -- telemarketing, all kinds of stuff, bank channels, those things.

The only change we're seeing a little bit of is more people go to the Internet to buy as opposed to talking to their friend or somebody in business, which is why we've had to switch more of our marketing money into Google.

So I think we're -- basically, the Google is picking up the part that's missing there.

Julio Quinteros, Goldman Sachs.

Just real quickly, John, on the metrics, what was the clients attrition metric for the quarter?

We didn't give it.

Better.

We'll give it at the end of the year.

Got it.

And then, the flat new sales number that you guys reported for the quarter, that -- how did that compare to your plan for the February quarter?

You know the guys we work for, you know the guy that used to run this place?

He doesn't accept flat in the plan, so obviously we were [off].

I'm not sure it was realistic, but we're not happy with where we are.

We'd rather be up, but at least we're moving in the right direction.

But I can't imagine Paychex ever having a plan that has negative client growth in it.

It won't.

Got it.

And then, looking at the margin guidance that you guys gave for fiscal 2011, there was a buildup that included some benefits from platform efficiencies, et cetera.

As you guys begin to think about fiscal 2012, thinking about the puts and the takes for the margin profile of fiscal 2012, other than some of the -- getting the revenue growth to give you guys a lot more leverage, are there any other plans, like platform efficiencies, that you guys are thinking about that should be an additional driver to margins as we start thinking about fiscal 2012?

We're working on things all the time.

That platform efficiencies is far from done.

Basically, our overall commitment is that whenever service revenue goes up, operating income excluding floats has got to go up more, and we're trying to get to two to three points' difference, and right now two is probably more realistic only because you don't quite have as much revenue growth, but that's our culture.

A day when revenue growth and operating income growth are the same will be a day that we're not very happy.

At the same time, I think it's important that -- and John has mentioned this before, as we get that productivity, we drive a lot of it -- a lot of the savings back into the development, the IT development and so forth.

So we're very focused, particularly over the last couple of years, of driving some of the productivity -- drive some of the margin, but much goes back into investing in new products and new development.

Yes, our investment in IT is up double digits.

And then, lastly, the -- I realize that the fiscal 2012 guidance around the interest on -- sorry, the combined interest on funds, et cetera, some of that has to do with the yield.

But what is the expectation for the actual growth of funds held for clients in the down 8% number that you talked about for fiscal 2012?

I'd say 4% to 5%.

Positive?

Wage inflation and some other stuff.

But that number doesn't generally change it too much, especially on (multiple speakers)

So you are expecting growth in that number?

Minor.

Not big.

When we estimate this float number, I'd tell you that those two [beats] will go down eight.

We won't be off much.

We estimated this year -- I can't remember what the estimate was, but it's almost dead on what we thought it would be.

Oh, sorry, since you guys mentioned tablets, my hardware guy would kill me if I didn't ask you guys, how many tablets deployed are there and how much further would you have to go in your sales force?

The payroll sales force is basically complete, and so that's 2,500 reps in total of the payroll sales force, just under 2,000.

So we've done over -- just under 2,000 at least, and then the other sales forces continue to have it.

We rotate so many -- we push so many each year, but we made a concentrated effort this year to probably put close to 2,000 out here in the last four to five months.

Got it.

And I think if I heard you correctly, you guys say you integrate that with your Salesforce.com platform for lead generation?

That's correct.

As well as an online order taking.

So with these faster tablets, it's easier to -- we basically now, over the last six to 12 months, can go out to a client, take the order, put all their information on the tablet, and turn it around and have them sign it, and then send it right to operations, which has given us some productivity as well and improved the sales process.

Jim Kissane, Bank of America Merrill Lynch.

If you guys look out over the next few years, in terms of retention, do you think the retention rate can exceed your previous peaks?

Given what you said about client satisfaction being at all-time highs, and also the fact that MMS (multiple speakers)

I would say there's a chance it can get better.

Yes.

But I meant, I think your previous peaks were maybe a little over 80%?

81%.

Okay.

So then when you throw in MMS, I think, John, you said that was a, what, $400 million business now?

MMS is better than that.

But if you do it on revenue, the 81% would be better, too.

If you did it on revenue, the number gets down around -- gets up to about 84%, 85%.

But I don't think -- now while I think it can get better than 19%, do I think it's going to 15%?

No.

But you've still got a big percentage of that being out of business.

So, the ones we can focus on are the ones with client satisfaction, price, things like that, product feature functionality, but there is a big piece of that that's just out of business or nonpayment because they don't have employees.

Okay.

Any sense on market share during the busy selling season?

Did you maintain?

I think some feeling now think you lost share during the quarter?

I don't think we lost share, but ADP probably -- we don't steal as much from ADP as we used to because they've just gotten so aggressive on pricing, but that seems to have calmed down, so I think this is starting to abate.

I think it's fairly even.

I think we take -- we used to be a little bit ahead on the net, from what we could see, and now I'd say it's pretty even.

(Multiple speakers).

We still take more from them, but it used to be bigger.

Okay, and how about the local and regional (multiple speakers)

The local and region, we've gotten better.

The new pricing method worked on that.

Now, there will be some specific ones that might not be better, but overall, we are doing better against the local and regionals, yes.

Okay, and just one last one.

On SurePayroll, what was the revenue contribution, and just the early read on the performance of the business?

Well, the early read is, I mean, there were $23 million in -- I think the only number we gave was their 2010 calendar was $23 million, which was very close to what we expected, and the early read on the business is very good.

No surprises.

They run a very good business.

Doesn't seem to be a lot of overlap.

We've got a lot of talent there on the marketing side and a number of sides, in their sales, their inside selling force, and so we're very pleased.

Gary Bisbee, Barclays Capital.

You know, I guess you said that MMS is approaching $400 million.

I think you last broke this out in fiscal 2006, and if I look at that and sort of back into what the growth has been in the core payroll ex-MMS, it looks like it's basically been zero (multiple speakers) over the last five years.

Can't look at it that way.

Over one-third of my MMS comes from core.

Okay.

And is that on -- how much on any given year?

Is there any way to --

It amounts to a third every year (multiple speakers)

Almost a third.

Yes.

And the $400 million is not an exact number.

So if you're going to try to look at that and determine an exact core number, it's going to be like throwing a dart.

We've also added a number of products and functionality in there that we include in that.

So you've got the HR, the time and attendance, a lot of things are on that MMS space.

The other problem with the MMS, when you want to look at it this way, is while we say MMS is 50 and above, it really isn't just 50 and above.

It's a platform that requires more complication, more features, and some of it is because it wasn't in the core platform.

So now what we're starting to do is the core will now start to take some away from the MMS platform as the new core platform has more features on it.

So while we can say that's kind of what we're doing upmarket, we kind of look at them together more and more now as they're going together more and more.

Okay.

And then, on the HRS revenue, it sounds like there was a little bit of a benefit this quarter from the PEO that reverses next quarter.

But when we look at the whole year and try and think trendline, is this business -- is the more normalized growth now 10% or 13%?

Which is a better proxy if (multiple speakers)

Well, the year is going to be between 10% and 11%, so the 13% isn't the right proxy.

But, you know (multiple speakers)

I thought in the first half of the year you lost money from having sold Stromberg last year and you talked about (multiple speakers)

I'm factoring Stromberg out of that.

I don't put Stromberg in.

So, we're saying 10% to 11%, and you're in an environment that has got to be better than that.

I think the longer-term goal for HRS is still in the 13% to 15% range.

But this is an environment that we can get double digit in, but we haven't proven we can get a lot more.

But a lot is going to depend on how well healthcare does.

Okay, and then, just on the operating expenses, you said it would likely be up in the fourth quarter, despite the revenue being a little lower.

I guess full quarter of costs from SurePayroll is one thing, but anything else in particular?

No.

It really relates to the selling costs are higher in the second half.

You also look at the second half, and you've got all the year-end, third-quarter stuff.

The lowest margin quarter is almost always the fourth quarter.

We add salespeople.

We do other investments.

It's just the way the year runs.

See, what happens is you start off the year, you do the price increase.

All the operating people sit on that, adding people, eventually do add some of them, and it just -- it's how it's worked -- it's worked that way for a long time.

Okay, and then just one last one, and you're probably going to tell me I'm getting too cute with the question, but when I think about the revenue commentary for the fourth quarter and think that you've got a full quarter of SurePayroll, which seems to me it's a percent or so contribution to the quarter, it feels like you're calling for the payroll revenue to decelerate quite a bit.

Is there anything that would cause that?

I wouldn't say quite a bit.

I mean, SurePayroll is going to be less than a percent of the revenue for the year.

So, it's (multiple speakers)

I guess if you divide the $23 million by four quarters, right, and --

It's $5 million.

Yes, it's $5 million or $6 million.

Divide that by last year's revenue number in the fourth quarter, you get 1.2%, so it's less than 1% for the year and maybe 1.2% is insignificant to you, but the guidance seems to -- so if you back that out, it seems like after a 2.3% growth in payroll revenue, that's got to fall to 1% to get to the service revenue below (multiple speakers)

(Multiple speakers).

Payroll revenue will fall sequentially in the quarter.

It will happen.

(Multiple speakers)

Is SurePayroll -- is that all in the payroll line or is any of that revenue and (multiple speakers)

It will all go on the payroll line.

Giri Krishnan, Credit Suisse.

Question for Marty.

I know you've spoken in the past -- in the recent past about this heightened focus on marketing, and you've made a few -- a couple of key hires.

Could you maybe speak to what's being contemplated in terms of changes in your strategy or what we should keep an eye out for?

Yes, I think the focus on the marketing is a number of things.

One, lead generation is the most critical thing that the team is focused on now.

I think we've done a pretty good job, but I think we could always do better, and by bringing in some professional marketing experience, like Andy has, both in the payroll and a number of other industries.

How are we best doing with lead generations?

Are we getting the most out of them?

We have a great sales force out there, but you can always give them more leads, and are we capitalizing enough out of the CPA market, out of the banking community, out of current clients, and off the web?

And so, he is spending a lot of his initial time here, just in the last three or four weeks, focused on that.

The next would be the brand.

We have a strong brand, but it's not always known as much other than payroll.

It's very strong on payroll, but outside of payroll, when we have this full suite of products to complete HR outsourcing we've been doing for many years, and I think we need to capitalize more on that brand, and he will be focused on that.

In addition to that, he'll be focused a lot on more competitive intelligence.

I think it's something that we have not had as sound a process in before, knowing what competitors are doing, where the best new opportunities are coming over the next few years, and he's spending time on that.

So, Andy has his hands full.

But he's got a very good team there, and I think those will be some of the things we'll be focused on right out of the gate.

Okay, and then a quick follow-up on the new business starts, or the outlook.

At this point, is this based on speaking with clients?

What do you think has to change?

Is it better access to credit, relatively fewer concerns about macro, or what is your sense based on what you've heard about just the outlook going forward?

It's hard to say because the guy that starts a new business, we are not talking to him.

We don't see him.

We see our existing clients, but they are not the ones who would start them.

They might add an idea or something, but -- so it's hard to tell who would tell you that.

Vishnu Lekraj, Morningstar.

Quick question here on your returns on capital for your payroll service.

With the focus on growth and the acquisition of SurePayroll and your pricing and your product mix changing a little bit, how should we think about returns on capital and free cash flow growth moving out beyond this year or next year?

Not much change.

I don't see anything that -- our net income or -- it's almost -- everything falls [with] line on cash.

I don't see any accumulation on the balance sheet.

SurePayroll won't change that, all the characteristics are the same as ours.

So, I don't think any of that's going to change.

Even with the greater investment in infrastructure and maybe training of sales folks, and things like that?

It's there, but it doesn't distort it enough to change those numbers very much.

Got you.

Given the modest decline in -- just back to some market share things, given the modest decline in your customer base, there's been some talk from some of your competitors, not necessarily ADP, but some other smaller folks that they're taking share, and you said that's nothing to be concerned about.

But moving forward with the acquisition of SurePayroll, maybe some businesses wanting to do things more online or do it themselves, do you see the situation changing a little bit in terms of what clients may need or want?

Well, we definitely acquired SurePayroll to get at a market we can't get at.

The do-it-yourself market, which -- there's about 5 million businesses in the U.S.

that do payroll with a pencil or a pen and a memo basically from the government on how to do it.

And we couldn't get at that market.

They want to do it themselves, and we don't have anything to offer them.

So that's where SurePayroll will focus on that.

The small outsourcers that -- I don't know how a small outsourcer can actually know whether they are getting share.

Most of them are local and regional.

There's only about two or three payroll providers that have more than 50,000 clients.

So they can look at what they're doing, but that can be all over the map.

Some of our -- when we had the advantaged licensees, some of our best licensees actually didn't sell a lot of new accounts each year, but they didn't lose hardly any.

They just had a business that was more stable, and we had some licensees that were -- they were pretty profitable.

I think as far as product and functionality changes, I don't think I've ever felt better about our product set.

At the low end, we're on the new platform now.

It's working extremely well.

It's driving productivity.

It's giving -- we just introduced online W-2s and pay stubs in November.

We've revised the online reports.

More clients are using our online reports and the flexibility and Web interface.

The midmarket has got more functionality and integration than it's ever had, and we're continuing to invest quite a bit in that, and we're seeing changes come out about every six months.

In the functionality and value, we've introduced new time clocks.

I think actually it's tougher and tougher for the local providers to compete with us, and that's where John said, I think we've seen some wins there.

So, I've never been more pleased with the product set we have and the roadmap for where it's going.

Mark Marcon, Robert W.

Baird.

A lot of the questions have been around new sales.

Wanted to take another look at that.

What are you seeing in terms of salesperson efficiency?

When you take a look at the number of closes on legitimate leads, are you seeing any variance there relative to historic metrics?

The closing rate actually is up a little bit, so we're feeling better about that.

I think it's -- as we've said, without the new business formation, you have fewer leads, then, to go on.

But we are feeling that -- from the data we have, that the closing ratio is moving up, and that's a positive thing.

So when we have referrals from CPAs or current clients, or even going into a competitive situation from a Google lead or something, the closing ratio is generally up.

So we're seeing that their productivity, the tools, and the training that we are giving them is starting to improve, and -- or starting to help them improve, and it was -- if they had more leads, we should be doing better because they'd be closing more of them.

Great.

And then, can you talk a little bit about when you take a look at the new clients, can you talk a little bit about their relative size to prior year?

So it sounds like this year, in this quarter, we probably closed fewer new clients ever so slightly than we did a year ago.

Are they roughly the same size as a year ago or are they slightly bigger?

Slightly bigger.

Okay.

Which is a positive.

And then, are there any regional differences that you're seeing?

We're seeing a few small differences but -- in new business formations by state.

Are you seeing those?

No.

We don't look at it too much that way.

But when you go talk to branch by branch, unless you really get to some of the places in the country which are hurt worse, but even Detroit is doing about the same as everybody else.

Really?

So you're not seeing that much of a difference?

No.

Not too much.

I think the states where the housing growth was hit so hard, I think that's still slower to come back because -- but even there, you're starting to see more building going on, in homes and so forth, from the data that we see, and so we do think, hopefully, that will start driving those contractors, landscapers, painters to start up more businesses, restaurants, and so that looks like that's starting to come back.

But generally, those are still the states and the regional areas hurt the worst, where the housing got hurt, the small businesses stopped because there wasn't demand, and it hasn't really come back yet, although the building does seem to be starting to come slowly.

And did SurePay end up growing their number of clients?

Yes, they grow it every year.

They were pretty close (multiple speakers)

How much?

Historically, they've grown around 20%, and I don't see any reason why they wouldn't continue to do that.

Is their client profile different?

Are they less dependent on new business starts?

Well, they're in that market that's trying to get people that do it with a pen and pencil to switch to a computer.

So they're probably not as dependent on new business starts.

Right.

I don't think they are.

I think, as John said, they are someone who is usually doing it one way and wants to go online.

I don't think they are quite as dependent on new business starts as we would be.

It's also different when you've only got 30,000 clients and you've got 550,000.

Sure.

And then, with regards to the new clients that you sold, exclusive of the ones that were brand-new business starts, and I recognize that that's a big portion of the clients that you sign every year, but exclusive of that, did that number improve year over year?

I don't know.

I think they all stayed about the same.

We didn't really see any big difference in anything.

Glenn Greene, Oppenheimer.

First question.

I just wanted to talk about -- I think part of your sort of sales changes you made in September might have been tightening discounting that might've been available to your sales force.

I was wondering as you went through the sales season, the February sales season, and sort of saw the new business formation being tough and maybe still pretty aggressive competitive pricing, did you have to give a little bit more latitude on the discounting?

We gave them a little bit more flexibility.

I have to say it was probably more regionally that we saw issues like that.

But there was a little bit more flexibility given.

Okay, and then, on the customer attrition, is it fair to say it's still -- I know it improved, but is it still sort of the 22%, 23% range, and maybe you could help us with the composition of that, like how much is bankruptcies versus, let's say, competitive or (multiple speakers)

Bankruptcies are still a big portion.

I think it's right around the 22% -- might be down to 21%-something.

Bankruptcies is what, 60%, 70% of that, maybe?

I would still say it's 60%.

That's improved quite a bit.

That's the one that, as you would expect, would improve with the economy.

But as a composition in total losses, pretty much still the same like that, yes, about 60%.

Okay, and then, I know you sort of talked about -- we know that you had the 3% price increase heading into this year.

Any reason to think that that's not a realistic range for the existing base heading into next year?

No.

So it's still sort of the same?

Yes.

And then, maybe, John, just for final question.

Just help me understand this and reconcile this.

If the new sales is -- sounds like it was relatively flat to slightly down and the customer attrition improved, I'm just trying to conceptually sort of a reconcile to the 1.6% down client number.

I didn't sell as many as I lost.

And last year, I didn't -- I sold fewer than I did on the loss.

The losses came down.

Next thing is, when we talked about revenue from payroll in the fourth quarter, the comparisons year over year starts to get a little more difficult because checks per client made its first positive move in the fourth quarter a year ago.

Jim MacDonald, First Analysis.

Most of my questions have been answered.

But on checks per client, your growth rate is much higher than the general economic growth rate.

How -- just give us some thoughts on how high can that get as the economy improves here?

Well, as we've said in prior calls, normally it's flat, except for downturns.

So, this is kind of new territory we're in.

I think some of it is because the job losses got so severe, and we don't have new business starts coming in, which would be smaller businesses, which would take my number down.

I don't do this on same-store sales because I can't do it.

I could do it, but not very well.

I've got too much churn.

We basically take the number of checks that were written during the period and divide it into the average client base.

That's how we do it.

Just a quick follow-up (multiple speakers)

You've also got to remember, we're in the down market.

So if you took -- take the total employees that we're in the market of, it's about 30 million to 35 million, so we're not -- when you start talking about the whole U.S.

economy, we're in the -- we're at the bottom.

So when they do all those other numbers, there's a lot of stuff in there that we don't even see.

Could you just talk a little bit about the impact of increasing MMS, which should help the number, but also maybe will SurePayroll, as that factors in, start to hurt the checks per client number?

It could.

But again, if I've got more clients, I've got more checks, so I don't really care.

Now that's also -- when we give this checks per client, we give this when the economy is bad and through these changing times.

Eventually, we'll stop giving that number because people analyze it and read things into it that it may not mean.

We've done that before.

We gave it in 2002 and 2003.

I can remember when we stopped, and then we returned to giving it when we got in this recession.

So, when it's an indicator and we think we've got a measurement that you can look at and make some sense out of, we give it to you.

But once it starts getting all over the map because everyone wants to hang in this number, they overreact.

The world sometimes moves on something that is -- it's infinitesimal.

Tien-Tsin Huang, JPMorgan.

A couple of clarification questions.

You discussed new unit sales, I think, in the press release.

Is that different from new dollar sales or bookings and dollars?

I'm just curious.

Never said anything in dollars.

Just said the units were about the same.

So you haven't given a dollar number.

It was units in terms of client units.

Right.

Okay, so you can't give us (multiple speakers)

I don't even remember the dollar numbers.

I was wondering, is there a way for us to think about -- is there inflation in terms of the dollar value of the units sold?

You've got price increases.

You've got all things going.

But you've got to remember that the base is a different place sometimes than in this business [zone].

Right.

No, and I appreciated that.

It was more just a question of are you -- it's some of the layering on of some of the higher incremental margin things like 401(k), et cetera.

That's where I was going.

Well, that stuff still happens.

We do that and we continue.

But not a lot has changed very much, not a lot usually changes in this business.

Now, on the other hand, we haven't talked about this in a while, and when you look at new business sales, one of the reasons you look at this and say, well, how much impact is it going to be?

We're still in a situation where what we sell during the year is not a significant part of revenue.

(Multiple speakers).

It's really more for the out year.

It's more for the following year.

But we can look out and people ask us, what do we see next year?

I know somebody was worried that we're going to be sitting on flat.

We're not going to be sitting on flat.

We have a pretty good look.

Both the good news and the bad news for us all the time is when you look out 12 months, we know about what it's going to be, and sometimes you like to be better.

Not easy to do that.

It's also not likely to be much worse.

Got it.

I appreciate that.

Just another clarification, just the asset value of retirement services?

I think in the release, it was up 25%.

Is the revenue you're getting in line with that growth in assets under management?

Or are you seeing some price compression there?

(Multiple speakers).

It would be, except that more and more people are shifting off that payment method.

Oh, really?

In other words -- well, they are not all paying off the assets and there's legislation going on.

That's just going to be a big change.

But we've evolved our products towards these other choices deliberately and we get fees differently, so we don't feel we're at risk on this.

We're still getting revenue from these things, but we've moved around, so we don't believe it's going to be a big change.

Okay, so maybe we should focus less on that and more on a blend of that and the units that you give.

Yes, yes, yes.

And that's been a gradual change over the last three to four years.

All right, last one from me.

I promise.

Just PEO.

What's happening on the PEO market share?

I know ADP has been pretty consistent in talking about growing in the mid-teens.

The problem is that you can't compare the two because their PEO is their primary way of going to market on full outsourcing.

Our primary method is our full outsourced product.

The thing you have to look at is how many worksite employees are we servicing?

They don't tell you how many -- well, they tell you and more of theirs are in the PEO than mine are.

They pushed the PEO more outside the floor than I do.

But we were one of the first ones to get to these products.

We were the first one to offer it outside the PEO environment.

And as a result, we still think we have as many worksite employees as -- almost as many as the next three combined.

And we rolled it out nationally a few years ago, really, and between the ASO model, the PEO model, and the new HR Essentials, it's continued to grow pretty strongly.

14%, 15%.

I think they do a good job of running their PEO and I think sometimes the other two have issues.

I won't go into detail about them, but ADP does not seem to have those issues, so I think they've got a well-run PEO.

They're just in the PEO environment a little more than we are.

Our final question comes from David Parker of Lazard Capital Markets.

Thank you.

Good morning.

You talked about the client base decreasing 1.6%, but showing some improvement.

Can you talk about the visibility of when you anticipate the crossover to occur and when you start showing positive growth?

Should it be next quarter?

Should it be early in fiscal-year 2012?

I didn't say I would get to positive growth.

I guess basically said when I measure year over year at the end of the fourth quarter, I think the decrease, and there would probably be a decrease, will be less than 1.6%, okay?

When do you get to a crossover?

This gets a little bit complicated because we have gotten over the crossover.

The first six months of the fiscal year, client growth is usually relatively stable, and for the last couple of years we've actually had slight increases, very slight increases.

But the big season is the selling season in the third quarter.

It's also the big loss season.

And new business starts up there, it makes it a little more challenging, but it's getting better.

And then, in the fourth quarter, it's important to us because that's when our normal selling season hits again with people being at the end of the year, which, because of new business starts, that's also been a little more difficult.

So it's a little bit seasonal, but we expect to see improvement.

I'm sure we're going to have a financial plan that's going to go for positive.

We're going to do all those things we can to get it to be positive.

But I wish I could tell you when I thought it was going to go positive, but I don't know.

But I do know that whatever the client growth you build into a plan is, our goal is to make the plan, and in this fiscal year, we obviously will be below our plan in client growth, but when it comes to making the profit, we'll make it.

Thanks for that color.

Just looking at checks per client, you did mention that the comps get more difficult going forward.

Do you still anticipate trending in that 2% to 3% range?

No, I would expect it'll be something less, but again, I -- we're already in areas where it's better than I thought it would be, but sometimes you get too pessimistic about it.

So we're still optimistic it's going to go up.

But as you've got to go against the tougher comps, I don't think it'll be at the levels it's at, but I still think it will be positive and more positive than we generally see.

So, we'll see what happens.

That will really start to change a little bit when new business starts to come back and we'll be so happy for that we won't care about the [change].

We'll care about them, but it won't be to the same degree.

Just final question.

Marty, I don't remember if you provided any update on, just, partnerships on the merchant processing side?

No, I actually didn't.

We're moving along on something there that we should be able to announce here in the next couple of months.

But we're continuing to move down that path and we think it's going to be a nice product add for our sales folks as they take it out to the street.

But I'll have more to say on that probably in the next 60 days.

This concludes the question-and-answer portion.

I'd like to turn it back to you gentlemen for closing comments.

Okay, I want to thank everybody again for their interest in Paychex.

I thought we had a good discussion here, and a lot of the discussion was on areas we are real happy with, and obviously we've got some things we are working on.

And the other thing we'd like all of you to work on, when I look out this window in Rochester right now, I played golf a week ago on the weekend, and right now we've got about half a foot of snow on the ground.

So hopefully by the next call, that won't be here.

So, thanks a lot, and I hope you all have a great day.

Thank you very much for joining us.

This concludes today's conference.

Thank you for your participation, and you may disconnect at this time.