沛齊 (PAYX) 2011 Q4 法說會逐字稿

Good morning and thank you for standing by.

All participants will be able to listen only until the question-and-answer session.

This conference is being recorded.

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

I would now like to turn the call over to Marty Mucci, CEO of Paychex.

You may begin.

Thanks, Kathy.

Good morning, everyone and thank you for joining us for our fiscal 2011 year-end earnings release call.

Also joining in the room here today with me is John Morphy, our longtime CFO and Efrain Rivera, our new CFO effective June 1, 2011.

About a month ago, John announced his desire to retire from Paychex.

I would like to start by thanking John for providing such great financial leadership for Paychex over the last 15 years.

During that time, John has seen tremendous growth here at Paychex.

Revenue has grown from $300 million to over $2 billion today and more importantly, profits have grown from $55 million to over $500 million in fiscal 2011.

Paychex is also well-known for the financial transparency in the filing of SEC documents on the same day as the press releases that John has been responsible for leading the path to that.

John is also the only second CFO in Paychex history and I really want to thank him for his accomplishments and wish him and his family all the best in the future.

He will be sorely missed and has really driven great integrity and financial performance here at Paychex.

We have been very fortunate to find a very capable replacement in Efrain Rivera, our newly appointed Senior Vice President, Chief Financial Officer and Treasurer.

Efrain is a senior financial executive with more than 20 years of experience in finance and accounting, in business leadership as well.

He was most recently the Vice President of Finance and Administration for Houghton College.

Prior to that, he served as Vice President and Chief Financial Officer for Bausch & Lomb headquartered here in Rochester.

We are very pleased to have Efrain join Paychex.

Efrain and John will be working together until the end of the calendar year making sure there is a smooth transition.

I appreciate John's help with that and especially with our Wall Street relationships.

They will be scheduling non-deal roadshows with analysts and investors and starting toward probably the mid to end of the summer, they will be getting out, being sure to get in front of everyone certainly on this call and beyond.

I would like to just take a few minutes before I start my (technical difficulty) to let Efrain introduce himself and give you a little bit of a background.

Efrain?

Hi, thanks, Marty.

It is a pleasure to be with Paychex and to be with you this morning.

As Marty indicated, Paychex, through John and his efforts, has set a very high bar for financial transparency and accuracy.

There is a lot of best practice that occurs in Paychex and that is a Company commitment.

We will continue to meet that and continue to operate in that way.

I look forward to meeting you in the upcoming months.

I was fortunate in my career to manage the investment relations function at a very early point.

I learned the value of looking at the company from an analyst perspective and I look forward to having those discussions and that dialogue with you in the future.

And now I am going to turn it back to Marty for his comments.

Thank you, Efrain.

We are very focused on executing our plans to continue to be the leading provider of payroll and human resource and benefit outsourcing to really America's businesses, that is the small and medium-size business market.

Our focus continues to be on driving growth in terms of clients and revenue and profits while continuing to provide exceptional service and value to our clients and their employees.

We are pleased with the financial performance for 2011.

While John will go into more detail, I'd like to give you some highlights.

Our checks per client, revenue per check and client retention all have demonstrated consistent improvement over the previous year.

Checks per client have improved for each of the last five quarters and client retention for the last seven quarters.

And while still experiencing a slowly rebounding business environment, we did see some improvement in payroll sales over the latter part of the fiscal year.

We have also enjoyed a 5% increase in the 401(k) client base even net of our ePlan acquisition.

While continuing our product development investment in what we call Paychex's next generation, we are able to achieve strong operating margins through the continued increased productivity in our operations.

We have completed two important acquisitions during 2011 to bolster our future growth opportunities.

SurePayroll with over 30,000 clients provides us with an entry into a new segment of the payroll online market, a segment positioned to grow as the 5 million small businesses who calculate their payroll manually move to the Web.

Paychex already has over 50,000 clients with online input available to them, but SurePayroll with their SaaS, software as a service-based model, will offer another alternative for those clients looking to be -- to have more of a self-service alternative.

Both companies offer quality service and from a client control standpoint, Paychex will now be able to offer a full range of outsourcing payroll alternatives.

Clients who want more control have SurePayroll where clients who want a high level of personal interaction with a dedicated payroll specialist have the Paychex model that we are known for.

EPlan Services was our other acquisition.

It provides us with an opportunity to further penetrate the 401(k) market where we have been the leader and this will help us in the financial advisory marketplace, one opportunity that we feel is growing more and more in the 401(k) business marketplace.

We are also pleased with the efforts of our employees on many fronts.

Client satisfaction results continue to be at the highest levels in our history in both the core payroll and major market payroll markets.

Our employees remain dedicated to our client satisfaction and being an essential partner with those clients and their employees.

We have recently been recognized for having the most new 401(k) plans sold for the eighth year in a row and for the first time recognized for having more 401(k) plans than anyone else in the industry.

We service 1 in 10 401(k) plans in the US and the assets are now valued at over $15 billion.

Over 567,000 client employees, up 13%, utilize Paychex HR Solutions services with both a national PEO and an ASO model for HR outsourcing and we have included -- including our new service alternative, which we started in the last fiscal year, called HR Essentials, which is telephonic support, we now service also over 100,000 insurance clients through our insurance agency and $1 billion in premiums.

During the first-quarter call, I discussed -- we discussed a number of new core payroll sales initiatives that were planned to be implemented.

All the initiatives have been completed, including the pricing and packaging enhancements and changes to our training programs to expand the knowledge and selling skills of our new sales representatives.

We have also made a number of changes to bolster our field sales management team.

We are fully staffed in all sales positions and have completed the deployment of the latest in technology to support our sales teams with new tablets and improve their efficiency and production and have moved to new compensation plans, which have been recently rolled out for the new fiscal year that are designed with our sales leadership to attract and retain the best sales candidates, simplify the calculation and payment of commissions and focus on driving more revenue.

I have also continued -- I am continuing the interviewing for a Senior Vice President of Sales.

As you know, I made a selection in the last few weeks, but for unforeseen reasons that did not work out.

However, that search continues very actively.

The Sales Vice Presidents in all of the payroll and HRS markets have reported to me since I took the position of CEO back September 30.

And as you can see by the initiatives that we have now implemented, no one is standing still.

We have made all of the changes that were on our list when I came into the job and I am very proud of the Vice Presidents, all of which have over 20 years of experience and the work that they have done to position us well for fiscal 2012.

We have also, as you know, added two other Vice Presidents in addition to Efrain in the CFO role.

Andy Childs joined as the Head of Marketing and Laurie Zaucha started as the Vice President of HR and Organizational Development, replacing Will Kuchta who will be retiring in October.

Both have added a significant amount to the team already in the short few months that they have been here and are fitting into the culture extremely well.

We have also recently announced that we have expanded our long-standing strategic alliance with CPA2Biz, a subsidiary of the American Institute of CPAs, through 2016.

Paychex has been a flagship service offering of the AICPA Trusted Business Advisor program for many years and remains the preferred payroll and retirement services provider for the AICPA members and their clients through this relationship.

This is very important to us as the CPA community is a respected partner and their support and stamp of approval is critical to the businesses that we both serve.

In summary, I would like to tell you I am very proud of the employees at Paychex and the work they have done.

I am extremely proud also of the leadership and how they have committed to making changes to get us back on a strong growth track for fiscal '12 and I would now like to turn it over to John Morphy to review the financials in more detail.

John?

Thank you, Marty and Efrain.

It's a pleasure to be here today.

Yesterday afternoon, after the market closed, we released our financial results for the fiscal year ended May 21, 2011 and we have also filed a Form 8-K, which provides additional discussion and analysis for the results for the year.

These are available by accessing our Investor Relations page at www.paychex.com.

We expect to file our Form 10-K by the end of July.

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

As Marty stated, we are very pleased with our financial results for fiscal 2011.

We have experienced favorable trends throughout each quarter of the fiscal year and here are some of the key highlights.

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 reflected an increase of 2.1% for fiscal 2011.

This compares to a decrease of 2.6% for fiscal 2010 and 2.9% for fiscal 2009.

We have been very pleased with the strong results in checks per client we experienced this year with increases of 1.2%, 2.5%, 2.8%, and 2.0% for each sequential quarter.

As you move into next year, we expect the growth percentage to be lower, but remain positive.

Over a longer period of time, checks per client tends to be very stable.

Our payroll client loss rate for fiscal 2011 improved 2 percentage points from last year to 21% of our beginning client base.

Our range of client loss rate over the past 10 years has been from 19% to 24% of our beginning of the year client base.

Our client losses in 2011 were 9% lower than for fiscal 2010.

This was largely attributable to fewer clients going out of business or having no employees.

Losses to other local and regional competitors also showed good improvement during the year.

We acquired two online service providers this year -- SurePayroll, an Internet-based payroll service, and ePlan, a provider of 401(k) services to the financial advisor market.

Both of these acquisitions will expand our product offering and bolster future revenue growth.

The financial results from these companies are included since their respective dates of acquisition, February 8, 2011 for SurePayroll and May 3, 2011 for ePlan, and they were dilutive in the last fiscal quarter of 2011 by approximately $0.01.

The effect of these acquisitions on margin growth in the fourth quarter and looking forward into fiscal 2012 is expected to be approximately 1%.

Most of the margin diminishment relates to the amortization of intangible assets capitalized in conjunction with the acquisitions.

Our payroll client base increased 5.2% to 564,000 clients.

This increase was largely attributable to our acquisition of SurePayroll.

Excluding SurePayroll, our client base would have declined 0.9%.

Not exactly where we would like client growth to be, but an improvement over negative 3.2% and 3.1% for fiscal 2010 and '09.

Most of the improvement related to fewer client losses as new sales units were relatively flat for 2011 compared to 2010.

This is mainly attributable to the lack of growth in new business starts.

Although the sales environment has remained challenging, we saw a slight improvement in the latter half of the fiscal year.

We also saw improvement in sales to clients who previously utilized local and regional competitors.

Looking to fiscal 2012, we are expecting to move to the positive side of client growth before including SurePayroll clients, which are expected to experience higher client growth than the rest of our client base.

Our operating income net of certain items as a percentage of service revenue increased to 36.3% from 35.4% last year.

The equity markets hit a low in March of 2009 with interest rates remaining low since then.

The federal funds rate has been at a range of zero to 25 basis points since December 2008.

Our combined portfolios have earned an average rate of return of 1.3% for fiscal 2011 compared to 1.5% for fiscal 2010 and 2.1% for fiscal 2009.

Assuming no changes to current rates, we expect our returns will be slightly lower in fiscal 2012 as more of the long-term portfolio matures and is invested at lower rates.

We continue to make significant investments in our business, some of which are as follows -- double-digit growth in product development expenditures over the past few years.

In fiscal 2010, we implemented an enhanced platform for our core payroll processing capability, which allows us to leverage efficiencies and our processes and provide excellent service to our clients.

This enhanced platform has contributed to productivity gains in operations and thus aided our operating margin.

Over the next few years, we will expand this enhanced platform to additional service offerings.

In fiscal 2011, we are further investing in our MMS platform to provide even better and more fully integrated solutions to our larger clients.

We also introduced new products to our clients.

Paychex HR Essentials is a new ASO offering that provides support to our clients over the phone or online to manage employee-related topics.

Paychex Smart Time time clocks, our self-contained system that offers small businesses an economical, easy to use time and attendance system that integrates with our payroll offering.

The investments are producing results, some of which are as follows.

Our insurance services client base, which includes our workers' compensation insurance and health and benefit services clients, grew 8% and now exceeds 100,000 clients serviced as of May 31, 2011.

We believe insurance services is an area that continues to offer significant opportunities for future growth.

We are the premier supplier of 401(k) recordkeeping services as we have total assets in the plan surpassing $15 billion and 57,000 clients.

We are now serving 1 in every 10 401(k) recordkeeping plans in the US.

We continue to generate significant cash flow to support our business and have paid almost $450 million in dividends to our shareholders.

This represents 87% of net income.

Our cash flows historically exceed net income, which allows us to be comfortable with and committed to maintaining our current dividend level even though the recent payoffs are substantial as a percent of net income.

I would like to now move on to the consolidated income statement.

Payroll service revenue increased 2% for fiscal 2011 to $1.4 billion.

This has benefited from the increase in check volume and improved revenue per check.

Revenue per check increased as a result of improvements in discounting and our overall client base and price increases.

This has been offset somewhat by a 1% decrease in client base, excluding SurePayroll, as previously discussed.

Human Resource Services revenue increased 10% from fiscal 2011 to $597 million.

If we exclude revenue in the prior year for Stromberg, which was sold in October of 2009, HRS would have grown 12% in fiscal 2011.

The HRS revenue growth reflects modest improvements in economic conditions, client growth and price increases.

Some additional highlights of contributions to HRS revenue growth are as follows.

Paychex HR Solutions' client employees increased 13% to 567,000 employees as of the end of the fiscal year.

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

Our new product offering, Paychex HR Essentials, contributed to this growth in clients and client employees.

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

Insurance services has continued to grow as both workers' compensation insurance and health and benefit services had higher revenue in fiscal 2011.

Health and benefit services revenues continue the strong growth since inception, increasing 29% to $42 million driven by an increase in the number of applicants.

Our fourth-quarter growth rates for HRS were lower than the full year mainly due to PEO revenue and consistent with the expectations we disclosed last quarter.

Our PEO revenue is more variable quarter-to-quarter than our other revenue streams due to normal fluctuations in their business conditions.

Our guidance reflects 12% to 15% growth in HRS revenues and we expect first-quarter revenue growth to be within or very close to the annual guidance.

So the lower than normal growth in HRS revenues in the last quarter will return to normal in the first quarter of the next fiscal.

Combined interest on funds held for clients and investment income decreased 9% for the year.

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

Expenses increased 2% for fiscal 2011, largely due to personnel-related costs.

Our reinstatement of salary increases and a 401(k) match contributed to this.

We also continue to invest in our product development and supporting technology.

Productivity improvements in operations and lower headcount helped offset these impacts.

Additionally, expenses for the acquired companies largely impacted in the fourth quarter negatively impacted our growth rate for expenses.

We anticipate higher levels of amortization expense in fiscal 2012 will add to the intangible assets acquired through SurePayroll and ePlan.

Also during fiscal 2010, we have to remind you we recognized an expense charge of $19 million to increase our litigation reserve related to the Rapid Payroll litigation.

Operating income increased 8% to $786 million for fiscal 2011.

Operating income net of certain items, which excludes interest on funds held for clients and the expense charge in fiscal 2010 to increase the litigation reserve increased 7% to $738 million.

Operating income net of certain items as a percentage of total service revenue was 36.3% compared to 35.4% for the prior year.

Net income and diluted earnings per share decreased 8% to $515 million and $1.42 per share.

Our investment strategy remains conservative and we have not recognized or realized any impairment losses for our investments.

Our investments have high credit quality with AAA and AA ratings and short-term securities with A1/P1 ratings.

More than 95% of our portfolio is rated AA or better.

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

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

Our financial position remains strong with cash and total corporate investments of $671 million as of the end of the year and no debt.

Our cash flows from operations were $715 million for fiscal 2011, an increase of 17%, somewhat due to higher net income and the timing of working capital.

Funds held for clients as of May 31, 2011 were $3.6 billion compared to $3.5 billion as of May 31, 2010.

Funds held for clients vary widely on a day-to-day basis and average $3.4 billion for the fiscal year, up 6% over 2010.

In fiscal 2010, we have experienced higher average invested balances primarily as a result of the increases in checks per client and increases in state unemployment insurance rates partially offset by lingering economic impacts on our clients.

Our total available-for-sale investments, including corporate investments and funds held for clients, reflected net unrealized gains of $59 million as of May 31, 2011 compared with net unrealized gains of $67 million a year ago.

The three-year AAA municipal securities yield decreased to a low of 48 basis points at the end of our first quarter, rose to 110 basis points at the end of our third quarter and ended the year at 80 basis points at May 30, 2011.

Total stockholders' equity was $1.5 billion as of May 31, 2011, reflecting $449 million in dividends paid during fiscal '11.

Our return on equity for the past 12 months was again very strong at 35%.

Our current outlook for fiscal 2012 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.

We did include our anticipated results for SurePayroll and ePlan, which impacted service revenue by approximately 2% and have anticipated earnings dilution of approximately $0.01 per share, mainly due to amortization of acquired intangible assets.

Our fiscal 2012 guidance is as follows.

We project payroll service revenue will increase in the range of 5% to 7% compared to fiscal 2011.

HRS revenue growth is expected to be in the range of 12% to 15%.

Total service revenue is expected to be in the range of 7% to 9%.

Interest on funds held for clients is expected to decrease in the range of 12% to 14% due to longer-term investments maturing and being reinvested at lower rates.

Investment income net is projected to be in the range of flat to 2% growth.

This is lower than what we normally experienced as the cash outlays in the second half of fiscal 2011 for the business acquisitions.

Net income is expected to increase in the range of 5% to 7%.

Operating income net of certain items as a percentage of service revenue is expected to be in the range of 35% to 36% and our effective tax rate is still expected to be approximately 35% in fiscal 2012.

And just on funds held for clients and investment income are expected to be impacted by the continued low interest rate environment.

The average rate of return on combined interest on funds held for clients and corporate investment portfolios is expected to be 1.2% for fiscal 2012.

As of May 31, 2011, the long-term investment portfolio had an average yield to maturity of 2.6% and an average duration of 2.4 years.

In the next 12 months, slightly more than 20% of the portfolio will mature and is currently anticipated that these proceeds will be reinvested at a lower average interest rate of approximately 1%.

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

Under normal financial market conditions, the impact to earnings from a 25 basis point decline in short-term interest rates would be in the range of $3.5 million to $4.0 million after taxes for a 12-month period.

Such a basis point change may or may not be tied to 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 in fiscal 2012 are expected to be in the range of $90 million to $95 million.

Fiscal 2012 depreciation expense is projected to be in the range of $75 million to $80 million and amortization of intangible assets for fiscal 2011 is expected to be in the range of $20 million to $25 million due to intangible assets acquired from SurePayroll and ePlan.

At this time, I will open the meeting up for questions and we look forward to talking to you.

(Operator Instructions).

David Togut, Evercore Partners.

Thank you.

Good morning, gentlemen and congratulations, John and Efrain.

Thank you.

Thanks.

Good morning.

Could you quantify your pricing strategy for fiscal '12?

Basically we are up about 3%.

We expect most of it to stick.

That price increase was put in on May 1.

And that has now been billed and we've had no real significant responses from clients that would be cause for concern.

A year ago, we put a price increase in of about 3% and we got a little more than 2.5% of it, lost a little bit to discounting, but that compares very favorably to the year before when basically a 3% price increase was totally lost to discounting.

I see.

And then could you provide a little more granularity on the new sales performance in the fourth quarter of fiscal '11?

Yes, I think what we have seen -- I don't think we give out a lot of detail, but I think what we have seen is that there has been a positive increase in units, particularly in the small business market, which is where we have seen the most impact from not having new business starts.

So for the last three quarters, we have seen some positive -- I mean it has been slight; I wouldn't say it has been significant.

But we certainly have seen an improvement for the last three quarters of the units in the small-business environment over last year in total sales.

The new business formations, sales from new brand-new businesses, is still pretty much flat to last year.

So we are still waiting for that.

But what that is telling you then is obviously sales from taking share, other sources are coming in, the new business starts are still pretty flat.

And then what has been your head-to-head win rate against your principal national competitor in payroll services recently?

It is pretty flat year-over-year, so what we take from them and what they take from us has been pretty flat when you look at last year to this year.

It has not seen any significant change at all.

Thank you.

And just finally, given the earnings guidance you have given for fiscal '12, would you expect the dividend to move up in line with earnings growth?

That is basically a Board decision.

We are all pretty much in sync.

I am not sure what they will do.

They will make a decision on that at the July meeting.

Thank you very much.

They won't reduce it.

Okay.

Nathan Rozof, Morgan Stanley.

Hi, thanks for taking my question.

First off, Efrain, welcome.

Congrats to you.

And then also, John, best of wishes on your retirement.

Thank you.

Thank you.

I wanted to ask you a little bit about the number of payroll clients.

You mentioned I think in the prepared remarks that you see the number of payroll clients trending up in fiscal '12, but can you give us a little bit more color on the pace of the trend over the near and medium term?

What is the amount of growth you expect in fiscal '12 and when can it kind of get back to the 3% to 4% range that we saw before the downturn?

It's one of those things you have got to wait and see.

Obviously, last year, we did negative 1%.

And a year ago, we had a plan to get to positive because we [work for the founder that] -- a plan that [stays] negative, just you are not going to get one of those nor should we have one of those.

Now, fortunately, last year, some weakness in that was offset by stronger revenue per check because we didn't discount as much and the checks per client and we still expect to get the checks per client positive this year.

And the fact the client base declined isn't as much and we are not going into the wind anywhere near as much as we were a year ago.

So we are still optimistic, but a lot of it is going to depend on how much we can sell.

Both the salesforces and apps are challenged on trying to get the positive client growth.

I think there is a real good chance we will get the positive client growth.

I don't think it will get to 3 because I think this is something that is going to take a couple of years, but I think we are heading in the right direction.

We felt real good going from a negative 3% last year to only negative 1%.

SurePayroll will help us on this, so we are very committed to it.

At the same time, we need a little help from the economy.

Not sure what it will produce, but we are going to keep pushing and we are getting better and better at what we are doing on the sales front.

Yes, basically having seen negative 3%, negative 3%, then negative 1%, as John said, we are certainly pushing to get back to that 3% or 4% client growth, but it is going to take a little bit and a little help from the economy, but we certainly see it trending in the right place.

Okay.

And then you mentioned that, I think, that you are expecting to see a little bit stronger growth from the SurePayroll and the other recent acquisitions versus the core business.

Can you give us a little bit more color on what that delta is?

(multiple speakers) they have about 33,000 clients.

They have been growing 10% plus.

When we bought them, we surely counted on them to keep that growth going and that is a market that we really haven't been in.

With the Google expense, our name will help a little bit.

So we are looking forward to that doing quite well.

Okay.

And then just last question and I will let you go is given that now you have got two platforms that you are adding your incremental new clients to, will that have any sort of impact on the operating margin leverage that you get from each new client or is SurePayroll still small enough it won't have a huge impact?

Go ahead, John.

No, I don't expect that.

We basically are running right now with three platforms you can say.

We have core, MMS and SurePayroll.

Now the SurePayroll platform and the margins there are really designed to operate off the fact that revenue is lower on a pure Internet full service client and we can get to the same margins by not having the same cost.

Obviously, they are going to gain some advantages out of the knowledge we have in the payroll industry.

We have got a couple of things in their platform we have got to change.

We have got to get onto their tax calculation -- our tax calculation model as opposed to the ones they are basically [renting].

And the MMS platform gets stronger and stronger.

But as the core platform improves, eventually those two platforms will be merged.

So you can see the leverage benefits.

When you look at the income statement and you look at operating income percent after float, what's a little bit not really misleading, but what you can't quite see is we got some really good improvement in operations and invested some of that back into IT, both product and systems, as we invested -- actually our growth in IT expenses were over 10% the last couple years and the way we have been able to afford that yet not have significant increases in expenses is the margin improvement we are getting off the product.

So I think we have to continue to invest through good times and bad times, have been doing that.

You have seen improved margins and we will continue seeing them.

And as the MMS platform merges with core, we are going to get some more opportunities to leverage.

Great.

Thanks, guys.

Kartik Mehta, Northcoast Research.

Hi, good morning, gentlemen.

Marty, I wanted to ask a question, a follow-up question on the statement you made about client additions and I wanted to see if you could tell me historically where most -- how your clients have come?

From new business formations, from competition and just from people that used to do it by paper and pencil or where it historically compares now?

Well, it has been pretty consistent.

I mean about 50% of the new sales come from new business formations so brand-new businesses and of course the rest is either doing it manually or from a competitor.

And we break it kind of local competitor versus obviously the main national competitor.

It hasn't changed all that much so where we have picked up some is -- and particular from the local competitors, I think as our products as we have moved on to the new platform a few years ago, the new products as well as the online interface got even stronger and I think we have done better against them.

I think with ADP, we have done about the same from last year or the year before and it is the new business starts that are still a little bit slow.

Even that is flat as opposed to down so we are positive on that.

We just need to see more of the economy improving.

And so Marty, you and John both made a -- said that you are getting more clients from regional competitors or may be losing less and I am wondering why that is.

Is that because of the new pricing structure you have put in place or is there another reason for that?

I think there is probably two.

One is again I think the sales force is doing a very good job in identifying the value of a national competitor, the strength of a national competitor.

There has been a lot of issues with small -- many of the small competitors that are not public companies a number of them go out of business etc.

of the payroll companies and some take the funds and so forth.

And I think that is always out there.

I think sales has done a good job to sell the strength of what our company does and the value we bring.

I think also the new platform again that we went to a few years ago now and converted all the clients we are selling onto that platform.

It is more robust.

It has got a great online interface and I think that probably has helped sell it as well.

And then just a final question, Marty, I wanted to get your perspective on the economy.

Obviously there is a lot of talk about where we are headed over the next six months and your checks per client looked really strong and I am wondering if you could talk about what the trends were in May?

Were they consistent with what you saw in March and April?

And then just your overall perspective based on what you are seeing from your client?

I think, Kartik, it has been very consistent over the last few quarters that the existing client base is certainly looking stronger.

The checks per client, the revenue per check, the client retention, all of that is looking very positive for the current client base and that has been very consistent now for a number of quarters and the new formation is still as we have talked about is still what we are not sure of.

I mean I would say that it still looks like housing in general has some impact certainly on us because it is the landscapers and the restaurants and all of those that support housing.

But I have to say that in certain pockets of the country, we are starting to see the sales pick up and even a little bit on new business, not a lot.

So I would say current client base looks pretty strong and consistent and new business formations going by what we see is that that is still relatively flat, but obviously hoping that that will start to turn pretty soon.

So you saw pretty consistent trends all throughout the quarter then.

Would that be fair?

That's fair.

We have not --.

Thank you very much.

I'm sorry, Marty?

A lot of people talked about softening and I don't like looking at short-term results because you get calendar aberration, the calendar is not regular.

But even having said that, we haven't seen anything that shows any real weakening.

The thing is -- it is moving up at a snail's pace, but we haven't got one statistic that has gone backward yet.

Thanks, John.

I really appreciate it.

Tim McHugh, William Blair.

Yes, just wanted to ask, you mentioned a couple of things you are investing in and obviously you have been investing in the past year.

I guess the guidance assumes a little faster expense growth.

Is there any areas that are picking up, especially as we look towards fiscal '12, that you are going to accelerate or will it drive the faster expense growth or are you just allowing for more sales commissions?

Any more color on kind of the underlying assumptions there.

Okay, Tim, I will give it a shot and then have John talk.

But the investment -- the thing we are very proud of is, over the last few years, as we moved the core payroll client base over to the new platform, we continued to invest.

And so that platform, what we call Paychex next generation, we continue to invest in pretty aggressively for not only that small business base, but also for our midmarket space.

And we see that continuing and we are very proud of that and we have releases about every six months, so it is not something that there is a big bang impact either.

So we are starting to see additional feature functionality roll out.

The other piece of that I guess was there is some additional expense from sales as we revamp the compensation and found different ways to pay -- not only clarify the commission payments, but also pay a little bit more upfront to get, we think, even a moral qualified candidate and also retain them and with the help of the Sales Vice Presidents, I think we have come up with a very good plan.

It did increase expense a little bit on the sales side, but not too bad and then, of course, we put the 401(k) match, some of the 401(k) match back in and that increased it.

But overall, as John said, I think we drive a lot of productivity to fund those increases and maintain a very high margin.

Yes, I wouldn't say our philosophy changed at all [for most of departments].

You got two things.

When you assume you're going to have a good sales year, that bumps expense up and the other area is on the acquisitions.

So really if you looked at the rest of the departments, other than investing in IT pretty heavily, all the rest, they have little or no increases.

Okay.

And then I wanted to ask about the investment or the client funds balance for 2012.

Can we expect it to grow probably roughly in line with the payroll services growth or does state unemployment taxes not go up as much, so we should expect slower growth next year?

I would expect slower growth.

I would say somewhere between 3% and 5% and the function there is not as much client growth as it is wage inflation.

Okay, thank you.

Glenn Greene, Oppenheimer.

Thank you.

Good morning.

I guess the first question is for you, John Morphy, on just sort of thinking about the revenue growth outlook for both HRS and payroll services.

So maybe first on the payroll services, the 5% to 7% guide, and sort of maybe explain to me why I am thinking about this wrong.

But if I think of starting with sort of negative 1% customer growth exiting this year, roll in 3 points of pricing and maybe 2 points of acquisition, I kind of get to 4% or so.

How do I -- and I know it is not a big deal, but sort of bridge the gap to the 5% to 7%.

Well, you've basically have got minus 1% from clients, but you have got plus 1% from basically checks per client growth, but we are estimating.

So that gets you about neutral.

Client growth we will say it is low single digits.

The price is 3% and the acquisition is 1%.

So that gets you between 5% and 7%.

And our financial plan is -- when we give guidance, our plan will be pretty much right in the middle of those ranges.

Like one of the things that is an advantage after the Sarbanes-Oxley is a thing -- there are two things in Sarbanes that (inaudible).

One is a requirement that you have got to have a whistleblower line, but the second one is you have got to have audit committee meetings before all press releases and year-end financial disclosure.

And basically when we look at the guidance and the Board approves the guidance, we have to show them what the plan looks like, what the sensitivities are, the high/lows.

So if you see us change guidance that has got to be supported by a forecast that is very -- on the same [basis] we always prepare them.

So pretty much any of this guidance hits pretty close to the middle of what we think it is going to be.

Okay.

And then on the 12% to 15% HRS, which I guess at the low end is kind of close to what the organic was in fiscal '11 ex-Stromberg, but are there any callouts there or is there mainly --?

The [EDD] thing will add 1% to that and a lot of it depends on how things kind of go.

I mean we have done some good things over there.

We did some good things on the human resource, the full outsourcing.

We introduced a new product that kind of was in between full commitment and not having to pay as much.

We are really reenergizing our insurance business.

We have continued to do well, but we knew we would eventually run up to the point where just simply getting broker of record transfers becomes a little more difficult.

Kevin Hill who has a lot of insurance experience has done a great job over there.

We have kind of made a lot of changes in an orderly fashion that will get that going again.

The insurance products and property and casualty all continue to look good.

So we think -- we feel pretty comfortable in the 12% to 15% and I think we will be pretty close back to 12% if not only slightly below it in the first quarter.

So I am not too worried about the aberration in the fourth quarter.

It was what we thought it would be.

We talked about that last quarter.

The PEO is just lumpy once in a while and it was lumpy up in the third and lumpy down in the fourth, which what we expected.

Is there any seasonality issues like PEO seasonality issues we should be thinking about for '12?

The only seasonality we really get is in the third quarter when that is the heavy selling season.

Okay.

And then just a quick one for Marty.

On the attrition, the 21 points of attrition, maybe just the composition of it relative -- what portion was bankruptcy versus competitive, whatnot.

Well, it stays pretty consistent.

It is around 60 -- about two-thirds come from out of business or can't pay or no employees.

So pretty much reasons that the business can't -- doesn't have a payroll anymore for one reason or another.

And then you kind of take the other third -- only about 5% or less is for dissatisfaction or some sort of service issue and that has always been in the 4% to 5% range.

And then the rest pretty much is price or competition of some sort.

It has been very consistent.

Obviously, the out of business -- while the whole thing has dropped, the out of business have improved the most, but everything has stayed fairly consistent.

Okay, great.

Thank you.

Ashwin Shirvaikar, Citi.

Hi, Marty; hi, John; hi, Efrain.

Welcome, Efrain.

My first question is, Marty, from a strategic standpoint, you made 2 SaaS acquisitions and going forward is the idea to sort of build scale on these organically or will you look for more deals -- do you need to broaden out the platform from a functional standpoint?

Well, I think both.

I think we will continue to look for more SaaS offerings that will fit our base, but I think that these are certainly two of the key ones for us to continue in the market.

The ePlan one in particular was more to attack that financial advisor market and 401(k) because we see the 401(k) market moving that way.

SurePayroll was really to take advantage of what we thought was very much a growing market of those doing it manually.

We already have probably 20% of our clients, including SurePayroll, I guess I would say, if you included that in our client count, about 20% are on some sort of SaaS now.

More than half of the major markets are on a SaaS model and we have our own online product that has a number of clients on it as well.

So we see both organically kind of within the Company growing more SaaS and then acquisitions would certainly go that way as well that look attractive to us.

Okay.

And in our past conversations, I guess you have mentioned that client referrals is not quite the source of growth that it used to be.

Has that changed in the last quarter or so potentially with SurePayroll or with any of the other things you are doing?

Well, the reason the client referral thing has changed is that basically we still get a lot of client referrals where in the past where some people would simply go looking for some advice, they go on the Internet and they buy.

So the thing that has really replaced a lot of that is the Google opportunity.

Yes, that has increased as a percentage.

The positive thing is we have seen uptick in ADP, or I'm sorry, in CPA referrals from CPAs and those from banks as well.

So we are seeing an increase in the referrals from banks and CPAs and where the current client is fairly flat right now.

But Google, the other piece of it, coming from Google has definitely picked up and we have invested more as a result of that because it is a much more growing referral source.

Okay.

So between that and the increase in SG&A as a percent of rev, when do you think we should, and I know this has been sort of asked before and it is a little difficult to predict, but should that necessarily translate into higher client growth here in the coming quarters?

Well, client growth really takes place in the last half of the year, so hopefully it will be, but I can't tell you what will happen.

I mean you are in the marketplace, you service your clients, we are doing a great job in retaining them.

But the next thing that is going to move that over the goal line is going to have to be sales and you have got to remember our sales cycle is about a week and a half on core.

So for anybody to sit here and say that they can predict accurately what they are going to be two months from now just isn't possible.

Now at the same time I say that, it doesn't mean that the year is very much exposed to what happens on this.

As we have talked about it before that the amount of revenue that is gained on sales, especially in payroll in the first year, it is important, but it doesn't alter the year very much, which is why, since I have been here and it has been 15 years, we have been within 1% of our revenue expectations on payroll revenue and actually the whole business every year but three.

Two were recession years and then this year when checks per client were stronger.

So we missed client growth this year, but the revenue wasn't really missed; it was exceeded.

So we have got a lot of factors going on.

So you want to sell as much as possible, but it is going to be what it is going to be and we feel pretty good where we are on the year and the bigger impact generally is on the following year, but then we readjust, we look at expenses and we are committed to keep growing.

We would have had margin expansion in this plan.

We did have margin expansion in the plan.

It was basically removed when we put the two acquisitions in, but we think those are good investments for revenue growth in the future and we feel good about it.

Okay.

Thank you, John.

Be sorry to see you go, but all the best.

Thank you.

Julio Quinteros, Goldman Sachs.

Great.

Hey, John, good luck with your retirement here.

Marty, real quickly on the -- just thinking about the longer-term prospects for bending the curve a little bit more, back to the old sort of normal growth rates on revenue growth, what would you say are the priorities right now in terms of being able to move that more favorably towards the sort of historical rates if we are still thinking about 8% to 10% as a longer-term rate?

Is that still sort of in the plan for you guys as you think about longer-term opportunities and what would be the important drivers for that?

Yes, the high end of single digits is I would say certainly where we are targeting for long-term revenue growth.

And I think that the drivers are pretty much the same as they have been for us.

You have got to have the right product set.

I am very happy with what we have done on product investment.

Even in tough times in the last few years, we have continued the investment very well.

We are executing well on that.

So not only are we changing a lot of the applications and rolling them out, releases every six months, but we are also creating things like our Smart Time clocks, the HR Essentials product to fit a niche there.

Doing acquisitions is another part of it.

We are very focused on that long-term growth.

The officer team very much knows we are kind of looking out five years and saying this is where we want to be in five years and we need to drive this growth and it has to be with net client growth.

As we have seen in the past, we have to get that client growth back up and we have to have the right products and then drive more of the products into that current client base.

We still have a nice opportunity when you think about it with even 57,000 401(k) clients to add even more 401(k) out there.

And certainly the HR outsourcing of both the ASO, the PEO and now the HR Essentials fit very well in our client space and we see a lot of interest in that market increasing in that.

So I think we have got a good product set.

We are continuing to invest pretty heavily in that product set to be ready for the future and be extremely competitive.

We are investing in new acquisitions that will fit our product set and we are still looking at more of those.

And we are also just -- how do we increase the very successful sales team that we have had in the past, how do we continue to market that to where they are driving even a higher closing rate.

I mean we have done pretty well in our closing rate even in tough times and we are always looking to drive that up.

That is the new comp plan, the new training, making sure all the positions are filled, etc.

Got it.

And then, John, I think you talked a little bit about the SurePayroll in terms of having that platform sort of exist next to the core and the MMS.

Are there any other integration efforts to think about as it relates to SurePayroll over the -- as you guys think about it over the next year from an integration perspective?

I will take that one.

It is Marty.

We are working -- we have actually got all the plans in place with SurePayroll already on how to move the backend into us, as John said, the tax filing, the tax calculation.

And we also have now built them into our technology planning roadmap.

So not only are we just trying to integrate them into what we have, but take them to the next level as we move to the next level of our service platform.

So that is the biggest integration that we have and frankly, we feel that we have got that worked into the product plans and we will have that done very much on schedule over the next 18 to 24 months.

So other than that, there is not a lot to integrate.

The MMS, as John mentioned earlier, the major market product, really will be an expansion of our current application that we rolled out two years ago so that will grow into the major market product.

So we will have not only the preview-based major market product we have now, but also grow the technology that we have in place to expand into one application for all markets.

Sorry.

And just a distinction between the sales approach in SurePayroll versus kind of the traditional business.

Is there a different approach in the way that you guys go after new sales in SurePayroll?

Yes, definitely.

They come mostly through the Web for SurePayroll.

They are sold through a telephonic sales approach as they have been very successful at because basically they have set the client up as they are selling.

They go in and help the client set up.

It is all telephonic, but we have already -- are trialing an integration with our core salesforce right now, have started that where referrals from our core salesforce, they will sell our product, but also be able to refer the SurePayroll product if there is a fit for that client and they will move those referrals right to SurePayroll in an automated sense and let SurePayroll telephonic sales close that.

So we won't increase the cost a lot to the SurePayroll sale because they are a lower revenue product, but we will gain the impact of the strong feet on the street salesforce that we have that has been very successful here at Paychex.

Got it.

Great, guys.

Thanks, good luck.

Jim Kissane, Bank of America.

Thanks and congratulations, John and Efrain and John, thanks for all your candor through the years.

I really appreciate it.

And Marty, can you give us an update on your mix of distribution?

I mean it does sound like it has changed over time in terms of what portion is from CPA referrals, what portion is from customer referrals say online and then just regular direct sales?

Thanks.

Sure, Jim.

Actually, the part coming from -- the sales coming from new business starts has not changed all that much.

It has always been pretty much at 50%.

I think what has changed is, as John mentioned, those that came in from current clients, they are coming in from probably current clients, but they are coming in through the Web.

They may -- the current client may refer us or say I use Paychex and they have great value and they have done a great job for me and what you will find now is new business hearing that, go right to the Web, research us and then get the lead to us that way, which we quickly react to.

So I think that what we are seeing from CPA referrals are pretty much the same, new business about the same and then the current client is changing a little bit to where it is more Web-based referral.

So CPA is still in the 35%, 40% range?

About 35%.

About 35%, 30% to 35%.

Okay.

And then, Marty, can you take a stab at maybe a long-term target for net client growth?

I mean you mentioned 3% earlier, but historically Paychex was somewhat higher than that and you were kind of stuck in the 3% to 4% range.

What is a reasonable long-term target in a more normalized environment?

I think, Jim, it is going to be 3% to 4% and I think that depends on what kind of growth you get in the small business.

The one thing I don't think you can change the opinion on is I don't think penetration in this market is going to change.

It can change a little bit on the SurePayroll side where those 5 million manual accounts are, but they are small, but pretty much the market has had the same level of penetration, so it grows about equal to what the world is growing.

Yes, we don't see a big change from those who would want to outsource versus those who don't.

And other than the -- and that is why we went after SurePayroll because they had such a great model for those that are manual today that will go to a Web-based and that is where we think there will be more growth there.

And maybe the average client size in terms of number of employees for SurePayroll versus the traditional business.

A little bit smaller.

A little smaller.

So just a little?

Okay.

And just last question, your targeted retention for F '12 and maybe you can give it on a unit basis and on a revenue basis.

Well, on revenue, retention is -- you measure at about 20, but on revenue, that would be down around 15.

Basically, the goal is to get -- the all-time best was 19 something.

We are probably taking where we just finished this year and trying to get to the best ever by about half, but you are cutting -- it is close to that.

Okay, thanks.

Jim MacDonald, First Analysis.

Yes, thank you.

Just a quick follow-up on the last one.

Does the SurePayroll, how does that affect your calculation of checks per client?

We won't put it in for the time being.

Okay.

(multiple speakers)

Checks per client -- this is not a number we keep giving all the time.

When the economy gets to a point where this information is meaningful, we give it.

When we get hopefully to better times and it is not so meaningful, we stop.

And the reason we stop is people start overreacting and looking at the number and it just winds up not being effective.

So that could happen at some point, but in the current conditions, I am sure we will be giving it for a while.

Okay.

And then my next question is could you talk about salesforce retention last year and how that is going, especially with all your new sales policies and new commission strategy?

Yes, salesforce retention was a little bit worse than normal than the average for us in the last fiscal year.

It went up a bit and we think that some of the changes, just having an awful lot of change sometimes stirs that up.

That that was voluntary versus involuntarily was roughly the same as it has been historically.

So we had a few more people leaving.

I think one thing, the economy got a little bit better in some respects, so there were more jobs and as there were changes here that we were working on, like the new comp plans for the last four or five months, I think people decided whether to make a change or not, we had some changes in leadership in the field at the senior manager level and I think that gets some people to change and do something different.

I do feel that all the steps we have taken, the new management team that is all in place now from a manager, front-line manager, second-level manager all in place, very strong folks.

In fact, we had them all together in Phoenix last week and I think they are a very highly energized group who are very experienced and will do a great job.

I think that is the biggest part of it.

I think now the comp plans we rolled out about a month ago started this month for our fiscal year and we got very positive feedback on the comp plans, not only from hiring new, but from retaining the existing folks that are here.

So I think a lot of good things are in place.

It definitely was up a little bit, but I expect that to start trending back down here in the next couple of months.

And just one more quick one.

A quarter ago, you gave us an 8% decline in client fund interest and now it is quite a bit worse than that.

Is that all due to softening interest rates here in the last couple of weeks?

No, we gave your range.

We don't think it has changed much from what we said it was.

Okay, thanks very much.

Tien-Tsin Huang, JPMorgan.

Hi, thanks.

I guess just first on payroll revenue in the fourth quarter, it actually came in a little better than we expected.

I am curious how it came in versus your plan.

Any surprises there?

No.

Pretty close.

Revenue has been a little better than we expected throughout the year only because checks per client has stayed stronger than we thought they would and we did a better job on pricing.

We didn't have to do as much discounting.

Okay, good.

And then just the departure of the Head of Sales after a pretty short stint here, what is the back story and how close are you to finding a replacement?

Yes, I have been very actively interviewing and I have got candidates -- actually had a candidate last week, have another one this week, tomorrow.

Very active and it is difficult to make sure you find the right person.

That was an unfortunate circumstance that I won't get much more into it than that.

It is just -- I thought I had the right person, did not and we dealt with it quickly and everybody and we moved on from there.

So I expect very soon.

I think the important thing to know is that the Sales Vice Presidents are all very experienced, have been reporting to me for -- since I got the position in September 30 and have not let any grass grow on them.

They have moved very quickly to get everything in place we needed to go.

So they are very motivated, but I expect to fill it as quickly as I can.

It has got to be the right fit from both an experience and a culture standpoint and I certainly hope to fill it quickly.

Understood.

That makes sense.

Does the person have to have a payroll background per se or are you looking for any broad sort of tech sales or service salesperson?

No, not necessarily.

I mean that always helps I think to know the business, but anything particularly in the small business environment that knows selling to small businesses and as much as possible, but it is just well experienced and is a great leader.

The most important thing to me is not only the experience, but the cultural fit with the Company, which has been around 40 years and it is very important that we have a sales leader that will energize and inspire the sales organization that we have.

For sure.

Last one for me, just thinking about the float portfolio, just skipping to fiscal '13, how much of the float portfolio comes up for reinvestment there?

Is 20% still safe to assume again?

It's about 20%.

Okay, good to know.

I appreciate it.

Congrats, Efrain.

Look forward to meeting you and John as well.

Hopefully see you out on the golf course sooner rather than later.

It would be a better place to see me.

Excellent.

Thank you.

Kelly Flynn, Credit Suisse.

Thanks.

The question relates to the checks per client.

I think in the Q&A someone asked you if the trend had been sort of stable year-over-year and you said yes.

But it looks like obviously since last quarter, the growth is slower and then you are guiding for next year to 1% versus the close to 2% that you are seeing.

Can you just give a little more detail on that?

Is it just kind of an issue of comps getting harder or anything you are seeing about the economy that is causing that?

Nothing about the economy.

Now you have got to go back.

Remember checks per client -- if you go back to '95 and it will be flat -- let's say it was 15%, 15.1%, 15%, 14.9%, you hit 2002, it drops 4% like a rock.

Next year, it drops from the 4%, but that is completely because we bought 80,000 clients with a smaller client size.

And then you keep going, you go same number, less the 4%, it moves along, moves along, moves along, moves along and you get to I think it's '09 and '10.

Now this time, the change didn't take place kind of coincidental with our fiscal.

It was a calendar year, so it dropped like a rock 5%, hit me about 2.5 points in each year.

Then this year it got better.

Normally the statistic never gets better; it only stays where it is.

But I think because there has been so few business starts because we throw the whole thing in that 2% plus is probably a little bit less than that.

So generally this thing stabilizes, but we believe it is going to continue to stay reasonably good and we think that will happen over the next 12 months.

But the comparisons are harder and so it really doesn't reflect any real change in conditions.

Okay, great.

That was it.

Thanks.

A lot.

Rod Bourgeois, Sanford Bernstein.

Okay, great.

And John, my words too, just wanted to say really nice work on your part over the years.

I wanted to inquire about the fiscal '12 margin outlook.

You are guiding to some margin contraction.

I just wanted to get your perspective on whether you are firmly expecting to return to margin expansion and if so, when and what is really the turning point in your business to allow that to happen?

Well, first off, we had margin expansion this year until I put those two acquisitions in.

When Marty and I went to the Board with the budget, first off, we didn't have them in.

I am going to use numbers that aren't the numbers so you have got an idea of what probably happened.

Let's say we were at 4, that meant that the operating income without float had to go up to 6 because we want 2 basis points.

And then what happened is these acquisitions basically added about 1% in total to revenue growth and took out 1% on the operating income growth.

So pretty much it went from 4 and 6 to 5 and 5.

And that is kind of what happened only on obviously the different number.

So basically we are not away from margin expansion.

Now looking forward, I think we are continuing to still get margin expansion.

It is a part of the culture, it is part of what you expect from us and the only time it won't happen is when there is something that is unusual.

Obviously, the recession hurt us and checks per client went down pretty dramatically.

But we believe we have got to get back on that.

So unless there was some acquisition, I think we will be back to leveraging, but again you might find a good acquisition, but if that accelerates revenue growth and at the same time helps profit growth go up, I don't think anybody would be too sad about that.

But we have not gotten away from our desire to expand margins and our commitment to the Board was we will continue to expand them and we have to show the forecast to the plan separate of those to clearly indicate we were doing so.

Right.

And then just to clarify, you don't need revenue growth to be higher than your fiscal '12 outlook to be able to have comfortable margin expansion.

Is that the case?

No, we would have had it -- those two acquisitions, when you buy them at the front end, you get hit pretty heavy with amortization costs, which eventually go away, but they diminish pretty fast.

We had the expansion.

It is not that we needed higher revenues or anything.

We would have had our normal model.

Okay.

And what is the main reason in fiscal '12?

You mentioned some of the factors that are pressuring your expenses in fiscal '12, but what is the main reason in fiscal '12 that you are not expecting or guiding to margin expansion?

You are missing my point.

We had margin expansion before I put the two acquisitions in.

Meaning we had to put extra 401(k) costs in because the match went for a full 12 months versus 6, merit increases we (inaudible) in the prior year.

We have got extra investments in IT, but all those were offset by operating productivity in both G&A and in the branches.

So what you are looking at, and I knew we would go through this, we did not -- the only reason we have operating margins not going up 200 basis points over revenue growth is because I had to add in the results of those two acquisitions.

Okay, all right.

That makes sense.

And then on the pricing structure, you made some changes to the pricing structure at the beginning of fiscal '11.

And I just wanted to see if you could give an update on what the real impact of that has been in the business.

I am assuming it maybe has contributed some to the lessened discounting trend that is out there.

Is that what is happening?

That is certainly true.

I think also then we made some more adjustments probably in the next six months after that.

We have made adjustments back and forth.

I think it is a little hard to tell because you have got the economy at the same time, but I think we did reset our pricing and our packages.

We then kind of tweaked them again about six months later.

And I feel -- the salesforce feels pretty good about where we are right now.

So we have kind of tightened down the discounting policy and got the prices and the packages set right.

And of course, you always continue to watch that, but I wouldn't say there was dramatic change as a result of that, but I don't think it necessarily hurt us either once we made some adjustments.

So we are kind of still watching it, but the salesforce I believe feel that we are pretty properly set right now.

Okay.

So no new pricing structure changes in fiscal '12?

Not at this point, no.

Not significant ones.

No, not significant ones.

All right, thanks, guys.

David Grossman, Stifel Nicolaus.

Good morning, thanks.

Just to circle back to the questions that you have had about growth, it looks like you are investing in three areas -- increasing the client base in the core, adding new products to increase revenue per client, then expanding into new market segments like self-service.

So I am sure you are optimistic that each will yield attractive returns, but it sounds like, if I take that 2% to 3% client growth and let's say 2% to 3% pricing, you get 4% to 5% of the total high single digit growth from the core.

Is that the right way to think of it and then the balance from expanding into new market segments (multiple speakers)?

Pretty close.

The numbers don't always work exactly when you get a little more volatility like we have had, but you are not far off.

Okay.

And then secondly, John, just quickly, is it possible to think about the float in the context if rates were flat -- let's just say they flatlined, can you guess at when investment income from client flow would go from being a headwind to a tailwind?

Hard to say, but I think if you go two or three more years, the whole portfolio is going to have turned over.

You have got two or three more we go down.

They can't go down much more than it is.

And reinvest (inaudible) long term was as high as 1.0.

You will have some, but it is going to go down gradually.

You're not going to see any big drop like we saw before and eventually the rates have got to go up.

Right.

So you obviously have -- relatively the rate difference is significant in fiscal '12.

Based on what you know is in the portfolio and what turns over in '13, does that pretty much go to a flattish type scenario in '13?

(multiple speakers)

It's closer, not quite, a little bit negative.

That is why you have got the guidance.

But the thing I do know is if rates go back up, this thing will move pretty quickly.

If you compare us to what I would say are normal rates for the last 10 years, except you take out this period where interest rates were at zero sometimes, we are down about $0.15 a share.

So it doesn't have to go up much to give us some of that back.

Got it.

Okay, guys, thank you.

Tim Willi, Wells Fargo.

Thank you.

Good morning and congratulations everybody on their new roles.

Two questions.

One was around sales and one around sort of the financial stuff.

First, Marty, could you talk a bit about -- anything around sort of I guess changes in behavior or territory management, things of those nature around the compensation plans that you have put in place?

Just curious if the market had evolved where sales wasn't being incented correctly, but has now evolved to be more in line with the market or product just to understand is it purely financial or is it around certain behaviors that needed to be addressed?

Good question.

I think it is a number of things and one on the territories, the Sales Vice Presidents took the lead on reviewing all the territories and being sure that people have equal opportunity and so forth and I think they are comfortable that they have made some changes that have done that well and set up for this fiscal year.

But I think the comp plans were really a couple of things.

One was to raise the base of what we start new sales representatives for.

So it attracts a little bit different candidate.

It is sometimes difficult to have a candidate come in and get attracted at least to then see what they can earn.

So I think we have been able to do that.

And that has helped in our recruiting efforts.

And then the other thing is really to gear them towards revenue.

It is very important -- you always have this kind of revenue and unit.

We certainly want the units to grow and there is some tied to that to get them to certain types of recognition, but the majority of that is driving them towards revenue and finding the best revenue and getting the most revenue from the clients and so forth.

So it encourages them to sell the right package, but to get more focused on the revenue and then there certainly is some kickers as well for unit productivity, which gets them to things like sales conferences and so forth.

Okay.

And then just to follow up on that quickly, obviously, a lot of tight financial controls within Paychex and decision-making.

Is the profitability and the discounting leeway, etc., does that flow more into a salesperson's ability around managing their revenue production or are there safeguards in place around compensation around the actual profitability that is coming in with the revenue?

When they discount, they hit their commission immediately, so they don't want to discount any more than they have to.

Sometimes they will take something -- a price they don't like, but they have got to act pretty much within the guidelines and you have got a control mechanism, which is really the branch manager.

Okay, okay.

And then on the financial side, just two quick ones.

One on the M&A environment, just sort of your thoughts around pipelines, pricing, maybe some comments around the relative size of deals you view as potentially doable.

Are we talking smaller ones like we have seen or are there some that might require substantial resources?

Well, we tend not to buy things that are very large because the prices are big and the bets get big and we have a great company, there is no reason to be putting this Company in any form of jeopardy off an acquisition.

There was a payroll acquisition that's out there right now that has got a fair number of clients in it, but they want a lot of money.

We don't think it is strategic to anybody at this point, maybe a new player, but they are not going to get enough to be able to do that much with it, so we are not going to deal on that one.

The best comp we can find are ePlan and SurePayroll are perfect examples.

SurePayroll was $115 million, so we didn't shy from paying over $100 million.

Basically they offer something that is very strategic to us and very important to us and if we have to pay up for that, we will pay up.

That is why we paid so much for SurePayroll.

Normally, we would not pay that much, but we saw the chance to get an Internet -- fully integrated Internet application we could not design in the timeframe we thought we needed to get it.

We saw an ability to get some people and some process, so we did it.

And I think it will work out fine.

So when you look at other acquisitions, we are still very picky about whether it is in our space, whether it makes sense and we don't want to start changing the whole way we look at things.

So we are going to look for the good ones and we have done quite a few now and not that many big ones, but since I have been here now, we are probably well over 10 and the only one that I would say did not come out real well was the time and attendance solution.

But we got the products we needed, we moved them to us and then we sold the piece back to some other people.

So even on that one, we did not have anything that I would say was very distasteful.

That was the Stromberg one.

I think, as John said, I think we are very selective.

We always have four or five things that we are looking at, which is good because that means they are out there and available.

I think the pricing sometimes is a bit high and also we pay a lot of attention to the distraction.

We have got a big business to run and there is a lot of things we are trying to do and so we are very careful about being selective in making sure that it is not a distraction unless it is worth it.

And I think -- I have been very proud of the two that we did this year.

They I think joined the Company very well and we are off to a very good start very quickly.

So if we can get it at a reasonable price, even if we have to pay a little bit more, if it fits and it is not a distraction and we can fit it very quickly and integrate it, we will go after it.

Okay.

And then just quickly, could you talk about the Board's sort of stance around debt?

I am just thinking buyback, dividend.

Obviously, you generate a ton of cash.

You don't want to do big deals for the sake of doing them.

With the stock where it is at, just sort of curious around the thoughts around more buyback activity.

Well, I don't know that we would borrow money to buy stock back; I am not going to say that would be never.

I mean they are pretty well committed to the dividend.

We looked at the stock buyback we did in '08 and to me, you can't just look at the stock buyback.

Our average price was $42, but you've got to look at the whole scenario from '08 to now.

We had a lot of money.

We got it out of interest or investment return levels at a great time.

It got us out of some investments, which maybe we would have got out of them anyway, but we were one of the first to get out of auction notes.

We had over $500 million at one time and we were one of the first ones to get out of certain variable-rate demand notes.

So I look at the whole strategy and say, okay, it might not have been perfect, but all I know is, from '08 to now, we didn't lose any principal money and we got some money off at the right time.

I am not always in favor of buying stock back simply to take on the debt.

Some will say you'll get a little bit better structure.

I am not sure when I look at the earnings per share, impact is enough to me.

It will change.

I am not even sure it is always going to change.

So I think we will continue the way we are.

I think we've got excess cash and we would possibly consider another stock buyback.

Now one change I think we would make is the last time we implemented the program over a relatively short period of time, about six months and next time, I think it would be more opportunistic we might announce a plan, but we wouldn't necessarily try to complete it in a short period of time.

The reason we did that on the last one was we hit $1 billion and we want to be a company that is known for doing what we say we will do and we did not want to announce a stock buyback program and then 12 months later have not bought really anything back.

So we will keep watching it.

I wouldn't say there is any closed viewpoint on this.

They are still open, but in these conditions, I don't think that is going to happen of any significant size, but then you never know.

Okay, thanks so much.

Gary Bisbee, Barclays Capital.

Yes, thanks.

I will just sneak in two quick ones.

Can you give us an update on the level of penetration of the major HRS product categories into the existing payroll customer?

Any thoughts on that and sort of how successful you are selling it to customers that are not existing payroll customers?

Well, in our HRS products, I would say the norm, it won't be on everyone, is about 50% comes from outside and 50% is from inside.

And while the one that is starting to move up is the 401(k), the product offering is getting better to get conversions.

The product offering on the thing we just bought is going to help and these financial advisors.

And the one thing on 401(k) that we make sure we are is we evolve continually because we want to stay number one.

And now we have more plans than anybody else, we sell more than anybody else and we know if we don't keep evolving and moving kind of ahead of the curve that won't stay that way.

Healthcare is still very much in its infancy.

The one that has kind of amazed me on the strength of full outsourcing of HRS services, those grew rather nicely right through this recession, which should say why would the most expensive product you have, one of the best growth prospects you add to that.

But I think we have got a real good offering that meets clients' needs.

So penetration is there, but I don't think it is anything that is alarming yet and we have just got to keep watching it.

But we look at -- HRS is going to continue to grow faster than payroll and we will see what happens.

But we haven't reached a point where there aren't opportunities yet.

Now at the same time I say that, that is why getting some client growth is important because you do want to throw more clients into the mix that the HRS people can go after.

And then just given that and what looks -- I mean if retirement is only really 10% penetrated if it's 57,000 clients --.

No, it is more than 10%.

Only 29% of our clients have a 401(k) plan.

Oh, I got you.

(multiple speakers)

And we have about 40% of that.

Okay.

And then just the 8-K last night indicated only 1% expectation in sales headcount growth, which is slower than last year.

I guess given the ramp in growth here, given maybe a slightly better economy on average, that surprises me.

Any (multiple speakers)?

We are pushing productivity.

We lost some productivity on our salesforce.

As it gets better we are hoping to get some of that back.

That doesn't mean that is 1% forever but we are looking at stabilizing the salesforces and I am sure we will be back to growing them more aggressively now.

Some of them are more aggressive, the insurance area.

One of the problems in HR is a few years ago we grew it faster than we probably should have and we have let that stabilize.

We will get the payroll thing stabilized and we will get back growing that aggressively.

And I guarantee you that will happen because we have got a founder that ask us that same question every year.

I think it is very much about getting the territories right.

As I said, the Sales Vice Presidents have redesigned some of the territories, redesigned the comp plans, the training.

It was like let some of this settle.

Let's make sure we have got everything in sync and then hopefully start growing again as we move through the year even.

Okay, thanks a lot.

Christopher Mammone, Deutsche Bank.

Thanks, I guess just a quick one.

You gave a couple of reasons why for your success in the marketplace against some of the local and regional competitors.

I guess do you have any more granularity on -- is any one reason -- product versus sales driving the bulk of that?

Is it sort of an even split?

Can you give any more color there?

I think I would say it is fairly even.

We have always had a very strong salesforce model and salesforce team with their execution.

I think to watch their closing rate pick up a little bit, it certainly didn't drop any and as the economy has started to come back, their closing rate has started to pick up.

We have very good -- very well trained sales reps.

We are very careful about who we pick and I think as the economy starts to get a little bit better and as the current client base starts to get a little bit stronger, they are out there right at the door getting referrals and so forth.

And I think we have done well on the Web in getting them more leads, which then they are executing on.

So I think it has been sales execution, but I also do think that having moved to the new product application about a year and a half to two years ago now finishing that conversion, the online interface and so forth is very good and we are getting very good feedback from the clients.

And of course, the service, we are at the highest levels of client satisfaction in our history, so we are not losing a lot and we are probably getting more clients that we would refer us, whether they go on the Web or not.

Okay, that is all I had.

Thanks.

Vishnu Lekraj, Morningstar.

Good morning, gentlemen.

A quick question here for you.

Have you seen any uptick in competition from some of the larger financial institutions concerning the core payroll services and have you seen more competition or more aggressive competition from other nontraditional say players?

Not really, no.

I would say we still have one national competitor and we have a number of regionals and as we said, we are doing better on the regionals and about the same experience with the national competitors.

So we really have not seen other players pick up much at all.

So none of the bigger banks have moved into this area or have tried aggressively to move into maybe taking share from you guys?

No.

We have not felt it.

I think they offer white label offerings and so forth, but we have not felt that.

It is either a different market or we are not seeing it.

One more then real quick.

Given the changing mix and your revenue and your business and the heavier investments in terms of acquisitions and HRS, how should we view capital returns given all this and the pricing mix and job growth?

I know it is kind of a large question, but if you can give some context around it, that would be great.

What do you mean by capital returns?

Yes, I mean do you expect the same capital returns from the investments you are making in these other businesses that you have made in the past in terms of your core payroll services?

Yes, but generally you calculate, in our return on equity, and we have been (inaudible) 35%, but in this business, I'm not sure that is -- I mean it is nice, it's beautiful, but (inaudible) business throws cash off better than any other business in the world and we are very profitable.

So I don't see any reason our profit levels are going to change or investment levels, but I don't know that that is always the best way to look at our business.

Got you.

Great, thanks.

Jeff Meuler, Baird.

It's Jeff Meuler from Baird in for Mark Marcon.

And if we could add our congratulations to you, John, and to Efrain.

Our question is around the productivity on the salesforce as well.

What is your productivity currently tracking at relative to what it was at during the peak just to give us some sense of the capacity and the existing headcount?

And then with all of the changes that you are making and hopefully some macro improvement, what type of productivity improvement would you expect this year?

You are not going to get a specific answer to that question, but I won't leave you with nothing.

Basically, we were the leader in the industry and we still believe we are the leader in the industry, but the gap isn't as big.

We have lost some, but for competitive reasons, we are not going to answer that question because we have got this big guy that competes with us that would probably like to know how we are doing.

But we know when we swap people sometimes, we know where our productivity is compared to theirs.

We have got to get ours back up.

Some of it probably can never be achieved again because, at one time, we were just almost spectacular.

But we know that when we go and buy Advantage, InterPay and other things, we look at what their salesforce is selling compared to ours, and ours is always considerably higher.

Now in some instances, it could be twice as much.

I don't know that it is still twice as much, so it is still there.

We are down some, some is the recession, some is we have got to get better at execution.

But the key is we keep working on it and we keep hoping it is going to improve and we are as committed as possible to getting the sales engine doing what we need it to do.

I think we see as it has decreased and flattened out and now we see it really improving, but it is still by far even when it flattened out, it decreased, it was still the best in the industry.

Okay.

And then just one separate question, in terms of your investment in product development, you rolled out a couple of new solutions organically this last year.

For the product development roadmap for next year, is it more about enhancing existing products and getting the MMS and core platforms moving towards each other or is it more net new development?

It would be, right now, the roadmaps are laid out for the next few years.

I mean next year is more about enhancing what we have and adding more to it because that is, of course, where the majority of the clients are anyway.

We will always look though through acquisitions and so forth if there is something new, but it will be continuing to enhance both the small business and the midmarket space products.

Okay, thanks and congrats again, John.

Thank you.

With that, I think we are out of questions and I will give it back to Marty and he has probably got a couple comments.

Yes, just to close it up, I am very proud of the employees and our results in fiscal 2011.

We have got an executive team very pumped and primed for next year, for the fiscal year and I would just like to close with thanks for your interest and participation.

And I would like to thank John once again.

John has done a tremendous job, has been a great partner to me for many years, all the years I have been here and we are excited for John and we are excited to have Efrain onboard too.

So thank you very much for joining us today and have a great weekend.

Goodbye.

Thank you.

This concludes today's conference call.

You may disconnect at this time.