沛齊 (PAYX) 2012 Q4 法說會逐字稿

Welcome and thank you for standing by.

At this time, all participants are in a listen-only mode until the question-and-answer session.

(Operator Instructions) Today's conference is being recorded.

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

I would now like to go ahead and turn the call over to your host for today, the President and CEO, Marty Mucci.

Sir, you may begin.

Thank you, and thank you for joining us for our fiscal 2012 year-end earnings release call.

Joining me today is Efrain Rivera, our Chief Financial Officer.

Efrain and I will review our financial results for the fiscal year and our guidance for fiscal 2013 after my opening comments, and then we'll open it up for your questions.

We continue to focus at Paychex on driving growth in revenue and profits while providing industry-leading service and products to our clients and their employees as the leading provider of payroll, human resource, and benefit outsourcing to America's businesses.

We had a solid financial performance for fiscal 2012.

Efrain will go into more detail; however, I would like to provide you some highlights

First, we achieved the highest service revenue in the Company history as we ended fiscal 2012.

Our checks per payroll have improved for nine consecutive quarters.

Growth in checks per payroll has been consistently positive this year.

Our client retention was at 80% of our beginning client base, very near record levels.

Our execution and operations has been excellent, demonstrated by achievement of our highest client satisfaction scores in our history, and we find this a very important metric, as the payroll and human resource rules and regulations affecting our clients have continued to grow increasingly complex.

And our payroll client base finished the year at 567,000 clients, including SurePayroll, up slightly from the previous year.

When you exclude SurePayroll, we're basically flat.

This marks a change from the past three years, when our client base posted declines.

Our insurance services business continues its growth, now with over 100,000 clients, as one of the 30 largest US insurance brokers.

During fiscal '12, health and benefit services revenue increased 24% to $52 million, with a 23% increase in the number of applicants.

We believe the economic environment improved modestly as the year progressed, but the environment for new business formation remains challenged.

We focused our efforts on improving leads, experiencing favorable results from our emphasis on our CPA referral channel and search engine marketing.

We also saw an increase in the win rate of selling to clients of our competitors.

Our sales force is doing an excellent job communicating the strength of the Paychex brand and the breadth and quality of our products and services.

With a solid sales leadership team and this year's new compensation plans and sales support tools in place, we improved sales representative turnover during the year.

We also continued to invest in our Paychex Next Generation platform and its suite of innovative products.

We believe that this is a key building block to our future success.

In fiscal 2012, we introduced technology enhancements to our software as a service product offerings with our Paychex online mobile applications.

Mobility apps were previously released for the iPad and Android tablets, allowing clients and their employees to have full access to our products and do anything they do now over the web on their PC or laptop.

This month, we released smartphone applications offering diverse capabilities for both employer and the employee on the go.

In our third quarter, we unveiled our business insurance payment service and our Paychex Advisor Select 401(k) offering.

In December, we acquired Icon Time Systems, Inc., a provider of time and attendance solutions for small to medium-sized businesses.

We had a successful relationship with Icon, and there was an opportunity to incorporate them into our Company.

Our two acquisitions from 2011 have created excellent opportunities in both of their markets.

SurePayroll continues on track in the do-it-yourself software as a service market, and we continue to make inroads in the financial advisor marketplace with ePlan Services, which further expands our successful 401(k) services, where we continue to sell and service more plans than anyone in the industry.

I am very proud of the efforts of our employees on behalf of our clients and shareholders.

We have a solid leadership team that is clearly focused on sales and service execution, technology innovation, and product expansion that drive our plans in fiscal 2013 and beyond.

I would now like to turn the call over to Efrain Rivera, our Chief Financial Officer, to review the financials in more detail.

Thanks, Marty.

Yesterday afternoon after the market closed, we released our financial results for the fiscal year ended May 31, 2012.

We also filed an 8-K filing, which includes a preliminary discussion and analysis of our results of operations and our financial position.

This preliminary discussion and analysis is not a complete MD&A.

A complete MD&A will be included in our Form-10K, which we expect to be filed by the end of July.

Our release and filings are available on our Investor Relations page at Paychex.com.

This teleconference is being broadcast over the Internet and will be archived and available on our website for one month.

As Marty indicated, Paychex delivered solid results in fiscal 2012, together with improving metrics.

Some of the key highlights are as follows.

Checks per payroll increased 2% for fiscal 2012.

This growth moderated from prior year as we expected, and we anticipate a lower growth rate in checks per payroll in fiscal 2013, which will impact quarterly comparisons in our service revenue.

Checks per payroll, I would remind you, is an estimate of the average number of checks issued per client payroll run.

We don't include SurePayroll in our checks per payroll statistics.

Total service revenue grew 7% to $2.2 billion, the highest level in our history.

Acquisitions contributed 2% to growth.

Operating margin, operating income net of certain items as a percent of total service revenue came in strong at 37.1% for fiscal 2012.

More on this later.

The interest rate environment remains challenging.

Our combined portfolios have earned an average rate of return of 1.1% for fiscal 2012, down from 1.3% last year.

Now I'll walk you through our results as presented in the consolidated income statement, with some additional highlights for the fiscal year end fourth quarter.

Payroll service revenue increased 4% for the fourth quarter and 5% for the full year fiscal 2012.

Organic growth in payroll service revenue was 3% and 4% for the respective periods.

We benefited from increases in checks per payroll and modest increases in revenue per check.

Revenue per check was impacted by price increases offset by discounting.

HRS revenue increased 12% for the quarter and 13% for the fiscal year.

HRS revenue growth was 9% and 11%, respectively.

This growth in HRS revenue reflects growth in clients and price increases.

In addition, our insurance services continued to benefit from growth in health and benefits revenue of 22% for the quarter and 24% for the full year, as the number of health insurance applicants continues to increase.

Our HR Solutions revenue growth rate was impacted by continued softness in our PEO and lower revenue per employee in our HR Essentials product.

Our PEO business tends to fluctuate with changes in healthcare rates and workers compensation claims experienced.

Healthcare insurance rates impact renewal rates for the business.

Retirement services revenue benefited from an increase in the average asset value of retirement services, client employees funds.

This excludes ePlan.

This is partially offset by the impact from a shift in the mix of assets within these funds to invest concerning lower fees from external managers.

The impact of market performance assisted growth in 2012 and is not anticipated to continue in fiscal 2013.

Combined interest on funds held for clients and investment income decreased 8% for the fourth quarter and 7% for the full year.

Yields available on high quality securities continue to remain low but are somewhat offset by increases in average investment balances.

Expenses increased 5% for the quarter and 6% for the year, partially due to expenses related to acquired businesses.

Excluding acquisitions, our total expenses grew 3% for both the quarter and full year periods.

We've continued to invest in product innovation and supporting technology.

Expenses related to information technology increased at a faster pace than overall expenses for fiscal 2012.

We anticipate that growth for these expenses will moderate for fiscal 2013.

Our operating income net of certain items, which excludes interest on funds held for clients, increased 9% for the fourth quarter and 10% for the fiscal year.

Operating margins were at 34.2% for the fourth quarter and 37.1% for fiscal 2012.

We expected operating margins to drop in the second half of the year with timing of expense for supportive calendar year-end operations and sales activity and planned spending on our innovation activities.

Our financial position remains strong, cash and total corporate investments of $790 million as of May 31, 2012, with no debt.

This compares to $671 million a year ago.

Our cash flows from operations were $707 million for fiscal 2012, a slight decrease compared to the prior year.

The decrease was driven by timing related to changes in our current assets.

Looking at our free cash flows, the improvement for fiscal 2012 was largely due to the impact of business acquisitions in 2011.

Funds held for clients as of May 31, 2012, were $4.5 billion, compared to $3.6 billion as of May 31, 2011.

Funds held for clients varied widely day-to-day and averaged $4.1 billion for the fourth quarter and $3.6 billion for fiscal 2012.

This amount represents a year over year increase of 4% and 7%, respectively.

Higher average invested balances resulted from several factors, SurePayroll, client funds, wage inflation, increases in state unemployment insurance rates, and the increase in checks per payroll.

Total available for sale investments, including corporate investments and funds held for clients, reflected net unrealized gains of $60 million as of May 31, 2012, comparable with unrealized gains of $59 million as of May 31, 2011.

Our investment strategy is conservative.

We don't recognize or we have not recognized or realized any impairment losses on our investments.

A substantial portion of the investments are high credit quality, rated double A or better, or A1/P1.

Our priority has been and will continue to be to ensure that we can meet all our cash commitments to our clients.

We anticipate our average duration on our available for sale securities to increase to approximately three years, a slight increase in portfolio duration.

Total stockholders equity was $1.6 billion as of May 31, 2012, up from $1.5 billion as of May 31, 2011, resulting from earnings and reflecting $460 million in dividends paid during the fiscal year or 84% of our net income.

As you know, in October, we increased our quarterly shareholder dividend 3% to $0.32 per share.

Our return on equity for the past 12 months was 34%.

Now let me turn to fiscal 2013 guidance.

And before I do that, you should be aware that certain written and oral statements made by management constitute forward-looking statements within the meaning of the Safe Harbor provisions of the US 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 cautionary note regarding forward-looking statements in the press release for our discussion of forward-looking statements and the related risk factors.

I'd also like to remind you that our outlook is based on our current view of economic and interest rate conditions continuing with no significant change.

Our guidance for 2013 is as follows.

Payroll service revenue is projected to increase in the range of 3% to 4% compared to fiscal 2012.

The projected growth rate is based on anticipated client based growth, modest increases in revenue per check, offset by moderation in the growth of checks per payroll.

HRS revenue growth is expected to be in the range of 9% to 11%.

This is in line with historic organic experience.

Total service revenue is expected to increase in the range of 5% to 6%.

Prior acquisitions will have minimal impact to revenue growth rates.

Interest on funds held for clients is expected to decrease in the range of 6% to 8%, due to longer-term investments maturing and being invested at lower rates.

Operating income net of certain items as a percent of service revenue is expected to approximate 37% for fiscal 2013.

Investment income net is projected to grow in the range of 25% to 35%.

Net income is expected to increase in the range of 5% to 7%, and the effective tax rate for fiscal 2012 (Sic-See Press Release) is expected to be approximately 36%.

A few additional comments on guidance.

Fiscal 2013 plan includes a 3% to 4% increase in the core payroll sales force and the full year impact of an additional 401(k) match that we put in place towards the end of fiscal 2012.

The impact of these actions on earnings per share is expected to be approximately $0.01.

As you know, we do not provide guidance on a quarterly basis.

However, as contrasted with 2012, we anticipate that first half and second half earnings in 2013 will be more similar than in 2012.

And due to a difficult comparison with very strong results in Q1 2012, we anticipate growth rates in the first quarter for payroll and HRS will be below the low end of the range of our 2013 full year guidance.

In Q1 of 2012, we benefited from stronger checks, higher asset fees from investments, higher work site employees in the PEO business, the ramp and introduction of our HR Essentials product, and some timing in terms of the end of the quarter.

The absence or moderation of each of these factors is expected to impact first quarter results.

Finally, beginning with our next fiscal quarter, certain client counts and statistics, primarily in our HRS revenue area, will be updated on an annual basis, consistent with our payroll client base disclosure.

And finally, a reminder that Paychex will be holding an Investor Day on July 18, 2012, in Rochester.

Registration information for the Investor Day is posted on our website, and we're looking forward to seeing you and having a great day.

Thank you.

Now I'll turn it over to Marty.

Thank you, and operator, we will now open for the meeting and the call for some questions.

Certainly.

(Operator Instructions).

The first question does come from Jason Kupferberg with Jefferies.

Your line is open.

Thanks, guys.

Good morning.

Wanted to start with a question on the operating margins.

Ex-float income, we're looking at 37% for the fiscal '13 guidance, which I think is pretty flat year over year.

And I wanted to get your thoughts just in terms of what's underpinning that, because I think most investors have traditionally thought of the processing nature of the model driving continued margin expansion over time.

I mean, is this any sort of sign that margins are close to maxing out here?

Is there room for ample margin expansion in a better macro environment?

Because I know you mentioned that the IT OpEx growth is going to actually slow in fiscal '13, so I'd suspect there's some multiple moving parts here.

But we would just love your bigger picture thoughts on what this means in terms of margin potential of the business model.

Yes, thanks, Jason.

The answer to that is when we put the plan together, we have leverage in it from sales to expenses of approximately 100 basis points.

So, our approximately 37% will result in some leverage in the P&L.

As I mentioned earlier in my comments, we did make some investments that increased expenses, primarily in terms of sales force expansion, and also on our restoring some benefits that we had not restored previously.

Okay.

So going forward, it sounds like you think there is a path to some continued margin expansion, albeit at kind of a modest rate?

There is a path to do that, and that's the way we build our plan.

We look typically to grow expenses below sales and typically by 100 basis points, and that's what we baked into our plan.

Okay.

And just based on where the laddering and the duration of your flow portfolio stands right now and the forward yield curves, do you think fiscal '13 will be the bottom in terms of interest on client funds?

It's real hard to tell.

If I freeze the rates right now, Jason, I would anticipate and I also hold average float at the same level.

I'd anticipate some contraction in the portfolio, probably in the 3% to 5% range, where interest rates stand at the moment, but they could change.

Let me just say one thing on that that I think is critical.

There's a tremendous amount of volatility on interest rates, and even within the last 90 to 120 days, we've seen a the 10-year treasury, which we benchmark our intermediate municipal bonds to go from 241 to under 150.

So we'll update on a quarterly basis, but that's what we're seeing.

So no, we haven't completely anniversaried it, but it will moderate from here on out.

Just lastly for me, in terms of balance sheet deployment, I think you've got total cash and securities now, $800-ish million plus, getting closer to that $1 billion level that I think you guys have talked about in the past.

Anything we should be aware of in that regard?

Does share buyback seem appealing here, or what's the M&A pipeline like?

Well, Jason, this is Marty.

I think we always continued to look at that, and the Board does.

Obviously, it's a Board decision, but we're always discussing it at each Board meeting that as we get closer, particularly to that $1 billion mark, we want to have the flexibility for acquisitions, because we're looking aggressively at what's out there and want to keep the flexibility.

But at the same time, we certainly understand as we're aggressive in the dividend that there's other options for that cash as well.

So, something we continue to look at every quarter with the Board, nothing to report at this point.

Okay, we'll see you in a few weeks.

Thanks guys.

Thank you.

The next question comes from Rena Kumar with Evercore Partners.

Your line is open.

Good morning.

I'm calling in for David Togut.

Hi.

Could you please update us on initiatives implemented by your new head of sales, Mark Bottini?

Yes, on the sales side, some of these things started right before Mark, but I think Mark has done a great job in moving these and executing on these.

One was a new compensation plan, some of the changes we made last year and some additional ones this year.

The focus is very much on revenue and revenue growth.

We also simplified the compensation plans dramatically last year to make them more direct and easier for the sales reps -- representatives to understand how they get paid on the next sale.

We think that that's gone over very positively in the last fiscal year and continues to do so this year.

We've also focused on technology, and so new tablets were given to all of the sales reps last year, which allowed them to have everything on their tablet at a faster speed, including sales force tools or tracking new leads, etcetera.

So, they got more technology.

We have also a proprietary program that allows them to load or initiate a client during a sale, all on their laptop to avoid paper, and that helps both sales and the operations team as well.

And I think between the comp plan, the tablets, a lot of training changes were made last year that went over well, and also some recruiting.

Since Mark has come in a little over eight months ago, he has been extremely visible out in the sales force and really assessing the leadership team, and I feel we're going to be off to a good start this year, as we kicked off the fiscal year this month.

Great, and can you quantify fiscal 2013 price increases?

No, we're not going to disclose the level.

We mentioned that they were modest.

I think they are not out of the range of what we had done historically, but we won't specifically quantify that.

We just think it's proprietary information.

Okay, thank you.

You're welcome.

The next question comes from Sara Gubins, Bank of America Merrill Lynch.

Your line is open.

Hi, thanks, good morning.

Just to quickly follow up on that last question, could you talk about your expectations around discounting next year?

Is that incorporated into the guidance?

Yes, I don't think we expect a lot of changes there.

I think from a competitive environment, things are about the same.

I think we felt good that we've done -- we actually had got more sales last year from competitors from clients who are with competitors, particularly regional players.

And I think the competitive environment with our national provider is about the same, so I wouldn't expect much change on the discounting front.

Efrain, anything you want to add?

That's it.

Okay.

And then, within the -- also on the guidance for next year, you're expecting lower growth in check per payroll.

It looks like that came in probably a bit better than expected in the fourth quarter.

And I know this is something of a theme from the second half of this past year, but could you talk about what's driving the expectation that it will be weaker going forward in terms of the growth rate?

Yes.

So, just a little bit more color on checks per payroll.

Again, it's not completely same-store sales, but we do take a subset of our client base and then compare it against the average for checks per payroll, and typically, it's pretty close.

I think, Sara, what we're seeing is moderation in that number.

I think that it's come down -- it's moderated more slowly than we expected, frankly, at this stage.

And it really is a function of what happens with hiring employees within our client base, which is tough to gauge.

It's been better than we expected.

We're very cautious about assuming that it will continue to be better than we expected.

Okay, and then just last quick question.

Could you tell us about your plans for CapEx next year?

Yes, I think it should be in the disclosure, but I think we're at $95 million to $100 million in the notes on the disclosure.

Okay, thank you.

Sure.

The next question comes from Joseph Foresi with Janney Montgomery Scott.

Your line is open.

Hi.

I wonder if you could talk about what assumptions you've made, if any, from the macro and to your FY '13 guidance and any indications you've heard with any spillover from what's going on in Europe.

Yes.

Well, first off, we're fortunate there really isn't any spill over in our results from Europe.

We have a very tiny business in Europe and happy to say it's profitable, but it really is fairly insignificant to our operations as a whole.

I think, Joe, if you collect all of the information that we looked at, everything from new business starts to what's happening with unemployment and including some internal indexing that we do, a model that we've developed, it all looked very similar to this year.

And so, our macro overlook was that this year was going to look -- I should say fiscal 2013 was going to look pretty similar to 2012.

There was a little bit of a hiccup when BLS showed its real weak results, I believe it was in April.

We didn't see it quite that dire, but at this point, we just see things just steadily inching up, I'd describe the environment as.

Yes, I guess I'd say -- the only thing I'd add to that, it's been a continuation each quarter as we've talked about it.

Existing businesses, with the checks per payroll, as well as the retention, we've certainly have seen a little gradual pick up, as Efrain mentioned.

So, the hiring to us looks like it's up, and it's not moderated as much as we thought.

We thought it would be flattening out, and it hasn't, so that's a good sign.

Also, our losses are down about 6% from -- in client losses, so our retention is near historic levels.

So we felt fiscal '12, frankly, pretty good from an existing client perspective.

And we would expect that the losses as we get toward near historic levels start to flatten out.

So we are not going to continue to see big improvement in retention, but we're still looking to inch up a bit.

And then the new business formation still looks pretty challenging.

As Efrain said, the stats lag six to nine months, but we're not seeing sales up much from new businesses.

They're fairly flat year over year.

However, a couple -- in the last two years they were down, so in fiscal '12 they were fairly flat.

So I would say that the most challenging macro thing is still new business formation.

Okay.

And then just maybe you could spend a second talking about SurePay and the progress you've made there, the integration, and how you're thinking about the balance between human and -- human capital and technologies as you head into the next fiscal year.

Sure.

I think we've made good progress there.

The Company, we kept it kind of standalone from a name standpoint and is run by the same management team when we acquired them almost really 1.5 years ago, and we're pleased with the results.

They're in double-digit growth and they continue to serve that market, that SAS market, and they're continuing to grow right along, so we're pleased with that.

We continue to look at the integration of the back end, and we've brought some of the back room functions into Paychex to make them, I think, even more efficient than they were, and they're continued on driving the growth on the top line.

The one thing we haven't seen and the nice part about having kind of both businesses, that do-it-yourself SAS model and our more full service model, is that there's been not a lot of change there in the dynamics, which we haven't seen in years.

So that if you're kind of a person who wants to control it and do it yourself, you're still doing that.

And there really hasn't been a shift in the market that we can see, frankly, in 10 years.

So we continue to watch that pretty close, but we feel good about the product that they have and continued improvements that we make together now.

And certainly, the back room has been integrated well, I think.

Okay, and then just one last one for me.

I think in your initial remarks you said that the win rate has gone up.

Maybe you could give us some color as to why you think the win rates increased and anything you could provide on just the level of competition out there and on the pricing front.

Thanks.

Sure.

I think the win rate has won, particularly in regional competitors, but probably even on the national one.

I think we've always been known for great service and personal service with our dedicated professionals with the clients and that those service levels are at an all-time high, so we're very proud of that.

I think on top of that, as you've seen the investments pay off that we've made in technology over the last few years, this year we introduced more innovation than we have in the previous probably three years or four years.

We did a single sign-on last summer where you could reach all of your information online for all of your services, 401(k) payroll, etcetera, in one place in a new enhanced web look.

And then we introduced iPad and Android tablet apps, and they were kind of state-of-the-art optimized for the piece of equipment that you're using.

And then we just introduced a few weeks ago our smartphone app, so I feel that we're really hitting our stride in mixing both great service with very strong technology, from both the mobility standpoint and certainly just overall product standpoint.

And I think it's harder and harder for regional players, smaller payroll companies to stay on top of the technology and all of the probably the changes that are being made from a regulatory standpoint.

And I think that's where we're winning.

Great, thanks.

You're welcome.

The next question comes from Kartik Mehta with Northcoast Research.

Your line is open.

Thank you.

Good morning, Marty and Efrain.

Good morning, Kartik.

Marty, I wanted to go back to a comment you made on acquisitions and just get a better idea.

When you talk about acquisitions, would they be outside of the payroll sphere, or are you talking about just acquiring companies that would allow you to have just better services or different services than you have now?

I think it's across the gamut.

I think we're always looking at whatever we can do to drive top line growth and improve the client experience for us, so there's tuck-in product.

And that's what you've seen.

Most of what we've done has been able to add product.

When you look at SurePayroll just 1.5 years ago, it expanded our, really our product set and suite into the do-it-yourself SAS market.

When you look at ePlan, it kind of did the same thing, and 401(k) would expand us to where we could do go after financial advisors more directly and on a web-based SAS program versus just going after it from our direct client view that we've always sold to.

And in Icon Time Systems, we found a great clock that we were selling to the low end, the 20 and less employee side, and we decided to buy them.

And so -- but just adding payroll clients, we would certainly look at doing that and all these product tuck-ins.

So, I think it's across the board.

I think valuations are always challenging, but we look at an awful lot of opportunity out there.

The good news is there's lots of opportunity.

The tough news is the valuations aren't always as reasonable as we think they should be.

And we're really disciplined in our look at valuation.

And then just your thoughts on maybe the positive or any impact you'd expect from the healthcare regulations.

Obviously, now the Supreme Court has upheld it, so that takes a little bit of the guess out of it.

And I was just wondering what you think the impact would be for Paychex.

Yes, I think -- well, I definitely think it's going to be positive, and I think either way it went, we felt positive.

But as there's a need now, a mandate to have healthcare for many small businesses, I think they are going to be looking for more and more of an expert to help them with all of the requirements, the reporting, etcetera, how to apply for the small business tax credit.

One of the great things I think that Paychex brings to this is the fact that having the payroll data and selling the insurance, we can seamlessly interface with our insurance business to be able to track all the information, move it from insurance to the W2, move it from the insurance agency to help them do all the reporting for tax credits.

I think that there's a nice opportunity here in a business that's already growing over 20% a year, so we feel pretty good about it.

I can't tell you exactly until you see how it all works out exactly how that will help, but I think it's a positive for sure.

And then just one last question.

Marty, you guys have a fantastic balance sheet.

You have a ton of cash on the balance sheet, and the end of this fiscal year, you'll have even more.

Now I'm wondering, is the Board waiting for that $1 billion mark before stating a different strategy of maybe increasing the dividend or buying back shares?

Or is it just that they haven't come to a conclusion as to what they want to do, or is it something else?

I don't think there's any magic to the $1 billion.

I think that we've talked about it, that that does hit some sort of threshold.

But I will tell you that Efrain and I talk to the Board actively every meeting about it.

It's always important to us that we're making sure that shareholders are taken care of.

So whether it's dividend, share buyback, or any of the other options, we discuss them every meeting.

So, I don't think there's anything magic about the $1 billion.

I think it's just a matter of discussing it every time and getting comfortable with what the next steps are.

Thank you so much.

Okay, thanks.

The next question comes from Ashwin Shirvaikar with Citigroup.

Your line is open.

Thank you.

My first question is to ask you about the specific nature of your ongoing IT investments.

Are there any details on the upcoming product road map that you can offer?

And also, you introduced a lot of new technology here in the last several months.

Any update on what the uptake of that new technology has been like?

I think it's early, excuse me, on the smartphone apps, but I think it's been very positively received.

We've gotten good reviews on the technology itself, Ashwin, and I think that we'll continue to move toward more integration and more online capabilities so that clients are kind of mixing that high level of service and technology.

I think what you'll see toward the late summer and fall time frame will be more focused on reporting and the fact that we'll make it easier for our clients to get their information and set it up the way they want to.

So you'll see some new advantages there.

And I think at the investor conference we'll have a chance to show you and describe some more of that with the head of technology, who will be presenting as well.

Okay.

Wanted to go back to one of your comments on expecting a slower start to the year in fiscal '13.

What gives you the confidence of a rebound later in the year?

Because we know -- we look at the underlying trends in the business and can isolate the things that were positives in the quarter that don't recur and feel pretty confident that the rebound will occur after that.

And some of it is timing, some of it's a number of factors that were just unique to that quarter.

So, it's not as though we're just starting slow and then we're expecting to ramp.

There's certain factors that we could identify in Q1.

We just had a great Q1.

We want to apologize for that.

It was a terrific Q1, and the compare is just difficult.

So it's primarily that the quarter last year was a good strong one?

It was a very -- you can see.

It was our strongest by far and, frankly, the strongest in a number of years.

And there were a number of real positives there.

I mentioned one of them was the launch of our HR Essentials product, in that we had introduced it the prior year.

That was a big contributor to the quarter, and simply the growth after you've launched the product, obviously, slows down.

But there were a number of other positives in that quarter.

Okay, a couple other questions, just quick ones.

One is, what are your plans for overall headcount this year, as well as for sales force increase?

I think the sales force increase Efrain mentioned, particularly on the payroll side, was 3% to 4%, and it's one of the first times, by the way, we've grown that sales force in a few years.

So, we're feeling good with Mark's leadership and the leadership in general of the sales team.

The overall sales force is fairly flat, I think up maybe 1% or something like that would be our expectation.

So the 3% to 4% is a gross number and 1% is net?

No, no.

The 1% is total sale.

I thought you were asking about total employee team of the 12,000, and then there's 3% or 4% in the sales team.

Okay.

Last question is, really a free cash flow continue to exceed net income in the coming one to two years?

Well, it's interesting, Ashwin.

The answer is it typically does.

We anticipate that it would.

And if you just do -- if you look through the items on the statement of cash flows that are recurring and you look at what we're spending on CapEx and then our D&A.

So, our D&A basically is similar to our CapEx, and then we have number of non-cash adjustments.

So typically, it's going to exceed it by a little bit.

And then the swing factor, obviously, is what's happening with respect to assets.

I'd just caution that what happens with respect to assets and liabilities is also a function of what day of the calendar year or quarter we close.

So directionally, yes, we would expect it to be up.

One thing I would add to what Marty said is in my comments I said 3% to 4% on the core payroll sales force.

Overall, the rest of the sales force is probably going to be about the same or in that range.

Got it.

Thank you, guys.

The next question comes from Glenn Greene with Oppenheimer.

Your line is open.

Thank you, good morning.

Good morning.

Just a couple questions.

I was wondering if we could somehow get a composition of the 567,000 customers, kind of thinking about sort of the payroll impact.

And I know you sort of suggested it grew double digits, but wondering if we could get a little bit more granular there.

Are they running closer to 35,000 now?

Yes, they're a little bit north of that, but in that range.

Okay.

So they had kind of healthy maybe mid-teens growth, it sounds like?

In that range.

Okay.

And then, at a high level, how should we think about customer growth expectations that you're assuming for fiscal '13?

At a high level, you should think about them as modest.

Modest, so kind of low single digits?

Modest, yes.

Okay.

And then finally, just maybe an update where you ended the year in terms of sales force turnover and your expectations for '13.

Yes, we definitely improved year over year, so we had kind of picked up.

And we're near historic levels, I'd say just slightly higher than that, but a nice decrease from the previous year.

And so I think we've done a nice job with some of the things we've put in place to get the turnover back down.

Expectations for this year would be, frankly, even lower than this -- how we ended fiscal '12 and -- which would get it solidly down to historic levels, if not slightly lower.

So kind of like targeting low 30%s, or are you thinking you could get something with the two?

I would say targeting low 30%s.

Okay, great.

Thank you.

You're welcome, Glenn.

The next question comes from Jim MacDonald with First Analysis.

Your line is open.

Hi, Jim.

Good morning, guys.

Just following up on the client growth, is there anything, any thoughts on what you can do to get that restarted again or maybe longer term?

Well, I think we do -- you know, we mentioned this.

We need an assist from -- we need an assist in business formation, just to give a little bit more color.

That's been inching up kind of 3% to 4% every year, so we would expect that we'll be doing better on the new sales front.

But I think the other part then is to really focus on all of the other areas that we gain clients from.

So, we're up in CPA referrals.

We're up in search engine marketing.

We're up in regional takeaways.

We're doing good battle with the national competitors.

So we're doing -- I think we had a good year from that perspective.

We just need a little bit of a uplift on the other part to get the engine going.

The other part that I'd mention is that, of course, net client is a function also of what's been happening on the retention side.

And we really did a great job, can't emphasize that enough, a great job on the retention side this year.

And we continue to put a lot of emphasis in that area so that we can boost net client growth.

Yes, I think Efrain is exactly right.

We've put a lot of focus on the CPA channel that we've always done very well in, and that continued to show an increase.

And the SEM is really -- bringing in someone to lead marketing and really tackle that has gone very well for us over the last year or so and the regional competitors.

I think also the current clients is one that is difficult because the economy, they aren't opening up as many of the new shops, the second location or third location.

And so we're working new programs to go back on the current clients, though, and see if we can get that to tick up as well.

So, I think there's a lot of activity going on.

Some has paid off last year.

We don't really rest on waiting for the economy.

That would certainly give us wind behind us, but we're very actively going at each place where we get our referrals.

When do you think your increase in sales force might pay off, start to pay off?

Well, we don't get a big bang in the following year.

We're going to add people as the year progresses, so it won't be all at once.

So you really will see more of a benefit in the following fiscal year.

And just a quick follow-up, a technical thing.

It looks like the investment income may have shifted some of your assets longer term and may have had an impact in increasing investment income.

Is that correct?

That's fair.

We have -- I mentioned before, we extended duration a little bit on the portfolio to get a little bit better yield.

It's frankly not a huge change, but it did give us a little bit of benefit.

Okay.

Thanks very much.

You're welcome.

The next question comes from Tim McHugh with William Blair & Company.

Your line is open.

Yes, just want to ask on the decision to expand the sales force more aggressively.

Can you talk how much of that is a reflection of you feeling more comfortable about the macro environment, versus some of the changes you've made to the sales force and you're just more comfortable with the leadership and execution there?

I guess kind of what drove you to start to grow that again?

Yes, good question, Tim.

I think it's both.

I think that there's certain areas of the country that we're feeling a little bit stronger in.

I certainly feel strong about the leadership team.

I think they're right on track, and that gives us a little more confidence to add more people to the group and how we're handling all of the changes we made between compensation, training, recruiting, and the technology that we've given them.

So there's some expansion areas in here.

I wouldn't go into where on the call as to where those are, but we're expanding in some areas where we already have offices, and we're expanding in some new areas as well.

Okay.

And can you comment, the HR Essentials, you made the comment that lower revenue per employee in that business.

Can you describe what's going on there and why that is happening?

Well, if you think about our HRO or HR outsourcing portfolio of products, we've got the PEO, we've got an ASO.

And then, year before last, we introduced HRE.

So, it's a more basic service that provides telephonic support for HR.

And due to the complexity of the environment in which businesses are operating, there's a need for that service.

It occupies a lower rung in terms of price compared to the other two, but we think it has more widespread opportunity, just because of the price point at which it operates.

So, as we sold more of that product because it had a lower cost associated with it, when you compare that to the amount of work site employees covered, you ended up with a lower number.

That's fine from our perspective.

That's what we expected, because we thought there was a space in the market for that kind of product.

It has done very well, and it absolutely from a mix perspective has an impact on our revenue per work site employee.

Okay, so it's not a lower revenue amount for kind of the same-store HR Essentials, but it's a mix shift out of the --

No, no, not at all.

It's a different product.

As Efrain said, we found this niche of really telephonic support where our ASO HR outsourcing or the PEO is really a hands-on dedicated person to your business, whether it's in the PEO or not.

But the HR Essentials was basically -- it kind of breaks clients into that with telephonic HR support before they're ready to step up.

And so the revenue is less, and it breaks clients kind of into HR outsourcing.

And so then we're also -- we always continue to look at those clients to say whether we could get them to upsell into the full ASO or PEO product as well.

But it found a good niche, I think, particularly in the economy right now to help clients break into HR outsourcing without paying the full amount for full -- having a full dedicated person to them.

Okay.

Thank you.

You're welcome.

The next question comes from David Grossman with Stifel Nicolaus.

Your line is open.

Hi, David.

Hi.

Good morning.

Thank you.

Good morning.

Just really quickly, just to go back to the spending on technology, I think you said it would probably be down this year versus last, given the concentration of new product development last year.

First of all, can you help us understand how we should think about product cycles and the evolution of the products, given that you went through a period of probably some under investment and now you've caught up a little bit?

How should we think about that going forward?

Look, David, just so I can clarify a little bit what you said, what I said was that our rate of growth in IT spending will moderate, not that it will go down.

So, I think that part of the answer, and I'll let Marty complete the question, part of the answer to your question is that we needed to step up spending at a base level rate from where we were, and so that's what was happening over the past three- to five-year period.

As we've said in calls before, we also at the same time were taking costs out of ops, so it wasn't completely transparent.

If you go back two years ago and you look at our op income before float -- our percentage of op income before float, you're going to see roughly about a 200 basis point improvement that we have been doing while we've been investing in IT.

So the -- part of the answer to your question is that we expect the rate to moderate, but we've already built in a higher level of go forward IT spending that's even being done with what is now our highest op income percentage that we've achieved.

So we've already accomplished a lot of that transition, and I'll let Marty talk a little bit more about that.

Yes, I think -- and that's a very good point to make, only the increase, the growth piece of it is moderating, but the level of spend is very strong.

And we were able to drive productivity out of the operations side in the last couple years and put those dollars into IT, and now we're seeing the payoff from that and will continue to see it.

I think, David, I think that it's always going to be important and has become increasingly important to be sure from a technology standpoint that you're very web-based, that it's a SAS model, even in full service, which we focus so much on the full service aspect of a dedicated person to our clients.

They do want availability of their reports the way they want them, how they want to customize the reporting of the information, how they want their employees to access W2s and pay stubs online or on their smartphones.

And so, I would guess that that will continue.

Frankly, I think technology spends are going to continue, and it's balancing that with the dedicated service.

We're not -- we will never walk away from the service level.

That's very, very important to us as a differentiator, but you got to have the technology as well.

So, I think the evolution of those products will continue, and frankly, we're just getting started.

We're very excited about the head of technology that I've had in place now for a few years on the development side, who came with a lot of experience from SAP, PeopleSoft, etcetera, who again you'll meet at the investor conference.

And he's got great plans for us, and we're really excited about him.

Thanks, that's very helpful, Marty.

And just as a follow then to that, should we think about new products as being catalysts for incremental market share gains or penetration, however you want to look at it?

Or does it -- do you not really view it quite the same way?

Well, it's an interesting point.

I think it's a little bit of both.

You always want to gain incremental, but I do think there's some that you just have to do to maintain position.

And I think that's where we start to win over some of the smaller, particularly low-end payroll companies, we handle smaller clients.

They can't keep up with that technology change, and so the larger players are able to invest and keep up with that.

So, I think some, to be very straightforward, some is to keep you in the game, and some is incremental.

We're certainly always pushing to be incremental.

I don't want to just match any competitor.

Our goal is to leapfrog the competition and that's thinking out two or three years that where you're getting to, you're going to be beyond the competition, knowing that they're investing as well.

And we're very focused on that technology enabling us to do what we call product expansion or introduction of new products, absolutely part of the strategy that we'll walk you through at the Investor Day.

Very helpful.

Thanks.

And just one last question, Efrain, for you.

Sure.

Just looking at the guidance for float income for next year, probably a little better than I would have thought.

Can you just maybe help us understand what kind of balance growth is assumed in that guidance for the year?

It's modest, probably in the 4% to 5% range on balance.

But frankly, what's going on there, David, is that we extended duration a little bit and looked at the portfolio so that we didn't take as big a hit as we would have if we had not really done that.

Got it.

Okay, great.

Thanks very much.

Okay.

The next question comes from Gary Bisbee with Barclays.

Your line is open.

Hi, guys.

Good morning.

Hi, Gary.

The HR services business seems like it's been losing a little bit of momentum, or at least this past quarter.

I realize you lapped ePlan part way through the quarter, and that's probably part of it, but is there anything else that you would cite for that or any other trends that maybe you're driving?

Yes, Gary, if you look at what's happening with HRS, it's really the softness of the PEO business.

And just to step back a second and explain that a little bit, when we go to a client unlike some of our competitors, we don't say to the sales force, sell them a PEO or sell them an ASO or sell them an HRE.

We've got a product set that basically, depending on the size of the client, HRE typically is smaller to PEO typically a little bit larger, a sales person can sell.

And what we saw this year was that the ASO just seemed to be the preferred model and that PEO just didn't do as well.

Now, part of that has to do with renewal rates and part of it just is the environment in which you're selling, and PEO was not the favored choice among clients this year.

As a consequence, we saw softness in that business, but we had a lot of strength on the ASO business, and that's impacted work site employees and it's impacted growth rates overall.

There's a little bit of a changeover going on there that we expect will normalize.

And I know the PEO has got a higher revenue, but a lot is the pass through of the insurance cost.

So if you thought like in profit dollars per work site employee, how does PEO --

PEO is higher than the ASO, not by much, but it is higher.

And certainly, HRE is much lower than both of them.

So you get a little bit of a mix effect, if you're mixing a little bit down to ASO versus PEO.

Okay.

And then, just despite a little bit of slowing there, clearly the penetration of the HRS offerings into the payroll customer base continues to march higher.

Correct.

Do you see any potential to accelerate that, or do you have any -- can you give us any updated thoughts on penetration, maybe how large some of that could go?

I mean, is this still --

Well, we're still at the early stages on most of our HRS products.

I'd say retirement services is one exception to that.

But with respect to the HRO or HR outsourcing products, we still have a long runway to go.

And I don't think we're anywhere near seeing a point of maturity in those businesses, especially as it relates to penetration rates.

Is there anything you can do to accelerate that?

It sounds like the client growth is going to remain pretty modest for a while until we get a big increase in the economy.

Are you trying to do anything to accelerate that, or is it more steady as she goes, keep marching the penetration?

I think one thing was, as we talked a few minutes earlier about HRE, we're trying to find other ways to kind of get clients to try it.

So when you look at HR outsourcing, really one of the fastest growing products we have, as we saw that start to slow where clients weren't ready to step up to an ASO or a PEO, we introduce HR Essentials, which gives you telephonic support and your handbook and gets you started in HR outsourcing.

And so I think there's ways to break into markets with a lower-priced offering that gives a little bit less service, kind of model, breadth of a model.

And so we're continuing to try things like that and then even be able to go back and say, now that you have this, boy, if -- you could really use, given your employee base or your growth in employees or complexity, you could use a full service outsource person who is dedicated to you.

Okay.

Thank you very much.

You're welcome.

Next question comes from Julio Quinteros with Goldman Sachs.

Your line is open.

Hi, Efrain.

Hello.

One quick point of clarification on the first half versus second half commentary that you made.

Can you just clarify the sales comments for the first part of the year versus the margin comments to make sure that I have those straight?

Oh, okay.

No, what I said was that if you look at earnings for the first half, or I should say, the results for the first half versus the second half specifically with respect to earnings, they're going to be more comparable in 2013 than they were in 2012.

That's as much as I can say on the guidance.

And then, I just said that first quarter will present a difficult compare.

For sales, correct?

Yes.

Okay, got it.

And I guess maybe, Marty, on the business front, you guys have invested in technology, you've invested in new sales, we're turning the corner into fiscal 2013.

We are not getting much in the way of acceleration in terms of revenue growth.

I know a lot of that, obviously, has to do with the backdrop in terms of the end markets that you guys are selling into.

Is that just kind of the reality of the business as it stands because of your SMB client base, or is there an expectation that these investments and the technologies and the platforms can actually yield a faster growth rate at some point?

And I guess over what period should we actually expect to see that?

Well, I think as we've talked about, Julio, long term, we're seeing ourselves back into the high single digits for top line growth.

And I think that all of the things that the sales and service execution, not only from a sales perspective, but from the service and all of the things that we're doing from a product innovation standpoint with the mobile apps and single sign-on and improved integration of multiple products for a client and the reporting, I think all those things are looking to how do we drive that revenue up, whether the macro is in our favor or not.

That looks like it's going to continue to be a gradual improvement, which I think will give us some win, but we're not counting on that.

We're looking at really the execution, the innovation, and the expansion of products to drive us there.

And that certainly is our goal is to get ourselves back into that higher single-digit revenue and then gain some leverage on top of that to get the earnings up.

We're proud of the fact that even in this economy, we've grown.

We're kind of at a point where the service revenues at the highest point it's ever been in our history and that from a client base standpoint, although there wasn't a lot of growth there, it's like an inflection point for us where we've been down in net clients for three years, and now we've reached the flat to really with SurePayroll up 3,000 clients, we really feel like we are not looking for the economy to certainly bail us out.

We're doing everything we can to get the growth going.

Okay.

And then maybe just as an incremental, it sounded like you said you felt like some of the healthcare reform stuff could be a positive.

Any way to put some parameters around how fast or in what areas we should expect to see that actually benefit the business going forward?

Well, I think it will be, obviously, in the health insurance business is where I see it.

It's hard to tell at this point, even though it looks like they've upheld the majority of the changes.

It's going to be tough to see still how they implement up to 2014.

But I do think that when they uphold the complexity of healthcare and mandates and more regulations on small business, that good news of that for us is that more will require outsourcing to take full advantage of that and, frankly, just to comply with the requirements.

And we think that a payroll/insurance agency combination like what we're doing is going to be positive in that respect, but it's hard to put a number on it yet.

I think that the only negative of these kind of things is the more regulations and requirements that are out there sometimes does continue to slow new business formation from necessarily maybe starting up.

I don't think that's the biggest thing.

I think it's still consumer confidence and will someone buy my product.

But I think when you're starting to get into a business, any entrepreneur that hears that taxes are unsettled, that healthcare is now needed, that there's all these requirements that may slow them down.

So, hard to put a number on it yet.

We need some time to see how the whole thing kind of rolls out.

Okay, great.

Thanks, guys.

Good luck.

Sure, thank you.

Thanks.

Take care.

The next question comes from Bryan Keane with Deutsche Bank.

Your line is open.

Hi.

Can you hear me?

Yes, now we're good.

Now we're good.

Oh, good.

Not sure what happened earlier.

I might have missed it, or I missed it, just the new sales growth.

I know it was up mid to single digits last quarter.

Did you guys track a number this quarter?

No, we don't disclose it by quarter.

We were up in the sales season.

We were up slightly this year in units, and what we saw was down in the first half of the year, up in the second half of the year.

And then how does that translate into guidance or going into next year?

You still expect it to be up or even accelerate from what you did in fiscal year '12?

Look, we expect it to be up.

That's what we expect going into next year.

Okay.

And then, just a clarification on the pricing.

You said the net impact of price increases plus discounting was still in the normal 2% to 3% range that you guys usually do?

We were in that range.

We didn't say that number precisely.

Okay, and going forward probably no change to that range?

Yes, we don't see that changing.

Okay.

Super.

Thanks so much.

Okay.

The next question comes from Jim Kissane with Credit Suisse.

Your line is open.

Hi, guys.

How are you?

Hi, Jim.

Marty, you had indicated that the win rate was up in the quarter.

Was that in the quarter or for the year?

And then, given that, what's been the trend in the win rate, say, over the past two to three years?

I would say that, well, one, that was for the year, so as you look at the whole year, and I don't think the quarter was much different.

So, the win rate on other competitors basically as we look at it --or in competitors was up, and so we're very proud of that, and that was quarter and year.

The trend over the years I think has been fairly flat, the last two years has been up and but fairly flat before that.

And I think actually if you went back three years, probably might even been down a little bit, might have been a little bit of a loss on that.

And so again, the last two years, and this was year-end fourth quarter, we're up a little bit versus competitors.

So you said you started to pick back up relative to the national competitor and the regionals.

How about the more SAS-based, the smaller web-based competitors.

How are you doing relative to those?

Really, Jim, we haven't seen much change there at all.

We don't really see a change where -- we don't really lose to SAS-based competitors, because the clients, the type of client is either a do-it-yourself or it's a full service, and we don't see a lot of that.

We do see where we gained some on manual, those who are doing it manual, that we're winning more of those clients.

We're up in sales from manual providers, but we don't see a lot of change from those who are doing it -- generally doing it themselves on a SAS-based type competitor.

They kind of either go, SurePayroll would see more of that but not us, okay?

And I think obviously based on their growth, they're doing well.

Are you seeing any of your existing customers move to SurePayroll at all?

No.

And Marty, can you update us on your mix of distribution, CPAs, web search, direct sales?

Oh, from a referral standpoint?

Yes, it hasn't changed much.

It's really still a roughly the same.

If you were to look at it generally, it's about one-third from CPAs, one-third from current clients.

That one might be down a little bit, given the economy, and then the rest from other sources like national sales support.

And the SEM, the search engine marketing, has picked up, I think, where the client -- the current client dropped off a little bit.

So SEM, while it's still a small number in general, is up dramatically from previous years.

And I think you'll continue to see that, just because of the macro kind of approach that clients are just go in on the web and search.

But I think we've done a much better job in being able to attract clients and win them over from the web.

Great.

If I can get one last one.

Efrain, can you give us a sense of the logic behind adjusting the disclosure around the HRS metrics, going from quarterly updates to an annual update?

Yes, part of it is that the -- frankly, the quarter, it seemed inconsistent to me to be updating one part of the business and not being updating the entirety of it.

We'll give color on where we see things, and if there's some dramatic departure, we would come back and talk about that.

But it just seems strange, because you could look at some part of the business and draw some conclusions on the business as a whole, but we weren't giving you much on the payroll side.

And frankly, we like to look at the trends over a longer period of time rather than quarter to quarter.

Okay, thank you.

See you in a couple weeks.

Okay, Jim.

The next question comes from Tim Willi with Wells Fargo.

Your line is open.

Thank you, and thanks for taking the question.

The thing I just wanted to ask about was, I think it's closer to the margin discussion that's been addressed a couple different times, but if you think about your sales force and the tools you've given them, how do you think about their productivity levels now versus what could potentially be if we started to get even a couple percentage points of client growth and how that might change sort of the longer term relationship between sales force growth versus client growth?

Is there any way that you guys sort of think about that with the new tools and comp plans and things like that you've put in place that would change that dynamic versus prior years?

Yes, I think it's tough to measure with the economy the way it is, but we're certainly always looking to help them be more productive.

And I think we've seen some improvement there, and so the tools have paid off.

When you take all of the paper out of their hands and allow them to do everything on their tablet and you put their leads much quicker in their hands and a way to monitor those leads, and you give them things even kind of some what we call sales force chatter is the name of a product where they can get back and forth between different reps and different areas of the business and they can have kind of almost social discussion, social marketing type of discussion and so forth, I think that does make them more productive.

I think it helps you stay even where the economy is pulling against you a little bit, but I think as the economy improves, that will certainly continue to make them more productive.

We're very proud of the fact that we've always had, in our view, the most productive sales force in this industry, and that -- I don't see changing, and I see it improving over the years.

Is there any way, however you measure it internally, whether it's revenue or client count or employees are being paid per rep, where you've sort of thought internally that these tools, etcetera, could make our guys and women 20% more productive when things pick up?

Or is there any way to think about it from that perspective?

Well, we certainly measure it by units, revenue, and every other way possible and closing rate, and we don't disclose any of that, but we certainly measure it very closely.

And as I said, I would just say at a high level that we've seen an improvement and we expect to continue to see that.

The reason why you change obviously incentive plans and give them additional tools is to help drive their productivity, so they're spending more time with leads and referrals and so that we can increase the closing rate and make them more productive, not only for us but for them.

So, we definitely see some benefit already occurring.

I'd say it's slight, but we're seeing it, and I think as the economy improves, that will benefit us even more.

Great.

That's all I had.

Thank you.

All right.

The next question comes from Mark Marcon with R. W. Baird.

Your line is open.

Hi, Mark.

Hi.

Thanks for taking my question.

Sure.

Was wondering on two fronts.

First, can you talk a little bit about MMS?

What are you seeing there?

What sort of rate of growth are you expecting, and how is the environment changed, if at all?

I think the -- I don't know if the environment has changed much.

I think we've kept up very well from a product standpoint with time and attendance and HR administration online.

As I've mentioned probably before that a lot of that sales team really tends to lead with those products, HR administration, more time and attendance and payroll comes along with it.

We've worked to improve the integration of those products, and so I think that that has helped us from a competitive standpoint.

I think we're very competitive, and I think you'll continue to see improvements and enhancements to that product set as well.

We don't really break out the growth there.

I think it is as competitive as its always been, and so I think that it's doing well.

I think what's surprised us over the years maybe is that I guess I'd put a little color on is the addition of the HR online and the time and attendance online has made this a very good business, and that has really lifted the revenue.

We don't disclose that revenue separately, but it's really helped lift that revenue per client.

The growth rate in the suite of products that comprise what we call our one-source solutions or MMS solutions is faster than payroll.

Okay, that continues to be faster then than payroll?

Yes, and just to put more color on what Marty said, I think their technology is very, very important.

What we see is technology migrating into that space at a faster rate than you see it in the core payroll space.

Absolutely.

And then just, I know its been covered a couple of times on the call, but I just want to make sure I'm 100% clear on it.

With regards to the way that its stated in the 8-K and the release, we're basically talking about fee operating margins in the 37% range, which would imply no margin expansion.

But on the call, we've talked about having normal margin expansion.

So I'm trying to figure out what exactly -- how we should proceed from here.

Well, we have modest margin expansion built into our plan, and as I said, we have expenses growing more slowly than sales and at an op income without float, we targeted about 100 basis points in our plan.

Okay.

And so that's probably the better thing to look at?

That's correct.

And in terms of the sequencing, is that going to be back-end loaded as well?

I think our plan is a bit more back-end loaded than this year's plan, just how expenses and revenue fell out.

Okay.

Great.

Super.

Look forward to seeing you in a couple weeks.

Okay, Mark.

Thanks a lot.

The next question comes from Tien-Tsin Huang with JP Morgan.

Your line is open.

Hi, sorry.

Good morning.

Good morning.

Good morning, Efrain.

I know you guys have covered a lot of stuff already, so just on the 401(k) record keeping side, wanted clarification there.

The asset fund flows I know have been tough, and the fee models changed a little bit.

Did this have any bearing on the outlook?

Any way to quantify this?

Well, it has a bearing on first quarter, as I mentioned, because assets have not grown.

If you look at first quarter, our disclosure assets from Q1 of '11 to Q1 of '12, we had a nice jump in assets.

We don't expect to see that in Q1.

That's going to be a drag on the quarter.

And then going forward, we don't expect to see the same level of growth in assets that we saw in previous years, so that will have an impact.

And also, our model is moving away from asset fees as a driver to revenue in that business.

Right.

So when is that transition out in terms of the compares with the fee transition?

I'm just curious, I understand it's a very high margin business but --

I think it's out.

I think we'll experience a bit of that in every quarter in 2013.

Hard to say exactly when, it will depend on the mix of plans that we sell.

Okay, and just high-level question at the Analyst Day.

I'm curious, now will you give us -- I don't know, it's a little bit of a preview -- but will you give us a build up to a long term outlook and your thoughts on revenue margins, etcetera?

Is that something --

We're intending to give you at least an intermediate term of build up.

Okay, terrific.

Looking forward to it.

Thank you.

Great.

Thanks.

The last question does come from Vishnu Lekraj with Morningstar.

Your line is open.

Good morning, everybody.

Hi, Vishnu.

How are you?

Good.

I wanted to touch here on the client retention rates.

You did a good job over the quarter.

I was wondering what is driving that mainly.

Is it a healthier client base, or is it more of what you're doing on your side in terms of service and things of that nature?

Yes, I think it's both.

I think we certainly have seen an improvement in the number of businesses going out of business, so there's fewer of those.

And that's been happening for probably nine quarters now anyway, and but we've also seen an improvement in almost every category.

So whether it's those clients who are leaving for price or leaving for service, which is a pretty small piece of the pie, or those leaving for other products, every one of them has improved.

But I would certainly say a good chunk of it is a few were out of business or those with no employees that were leaving for those reasons.

So, it's across the board, improvements across the board, but a good chunk of it, because that's a good chunk.

Usually two-thirds of our losses come from businesses who are out of business or have no employees and just aren't running payroll.

Great.

Just want to touch year-end guidance one more time, and I'm sorry if I missed this.

But in terms of the checks per client coming down or moderating, is that more of a mix in terms of the customer acquisitions and then them having lower payroll headcount?

Or is that just an assumption of lower employment growth overall?

It's an assumption, Vishnu, of our client base, the decline or the moderation of the improvement in our client base, kind of a roundabout way of saying that when we hit the depths of the recession, our clients then started adding more employees.

And they were adding them at a rate that was faster than we anticipated, and we frankly just expect at this point it to moderate going into next year.

Got you.

See you guys in a couple weeks.

Thanks.

Thank you.

Is that the last question, Jose?

There are no other questions at this time.

All right.

At this point, I would like to close the conference call.

If you're interested in replaying the webcast of this conference call, it will be archived until July 27.

Thank you for taking the time to participate in our fiscal 2012 year-end press release conference call, and we look forward to seeing many of you at our investor conference on July 18.

Thank you very much.

Thank you for participating in today's conference call.

The call has concluded.

You may go ahead and disconnect at this time.