沛齊 (PAYX) 2013 Q2 法說會逐字稿

Welcome, and thank you for standing by.

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

(Operator Instructions)

Now I would like to turn the meeting over to Mr. Martin Mucci, President and Chief Executive Officer.

Sir, you may begin.

Thank you.

And thank you for joining us for our discussion of Paychex's second quarter fiscal 2013 earnings release.

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

Yesterday afternoon, after the market closed, we released our financial results for the second quarter ended November 30, 2012, and filed our Form 10-Q, which provides additional discussion and analysis of the results for the quarter.

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

This conference is being broadcast over the internet and will be archived and available on our website for approximately one month.

On today's call, I will review the highlights for the second quarter in our operations, sales, and product development areas, and Efrain will review our second quarter financial results and discuss our full-year guidance, and then we'll open it up for your questions.

Our results for the second quarter of fiscal 2013 reflect solid progress.

We are focused on driving growth in revenue and profits while providing industry-leading service and technology solutions to our clients and their employees.

Our client base, checks per payroll, and client retention demonstrated continued positive growth.

In fact, the growth in payroll service revenue and HR service revenue over the previous year's quarter accelerated in the second quarter versus first quarter.

Efrain will go into more detail on the financial results and comparisons.

However, I would like to provide with you some highlights for the quarter.

Payroll revenue grew by 1.4%, impacted by lost revenue as a result of the impact of Hurricane Sandy.

HRS revenue grew double digits for the second quarter, as we continue to experience success in selling 401(k) and HR outsourcing and other value-added solutions to our clients.

Total service revenue grew 5%, versus 3% in the first quarter.

Checks per payroll has improved for 11 consecutive quarters, with second quarter growth at 1.2% compared to 1.8% for the prior year second quarter.

Checks per payroll were impacted by Hurricane Sandy as well; and without Sandy, we believe checks per payroll would have only moderated slightly from our experience in the first quarter, which was 2%.

Client retention remains at near historic highs.

Our first six months has us on track for another strong year and possibly historic year of retention.

Execution and operations remain solid, as evidenced by our exceptionally strong client satisfaction results.

It is our exceptional client service, along with our technology, I believe, that sets us apart from our competition.

We are seeing good results from our sales execution in the small business market and are well positioned for our peak selling season.

As planned, we have added a number of territories and have placed new focus on franchise and banking opportunities.

In addition, we have seen the core sales force turnover return to lower levels.

We expect to see additional penetration of our products and services within our client base with the goal of increasing our share of revenue from our clients.

Our SurePayroll business continues to perform well, with revenue growing at double digits.

From a technology perspective, progress continues on integrating our leading technology and mobility platform with our world class customer service through the Paychex next generation suite.

In October, we introduced the new best-in-class web-based report center for our clients and CPAs and have already received glowing reviews.

We launched a newly designed Paychex Account Knowledge Center, which is a free online resource available to accountants through our website that brings valuable information and time-saving on-line tools to accounting professionals.

In addition, we also launched the new and improved buildmybiz.com.

It now includes a number of new features that provide enhanced resources for entrepreneurs and small business owners.

At the end of November, we acquired ExpenseWire, an online expense management solution for small- to medium-sized businesses.

We previously partnered with ExpenseWire to power our Paychex Expense Management, a web-based solution that provides clients with tools to manage and control the expense reporting process.

This acquisition gives us the ability to further enhance and integrate our Paychex one-source solutions for major markets and provide even greater value to our clients.

As you are aware, Hurricane Sandy resulted in devastation in several areas on the East Coast.

We are grateful that all of our employees are safe, and though not all were untouched by this event, Sandy resulted in the most significant test of our business continuity plan to date, involving 90% of our branch network either being impacted or covering those branches that were impacted.

The effort was extremely successful.

I'm extremely proud of the employees at Paychex, and this was a testament to the commitment of our employees across the nation to ensure that all clients still had exceptional service, even during a devastating event.

In addition, our employees demonstrated a commitment to their fellow colleagues, donating time and money to help them get back on their feet.

The storm did have an impact on many of our clients.

We estimate that there was approximately 0.5% impact to our payroll service revenue growth during the quarter.

In summary, fiscal 2013 reflects continued progress in growth metrics.

I will now turn the call over to Efrain Rivera, our CFO, to review our financial results in more detail.

Efrain?

Thanks, Marty.

Let me start with our standard legal disclaimer.

You should be aware that certain written and oral statements made by us 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 refer to our press release for our discussion of forward-looking statements and the related risk factors.

As Marty indicated, our second quarter financial results for fiscal 2013 represented sequential improvement from the first quarter.

Here are some of the key highlights for the quarter and six months.

I'll provide greater detail in certain areas and wrap with a review of the 2013 outlook.

Total service revenue grew 5% in the second quarter and 4% for the six months.

Interest on funds held for clients decreased to 8% for both the second quarter and six months, to $10 million and $20 million, respectively.

This result was a by-product of the current low interest rate environment.

Expenses increased moderately, 4% for the second quarter and 3% for the six months.

We continue to invest at a high rate in product development and supporting technology; but this was partially offset by increased productivity within operations, which allowed us to maintain solid operating margins at 39.3%.

Operating income net of certain items increased 6%, to $220 million for the first -- for the second quarter, and 5%, to $448 million, for the six months.

Operating income net of certain items as a percentage of service revenue is expected to be lower in the remainder of fiscal 2013.

As you know, expenses tend to be higher in the third quarter, due to costs to support our calendar year end operations and sales season activity.

In addition, we continue to invest in innovation.

Net income increased 5%, to $148 million for the second quarter, and 4%, to $301 million for the six months.

Diluted earnings per share increased 5%, to $0.41 per share for the second quarter, and 4%, to $0.83 per share for the six months.

Now, let me turn to payroll service revenue.

It increased 1% for both the second quarter and for the six months.

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

As Marty already mentioned, our checks per payroll continued to advance, increasing 1.2% compared to the same period last year.

This result reflects a moderation of last year's rate of growth in the second quarter, which was 1.8%.

Revenue per check grew modestly as the result of price increases, partially offset by discounting.

And as mentioned previously, payroll revenue growth was impacted by approximately 0.5% by lost revenue from Hurricane Sandy.

Just to put what Marty said in perspective, we believe that approximately 20% of our branches were in the -- 20% of our clients were in the path of the storm, and 15% of them were significantly impacted by the storm.

Now let me turn to HRS revenue.

It increased 12%, to $182 million for the second quarter, and 10%, to $365 million for the first six months.

We were up significantly from the first quarter's 7% growth rate.

HRS revenue growth reflects favorable trends in checks per payroll, price increases, and also client growth.

Some highlights of the contributions to HRS revenue growth include retirement services revenue, which benefited from client growth and an increase in average asset value of retirement services client employees fund.

This was partially offset by the impact from a shift in the mix of assets within these funds to investments earning lower fees from external fund managers.

And just a note to say that we believe that our segmentation results in the 401(k) area, which we talked about both at the investor day and on prior calls, is showing some good early results.

Paychex' HR Solutions revenue was positively impacted by prices increases and growth in both clients and client employees.

The rate of growth was tempered by fewer client employees within our PEO compared to the previous quarter.

Insurance service revenue benefited from strong growth, driven by an increase in the number of applicants, while workers' comp insurance delivered increases in both clients and in premium.

HRS revenue quarterly growth can vary due to the volume of clients, PEO workers' comp, and fees earned on retirement services clients' employees funds.

These fees change due to fluctuations in the financial market and the asset value of funds invested.

PEO net service revenue also exhibits greater variability between quarters, due to a number of factors, which include changes in workers' compensation claims experience.

Let me turn now to our investment portfolio.

As you know, we maintain a fairly conservative investment policy, and our goal is to protect principle and optimize liquidity so that we can ensure that all of the cash commitments we've made to clients can be met.

On the short-term side, our primary investment vehicle is high quality variable rate demand notes and FDIC-insured deposit accounts.

In the quarter, we had more VRDN investments than FDIC-insured deposits, and you can see that in the statement of cash flows.

In our longer-term portfolio, we invest primarily in high credit quality municipal bonds.

Interest rate environment remains at historically low levels.

Our combined portfolios have earned an average rate of return of 1.2% for both the second quarter and for the six months, compared to 1.3% for the same periods last year.

Interest on funds held for clients increased 8% for both the second quarter and the six months, to $10 million and $20 million, respectively.

The decrease was driven by the decline in the average rate of return on this portfolio to 1.2% for both second quarter and six months, from 1.4% last year.

This was partially offset by increases in average balances of 4% and 3% for the quarter and six months, respectively.

Our average rate of return was also impacted by our allocation of investments to a greater percentage in tax-exempt securities within the short-term portfolio.

As our interest on funds held for clients and corporate investment income are reported before taxes, the return appears lower on average when we have a greater mix of tax-exempt investments.

The increase in average investment balance was the result of favorable trends in checks per payroll, wage inflation, payroll tax administration clients, and calendar impact.

Last year reflected strong growth in average balances, due to the inclusion of SurePayroll client funds and favorable impacts from state unemployment insurance and checks per payroll, resulting in a difficult year-over-year comparison on this metric.

Our investment income increased 22%, to $2 million for the second quarter, and 26%, to $4 million for the six months.

This result was mainly due to higher average investment balances resulting from investing the cash generated from operations.

We anticipate that growth in investment income will be lower in the second half of the year, due to lower average balances and lower interest rates than planned in the second half of the year.

Now let me talk about our financial position and walk you through some key highlights.

It remains strong.

Cash and total corporate investments were $806 million as of November 30, 2012, and we had no debt.

Funds held for clients as of November 30, 2012 were $3.7 billion, compared to $4.5 billion as of May 31, 2012.

As you know, funds held for clients vary widely on a day-to-day basis and averaged $3.3 billion for the six months, a year-over-year increase of 3%.

Our total available for sale investments, including corporate investments and funds held for clients, reflected net unrealized gains of $63 million as of November 30, 2012, compared with net unrealized gains of $60 million as of the end of May 2012.

Total stockholders equity was $1.7 billion as of the end of November, reflecting $236 million in dividends paid during the first six months.

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

Cash flows from operations were $326 million for the first six months, a 10% increase compared to prior year.

The increase was driven by timing related to changes in operating assets and liabilities, and also higher net income.

Now let me turn to our guidance for the remainder of fiscal 2013.

I'd like to remind you that our outlook is based upon our current view of economic interest rate conditions -- economic and interest rate conditions, I should say -- continuing with no significant changes.

Payroll revenue growth of 2% to 3% is based on anticipated client base growth and modest increases in revenue per check, offset by some moderation in growth in checks per payroll.

We expect payroll revenue growth for the third quarter to be comparable to results in the second quarter and then increase in the fourth quarter.

And let me just repeat that.

We're expecting that payroll revenue growth for the third quarter is going to be comparable with the second quarter, and then increase in the fourth quarter.

We anticipate that fourth quarter will be stronger than Q3.

That's a bit of a difference than what you saw last year.

Our HRS revenue growth is expected to be in line with recent historical experience.

For the third quarter, HRS revenue growth is anticipated to fall within the range of guidance we have given for the full year, but at the lower end of that range.

In total, service revenue was anticipated to be at the low end of our full-year range of guidance of 5% to 6%.

We anticipate minimal impact from the acquisitions we have made or prior acquisitions, and our operating margin for the year is anticipated to be approximately 37%.

This is lower than the margin experienced in the first half of fiscal 2013.

As previously discussed, our margins are historically lower in the second half of the fiscal year.

We do anticipate an increase in the percentage of tax investments in our short-term portfolio, and investment income net was revised down to a range of 0% to 5% to reflect the impact of anticipated lower interest rates and average cash balances.

I'll turn it back over to Marty.

Operator, we'll now open the meeting to questions.

Thank you very much.

(Operator Instructions)

Our first question now is from Paul Thomas of Goldman Sachs.

Your line is open.

Good morning, guys.

Thanks for taking my--

Good morning, Paul.

Good morning.

Thanks for taking my question.

Could you comment first on new business growth and how that trend had compared with your expectations during the quarter?

Yes, I think what we've seen is the sales from new businesses are still a little bit behind where we would like them to be.

I think we are feeling good about the peak season as we're going into it, and we're into it right now and selling, in the fact that a lot of things are in place on the sales team, the market segmentation, and the focus on franchise and banking channels.

And that the sales rep turnover is back to normal and -- but we've seen still kind of a lagging business environment.

It's getting better, but it's not changing a lot.

It's still pretty gradual, but it just makes us work harder to get the clients.

And then looking at 3Q and 4Q, the impact from Sandy, is that expected to persist at all into 3Q, or is that pretty much limited to 2Q?

Look, we quantified as best we could what we thought the impact of the storm is.

At this point, we don't anticipate it will be significant.

But we're still quantifying some of the impact.

Okay.

Thank you.

Okay.

Our next request now from George Mihalos, Credit Suisse.

Your line is open.

Hello, guys.

Thanks for taking my questions.

Sure.

Just to follow up on the prior question now, for the third quarter payroll services growth, where you said it would be in line with 2Q, is that adjusting for the impact of Sandy?

So should we be looking at a 2% type number?

I can't get into the exact number, but the impact of what we saw in Q2 has a follow-through impact on Q3.

And the other thing that I would mention is that the Q3 compare is difficult, because we had an extra day of processing there because it was a leap year.

Okay.

And then just on pricing, has pricing held from first quarter levels, or have we seen a little bit more deterioration on a net basis?

No, I think pricing has held.

I think when you factor in checks and the impact that we saw from the storm, it probably caused a little bit of disruption in the quarter.

So you can't look at the data and say that there's been a change in pricing.

The effect of the storm and the impact it had on clients who didn't run payrolls is going to have a little bit of effect on revenue per client.

But it does seem to be holding pretty well.

We don't see really a big change there.

Okay.

And last question for me, the outlook for the PEO, when do you think that business starts to stabilize?

Thank you.

I think we've already seen where it's starting to come back, and so we're feeling pretty good about that.

We're anxious to see where we are after the selling season.

That really will tell the difference.

But we feel good about the client retention and the sales at this point being improved over last year.

Our next request now, David Togut, Evercore Partners.

Your line is open.

Thank you.

Good morning.

Hello, David.

Could you provide more insight, perhaps the rate of growth you're seeing in terms of new business signings on a year over year basis in the payroll services business?

Yes, I think from -- it's fairly, you know, we're still seeing it fairly flat to down a little bit, because there are not that many new businesses additionally starting up.

And so from a sales perspective, I think it's still pretty tough out there, and just gradually improving.

But I think we're doing about the same as a percentage of the new business starts.

But it's not getting that much stronger.

Anything you want to add to that, Efrain?

No, I would just say that focusing on new businesses is only part of the equation.

And what I would add is that in the last two months, we've had some of the best back-to-back sales months that we've had in a while.

And it's a focus -- it's a product of focusing on the issues that Marty mentioned earlier, on all the other channels that we put an emphasis on execution, better execution.

And so I think although Marty's correct in terms of the constraints that we're having with new business coordinations, it's not impacting, at this point significantly, our new business sales, because we're seeing good results in terms of early results on sales.

Yes, kind of across the board.

We usually don't get into too much on the sales until after the -- into the third quarter, so we see the selling season.

But we will say, we feel we're off to a very good start.

I think this is the best in a long time that I've seen.

I think the sales team is doing a great job, and particularly the core team on bringing in new business and revenue per client is feeling very good.

I think it's the focus, as Efrain said, on execution, the sales rep turnover coming back down to normal levels, a focus on segmentation, so really focusing the teams on their various market segments.

And I think the technology and the addition of the mobility platforms and new payroll report center is all adding up to a very positive, at this point.

What percentage of your bookings in Q2 and Q1 were sole source versus competitive payroll services?

We don't disclose that information.

Let's put it this way.

Given our increase in sales year over year, what we're seeing, we're winning our fair share.

In other words, what are you seeing in terms of head-to-head bookings competition versus ADP and the Run product?

Can you give us some insight there?

I guess, because we don't break it down, but I guess I would repeat -- I would reemphasize what Efrain just said, which is we're feeling very good about it.

In comparison year-over-year, I think head to head, we're competing very well.

And both on a retention, by the way, standpoint, and on a sales standpoint, I think we're doing very well.

Thank you very much.

You're welcome.

Our next request now, Jason Kupferberg, Jefferies.

Your line is open.

Hello, Jason.

Hello.

How are you?

Thanks, guys, for taking the question.

So I just wanted to put some of the payroll numbers in context here.

I guess over the past three quarters now, the core payroll revenue growth has averaged, I think, a hair under 2%, and sounds like that's going to continue into your Q3 here.

So that, over that time period, would seem to imply slightly negative volume growth.

And so I was just hoping you could give us a sense of what gives you guys the comfort that that's kind of temporary rather than something more than temporary, just as we think about longer-term growth trends for Paychex in payroll services.

Okay.

So David, we know what our price increases, which we didn't disclose, was.

And our average realized price on the price increase was higher last year than it is currently.

So that's one factor.

And second, we do have a window into where we see the year ending and feel good about where we think we'll end.

We've ramped a little slower than perhaps our plan anticipated, but we are ramping through the year.

And that's the way we constructed the plan.

Okay.

And then I think one of the areas you had talked about in the press release and in the 10-Q was some impact from changing mix within the mid market clients having an impact on payroll services revenue.

Can you just elaborate on what you mean by that, and is that impact expected to continue in the second half?

Don't expect it to continue in the second half, but if you go back to 2010, and we don't disclose the information, but it did have an impact on payroll service revenue.

We had seen an increase in the amount of employees per payroll in our mid market segment.

And while it did increase in Q2, it just -- the growth rate moderated a bit.

Okay.

And then I guess just finally, you guys have mentioned in the past, the US economy obviously needs to recover more fully in order for your revenue growth to accelerate up to the high single-digit range that you talked about as long-term guidance back at the July analyst meeting.

Is there any more specifics you can give us in terms of key economic measures, where they need to recover to in order for that long-term guidance to be realized?

In other words, does unemployment have to fall to X percent or X thousands of new businesses need to be created?

Just any color that we can use to gauge the potential benefits to Paychex from improvements in the macro environment over time.

Yes, thanks, Jason.

I'll start, and then let Marty add some comments to it.

So if you look at where we were when we were posting high single-digit growth in payroll, you were in an environment where new business starts were 850,000-plus.

The last readout we got was 758,000.

That was then revised upwards by 23,000 to 781,000.

So we're not even at 800,000.

We get a question from time to time around whether we're losing share.

And we can peg what our new sales are to that number of new business starts pretty closely, and we don't vary too much, not more than 1% in a given year.

So obviously, we're not in that kind of environment.

But I would say that as unemployment drops and as new business formations start to increase because people are more -- have less uncertainty and have more certainty about committing capital, we think certainly that the business will start to -- business revenue will start to pick up.

Yes, I wouldn't add much to that, except I think what we've seen is we start to see an improvement kind of in the feeling in the economy, and then it gets back to kind of standing on the sidelines.

And I think in the last couple of months in this quarter, besides Hurricane Sandy, we've also seen because of the election and now the fiscal cliff discussion, you know, a lot of businesses, the NFIB index being a pretty low number right now, consumer confidence dropping after it was starting to pick up again.

I just think that we need to see not only new business starts, but a little bit more investment and consumer confidence buying things, then people will open up.

What we're not seeing is necessarily that opening up that second branch, that next location, that kind of thing for our client.

So I think hopefully new business starts and with some -- just some more confidence that there's consumer demand, we'll start to see the growth that will help push us up into the high single digits.

Okay.

Understood.

Enjoy the holidays, guys.

Thanks.

Same to you.

Our next request now, Joseph Foresi, Janney Montgomery Scott.

Your line is open.

Hello, Joe.

Hello.

How are you?

I guess my first question here is, just based on the conversation that you guys were kind of just addressing in the last question, have you put any thought to the fact that maybe unemployment is structurally going to be higher than some of the levels we've seen in the past?

And if that's the case, how do you structure or address the demand environment if we're sitting at this unemployment rate for an extended period of time, and/or if the unemployment rate remains at a higher level for a longer period?

Joe, so two things there.

So one, kind of a micro issue, and then second, a macro.

So we mentioned the sequential change in checks per payroll from 1.8 to 1.2.

We think that was a blip in the quarter.

What we have seen is just very, very gradual moderation, which we're assuming in the plan.

So in terms of the segment of customers we have, at this point it looks like the bias is towards more hiring rather than lower.

To the extent that unemployment remains high, the challenge you've got is that that creates an environment of where sentiment for small business owners is not really good, and they don't hire the additional employee, or as Marty mentioned, they don't open the additional location.

It becomes more difficult.

I just want to reiterate that neither Marty nor I are saying that this environment is an excuse for not growing.

We believe we can grow.

And I think that we have early signs that we're doing a good job in terms of core payroll.

But obviously, it creates a bit of a dampening effect.

Yes, I think the only other thing I would add is, on the positive side, you are starting to see housing starts and home pricing start to pick up, and that has continued.

So, some mixed signals.

But with that picking up, then additional businesses do tend to start up, small businesses, around that housing market.

So we're not expecting that long-term -- certainly there's going to be a level of unemployment, but I do think it will start to pick up once things start to settle down a little bit from a government standpoint.

Okay.

And just kind of moving on to a different part of the business, you did -- it looks like a small acquisition, and the focus has been technology, which was put forward at the analyst day.

How are you thinking about your investments there and how competitive you are, and how comfortable are you going forward?

I think that leads into sort of the second question there.

What can we expect from an investment perspective on the margin side?

Yes, I've got to tell you, I've never felt better.

I think we've really -- now, the investments that we've been doing the last three or four years have been really coming to fruition now.

So rolling out the tablet product, the mobility platform with tablets and smartphones, the report center we just did in October, everything has been right on schedule.

You know, you got to wait a couple of years to get all of that pulled together, but I've never felt better about the execution of the work that's being done there.

And we have some great releases coming in the next calendar year that are planned out and right on time, and more for even the middle market, the major market side of the business.

I feel very good about that.

I feel good about the investment, that even with that level of investment, we've been able to produce our industry-leading margins.

And so, you know, that's going to continue.

It will, you know, moderate to some degree, because we had kind of a peak there.

But it's still going to be double-digit increase in expense, and we're making up for it in the productivity in other areas.

So I feel good about the execution.

I feel good about the client response and CPA responses, and I feel good about the continued growth in that technology.

To us, it's always been a service model and a mix of technology, and I really feel good about the technology piece that we've been able to release, particularly in the last 18 months.

Okay.

And then just the last one for me.

The sales force has been selling into a difficult market here for a while, with new sales growth kind of being stagnant, but yet the attrition came down.

Maybe you could just give us some insight into how you're keeping the sales force incentivized; and when there are new sales taking place, are those market share gains or are those new clients?

Well, I think it's a combination.

I would say we're definitely, I think, doing well on the market share.

I think we're doing well head to head, and -- because you got to make up for some of the new businesses not starting up.

I think it's a lot about execution and leadership.

As you know, I brought in a new head of sales a little over a year ago now, Mark Bottini.

I think he's done a nice job, he and his team, across the company, in getting the group pumped up.

They are feeling good about the products.

They have always felt good about the service.

And they have now seen a lot of product technology come out.

And then I think you're also seeing a focus on segmentation.

So we split our payroll sales team to say, focus really on under 50 and over 50, made a clear segmentation there.

We focused on new channels with franchises, won a big one with Subway, the largest franchise in really the world and certainly in the country, and getting a partnership there.

I think they are feeling like, hey, the company's doing a lot of things to support them.

And certainly, I think that's showing up in why the turnover is down, and I think their success will increase.

Great.

Thanks.

Thanks, Joe.

Our next request now, Sara Gubins, Bank of America, Merrill Lynch.

Ma'am, your line is open now.

Hello, Sara.

Thank you.

Good morning.

Given that the payroll service revenue isn't coming in where you originally thought it would, is there any change to your sales force plans or other costs?

No changes, Sara.

I just would qualify that slightly.

I think what we said was the ramp was a little bit slower than we had anticipated.

But in terms of what we expected, how we expected the year to unfold, we're pleased with where things are heading.

Okay.

Sorry.

I just meant within the payroll service revenue, the revenue growth expectation being slightly lower than it was before.

Yes.

I understood the question.

So the way we constructed the plan was that, as we've talked about last year, was we anticipated Q1 would be a challenging quarter, difficult compare, and that we'd build from there.

And when you subtract some noise that I've mentioned from it, we think that we're on track to get to where we wanted to be at the end of the year.

Okay.

And then on a separate note, you recently announced a new share repurchase authorization.

How do we think about the plans for that?

I think what I've said is that we'll repurchase shares opportunistically.

I haven't planned and I can't give you a specific dollar amount, but we do intend to go into market when we think the opportunity is there.

Okay.

Thank you.

Sure.

You're welcome.

And now Kartik Mehta, Northcoast Research, your line is open.

Good morning, Marty and Efrain.

Marty, any changes you're making this year on the selling season versus last year?

It seems like you seem to be more confident about what's going to happen this year.

And is that the result of just an improving economy, or is that the result of changes you have made, anything you could talk about on the sales side that could lead to better results?

Yes.

One, I think it's the momentum.

You can feel with the team and the positive feeling that they are winning, they are driving more revenue per client, they are having success out there.

They like the technology and the service combination that is there for them to sell the value.

I think the leadership and the execution, when you look at, again, the franchise and the banking channel, I think they are just feeling like there's a lot of things going there.

We've got various promotions, and I think the incentive plan is working well for them.

So I think it's all those things together.

It's a momentum that you feel.

Now, we're usually pretty cautious until we get through January and February and get through that quarter.

But at least going in at this peak time, we're feeling pretty good about all of those things showing through the turnover and in a general positive sense of the sales team.

Kartik, the other thing I would add is I think Mark has brought a real emphasis on execution again, specific segments of the market.

And I think we're earlier in identifying where we thought we could gain business, and those programs have been put in place and in some cases tested, and we feel pretty good about the results that we think we're going to get.

And then, on the HRS growth, that segment has continued to show some really strong growth.

Are you getting to a point where the law of large numbers becomes an issue and it's hard to keep this momentum going over the next 12 to 18 months?

Or are there other products you can put in there that allow you to keep this momentum?

Well, yes.

I don't think so.

The numbers aren't large enough for us yet.

I think that, particularly like if you look at 401(k), we've been in it a long time, and yet we have found kind of a different way to go -- to really focus and execute this year, focused on the financial advisors.

We tried it before.

This year, I think we went after the financial advisors to work with them directly, to go after the larger clients, larger 401(k) plans as well, and we've had some nice success.

Just starting it up, we've had some nice success.

So I think there's always new ways to even go at something that's mature for us, but still has a lot of potential.

When you think about the penetration levels into our client base, we still have a lot of room to grow.

And then one last question, Efrain.

I just want to make sure, on the guidance you gave for payroll revenue in 3Q being similar to 2Q, is that mostly just the after effects of Sandy, or are there anything else pressuring that revenue line for 3Q?

So I'll mention it one more time.

It's twofold.

There is a lingering impact -- and this also goes back to Sara's question.

So when we impacted a bit of the growth rate in Q2, that has a follow-on effect obviously through the next -- ripples through the next three quarters.

So there's some impact from that.

And we think we've quantified.

But I'd say it's at least 0.5%.

It could be more, based on what we've seen.

So that's part one.

But part two is that in Q3 of last year, we knew this when we planned the business out, we had an additional day of processing, because it was a leap year that doesn't recur this year.

So this is the year where we don't benefit from that day.

And so both of those are factors there.

So the Q4 compare is going to get easier, and what we are anticipating a good quarter over quarter comparisons in that quarter for payroll, and we are anticipating that Q4 sequentially is going to be a stronger quarter than Q3 is.

Perfect.

Thanks, Efrain.

I really appreciate it.

Okay.

You're welcome.

Our next request now, Brian Keane of Deutsche Bank.

Your line is open, sir.

Hello, Brian.

Hello, guys.

How are you doing?

Good, Brian.

Just because it's important, I want to go back to the payroll services again.

Obviously, Sandy, if you add that back, you guys have suggested the ramp is still slower than you guys expected.

What exactly has been causing that slowness?

Is it just economy, or what is causing the slowness compared to what you guys thought?

I think, Brian, we -- as we come into every plan season, we assume this is the year that we start to see an acceleration in improvement, particularly around new business starts.

And what we have ended up seeing, and now obviously for two to three years having the same conversation, it's just going to be gradual.

We've incorporated that in our thinking.

I think there also was a significant amount of uncertainty in the first half of the year that impacted how people thought about whether they wanted to start a business and whether they wanted to add employees.

So a combination of those two factors, from a macro perspective.

I think on the other hand, we're executing better and we think that's an offset to those negatives.

Because it doesn't seem like you guys are suggesting you're losing share or you're disappointed in the sales growth.

So I guess we're just left with the macro, as the assumption that maybe was off.

Yes, that's correct.

We obviously don't disclose where we ended up in terms of sales growth for the quarter, but we feel positive about where we ended up.

Okay.

And the lack of a leap year in the third quarter, can you quantify that impact?

Is it 0.5%, or is it less?

It's between 0.5% and 1%.

Okay.

And then, the pickup in the fourth quarter, is that just because sales start to pick up, or do you need a little bit of new business starts to pick up as well in order to get that ramp-up back in the fourth quarter?

Well, it's the absence of three quarters where we had just unusual negatives.

That's part of it.

And then the Q4 compare is just easier.

And the sales ramp.

All of those.

Okay.

And then, last question for me.

How big is Expense Wire and how much should we add to our -- to think about adding to the growth rate?

Yes, it's very, very modest.

So it's probably a rounding error.

But, here's the issue.

So our strategy in terms of acquisitions is get the technology and push it through the distribution channel.

So it is not one of those acquisitions where we are acquiring a big base of business together with the technology.

Here, it's more technology-driven and some base of business.

The opportunity for us is to drive a really world-class expense management solution through our distribution channel.

Right.

It's something we've been selling for a number of years in partnership, and again, bought it, bring it in, get it integrated, and it will build over time.

So as Efrain said, small base coming in, but a lot of potential, particularly in the major market business.

Okay.

Great.

Happy holidays, guys.

Thanks.

Same to you.

Our next request now from Jim MacDonald, First Analysis.

Your line is open.

Good morning, guys.

Hello.

Good morning.

I would like to get deeper in the HR revenue acceleration.

You talked about a price increase impact.

Can you talk about what particular segment that was in, and whether that caused the acceleration or whether the acceleration was caused by better client growth?

Actually, it was a little bit of all of those.

So we had some price increases, really kind of across the board.

I would characterize them as modest.

The second is we did have increases in clients quarter over quarter.

But if you're looking at it sequentially, Jim, it was the absence of some negatives in Q1 that didn't appear -- as every quarter goes on, for example, our PEO comparisons get better.

So that becomes less of a drag.

In the Q1 of two years ago compared to Q1 of this year, we had higher basis point fees in that quarter that caused a comparison issue in Q1.

As Marty said, we're executing well in the 401(k) business.

We've got higher assets; and although base on average are down, we did well in the quarter.

So it's really an execution against all of the three segments of the businesses, and then the absence of the negatives that hurt in Q1.

And then looking at your change in corporate interest guidance, is that due to an assumed repurchase or something else?

No, we haven't necessarily baked that in.

If we do that, then we would have to figure out what the EPS impact is.

Now, what's happening there is we made assumptions about interest rates in the back half of the year that have turned out to be lower, and also average investment balances, because of the acceleration of the dividend, end up creating lower average balances.

By year end, we'll be at the exact same point, or probably higher than we were in December, but the average balance will be lower.

Just to follow-up quickly, to get to 0% to 5% when you've had good growth for six months already this fiscal year, that implies almost a decline or something.

No, no, it won't decline.

It's just not going to increase quite as much as we thought for the year.

Okay.

Thanks very much.

You're welcome.

Thank you.

Our next request now is from Tim McHugh, William Blair and Company.

Your line is open.

Yes, thanks.

Excuse me.

Just wanted to ask from a high level, given your commentary about the various factors, how would you describe the overall demand environment and selling environment?

Has it gotten tougher in the second half of this calendar year, or has the overall environment that you're selling into not changed much?

I think it's been pretty consistent.

We've seen gradual improvement.

I think there was some improvement in the first couple of months of this fiscal year, and then it seemed to stall again, because of the election coming out.

So I think the new business formations we've talked a lot about, that really hasn't recovered.

I think then just businesses opening up those additional locations, adding employees, has kind of stagnated a little bit, has been pretty flat this quarter because of the election and then fiscal cliff discussion and so forth.

So I would say it's not worse, it just hasn't gotten a lot better.

So I think it's tough out there, but I think we're executing better and I think we're giving more things in the tool bag for the sales group to sell, as well.

Okay.

And the Q4 growth rate picking up, is that reliant on you having a real strong finish to the selling season, or is it based more so on things you have in hand, I guess?

I think it's half and half.

I wouldn't call it real strong.

I would say executing where we think we can for the quarter, based on what we're seeing.

And Q4's just simply, for a number of the reasons I mentioned, an easier compare than Q2.

Or Q3, I should say.

Okay.

And then lastly, if I could -- healthcare reform's now kind of post-election.

How are you thinking about it and what are you hearing from your clients, both as it relates to the insurance business, and then broadly, the small business environment out there?

Yes, I think the main word would be confusion.

I think there's still confusion as, what do I have to do?

Do I really have to do this?

Should I take a penalty or should I get the insurance?

Am I going to be able to go to an exchange and what does that look like for my employees?

I think all that generally bodes pretty well for us, from the standpoint that we've got a good health insurance business that has been selling near 20% or over, and I think that we'll continue to be that expert for them.

So we see it as fairly positive, at this point.

While there will be pressure on the commission rates from the carriers to us for selling and the exchanges, I do think we're positioning ourselves to continue to be an expert for them to come to as a small business and help decide what they're going to do, and we're looking to capitalize on that.

So I think the major thing is just confusion, just not sure how it's all going to pan out.

And I do think that's part of why they are not expanding, either, in the employees.

They just don't know what their health costs are going to be, what their tax rates are going to be, and if there's going to be credits and things like that.

I think that's how I would categorize it.

Okay.

Great.

Thanks.

Thanks, Tim.

Our next request now, Tim Willi, Wells Fargo.

Sir, your line is open.

Thank you, and good morning.

Good morning.

Two questions.

The first, maybe just to follow-up on what Tim was asking, about the healthcare.

So we see a lot of small businesses that talk about maybe part-time employees as opposed to crossing over the full-time, I guess it's 50-person cutoff.

If that were to be something that truly is at least a stop gap for a couple of years as employers try to hold off on the mandatory health coverage, would your -- would the correct thought process be more potential part-time employees where a payroll is processed, but smaller average check sizes?

Or would you envision staffing companies helping out with that part-time requirement?

How should we think about that dynamic, in terms of just head count at companies?

I think that plays well from a public relations, very interesting kind of anecdote.

But I don't think that we're -- we're not seeing much of that at this point, and I don't know if you're really going to see a business go and transition everybody to part-time just to avoid or change their healthcare costs.

It sounds good.

But when you think about changing your business and the way you are structuring your employees, and risking that they're going to leave because they're part-time versus full-time, I don't think you're -- I honestly don't think we're going to see that much of that.

What I do think you'll see is more employers may go to a set dollar amount.

They may change the structure of how they are paying for healthcare and go to, hey, I'll give you a set dollar amount, and then help you pick individual insurance.

And again, we're trying to structure ourselves and our product set and sales people to say, hey, we'll help you with that.

It's a combination of health spending accounts and reimbursements and so forth, as opposed to just straight old, I'll pay 75% of the premium type of thing.

So I think you're going to see more of those changes and products than you will people necessarily shifting to part-time.

If it does happen, where that happens, I don't think that would have a big impact us on.

It's just, frankly, it might be more checks, if you have more part-timers versus full-timers.

But I really don't see many businesses shifting that.

That's just too risky, from a business standpoint.

Okay.

That makes sense.

Appreciate that.

My follow-up was, I guess thinking about customer acquisition to the extent that there are new businesses formed and then ongoing penetration of businesses that are existing.

So maybe I could draw a bit of an analogy.

We've seen in the payments world sort of models, like companies like Square and Intuit, Go Pay, where effectively a very small business is going out and getting the capabilities to accept cards on their own, eschewing or finding a way around the traditional feet on the street, merchant acquiring model, sort of self-service through e-mail, text chat, et cetera.

And again, while that in itself is a niche market, it's shown that small businesses will go out and get something like this, whereas traditionally that was sold through sales forces on the street with quotas and service, et cetera.

Do you think there's a point in time, is it evolving, how would you think about the payroll world, especially for smaller businesses evolving into that kind of model, to the extent that it's going on now and where it could go, and how you guys think about your position, to the extent that it's something you think you need to address at a point?

Well, one of the reasons we acquired Sure Payroll, now almost a couple of years ago, we really felt that they positioned well for that market, that if small businesses, particularly smaller businesses, in the five to seven employee range or less, wanted to use technology to save costs or just do it themselves and control it themselves, that market that we thought Sure Payroll was a very good alternative for that.

And so we acquired them.

And we're seeing them with double-digit growth, as I said.

So I don't think it's necessarily taking from us at this point, from a full outsource model, because what we haven't seen, and I think our competitors have said the same thing, there doesn't seem to be, at this point, a shift in those who want to do it themselves and those who want to outsource.

But I do think that more will go from manual writing checks to an online product that will make them more productive as a small business, and as they get more comfortable with technology, like Square is to merchant processing.

So I think we'll see more in Sure Payroll.

That seems to have happened.

It doesn't seem to come at the expense of a full outsourcer, because you're kind of in one mindset or another.

And as far as the sales force, I think we're always ready to say, yes, there's going to be -- we've even gotten more sales from web leads.

I think there will be more search, more online going out and looking for something.

And I think we've positioned ourself very well to take those web leads and send someone else to sell it or sell it over the phone.

Both have increased pretty well, from a sales sourcing perspective.

Great.

I appreciate the comments.

Thanks very much.

Thank you.

Our next request now, Gary Bisbee of Barclays Capital.

Your line is open.

Hello, Gary.

Hello, guys.

Good morning.

I hate to go back to payroll service revenue, but I can't resist one question.

Go, go.

You said two things that I wanted to ask about.

One was that while it may be a little slower, the year is generally building the way you had planned.

And the second was that you're seeing early signs of better execution or a better job internally on payroll.

You know, I'm sure you can understand why we're all asking questions, because we don't really see it in the numbers.

Can you give us, either quantitatively or qualitatively, just what are these signs that things are getting better?

How do you see it building?

Because when we add back the adjustments, the timing issue last quarter and Hurricane Sandy, it actually looks like payroll revenue growth decelerated from 2.4 to 1.9.

And I think that's why we're all asking the question.

So what--

No, I understand this.

But the fact that you can't add in your numbers, because we deliberately did not disclose the exact amount for the price increases, what's the price increase this year versus last year?

And I can say that the net price is lower this year than last year.

So that's the factor that you're not equating.

And part of the reason, the way we built the plan was, we said -- we chose not to create a higher revenue number based on greater amount of pricing and thought that we could get greater revenue through greater clients and also pricing within the clients that we got.

And that was the plan, or that was our approach and the way that we constructed the plan for the year.

So what we're seeing when we look at our plan through the quarter is, it's building in a way that will get us to where we want to be in terms of the growth rate in Q4.

There are anomalies in each quarter that, frankly, would waste too much time going through.

I mentioned in Q1 the timing differences now.

Now we got hit with Sandy in Q2, and then we've got the additional payroll date in -- payroll processing date in Q3.

So those were all things that created lumpiness in the quarter.

One other thing, Gary, I would mention is that when we said we thought HRS would accelerate from Q1 to Q2, I know there was, justifiably by some people, skepticism around there.

And you saw what happened in Q2 with respect to HRS.

So we can see the numbers and think we're building the way we want to.

Okay.

Great.

And then just one more on that.

If we were to back out pricing, because I understand we don't have that detail, and if we even ignored also the sum moderation in the checks per client and just looked at growth year over year number of net clients, new ones versus losses, is that doing better in first half of '13 than it did in first half of '12, or has that moderated as well?

Okay.

We don't talk about it, but I'll just say it's positive.

Okay.

All right.

And then just one clarification.

I'm trying to understand how the leap year plays in.

How much of the revenue is charged on a per-day basis?

I was under the understanding that for the payroll business, most of it was done per paycheck processed and so that wouldn't really come into play.

It does.

It depends on, every day has its own unique characteristic.

It's going to depend on what day of the week it falls and what payrolls tend to be processed on that day, weekly, semi, two weeklies and monthly.

Okay.

That makes sense.

And then just one last one, which is you've mentioned several times the sales segmentation and you obviously went over that this summer a lot.

What's the time line for that to really take hold and start to impact the business?

Is that big enough that it helps this selling season, or should we think that that can become a lot more important, maybe as we exit this year and get into next fiscal year?

Thank you.

I think it's -- yes, I think it's already been -- it rolled in very quickly, and I think it's already impacting this year.

I think it's just a clear definition.

It's another thing that Mark has done, I think, to provide very clear direction, who is selling to what groups, that on top of the focus on other markets expanded some territories, seeing the turnover come back down.

All these things are giving us some good momentum going into the peak season.

Okay.

Thank you very much.

You're welcome.

Our next request now, Rod Bourgeois at Bernstein.

Your line is open.

Hello, Rod.

Hello, guys.

We'll talk about a different topic here.

Paychex has historically been strong in the CPA channel, and it seems the bank channel should be an increased opportunity.

And also my check suggests Paychex has been making a push into the bank channel.

So I guess the question here is, do you view the bank channel as a significant opportunity to tap in the future?

And if you see it that way, can you give us some thoughts on your progress, the progress that you're making in that bank channel?

Rod, good intelligence.

I'll let Marty talk to it.

I -- yes, I think, you know, it's always been something that we've been involved in, but have not put a dedicated effort to.

And this year, we decided that we really thought there was an opportunity there.

So I think you'll see it gradually improve.

We're already feeling pretty good about the folks that we have running that channel, very specific focus, and then tying that support back to the overall sales team.

So just feel good about that.

I think it's going to ramp up over time, as opportunities come up.

I also would tell you that when you look at Sure Payroll, what they have done there is offer that white label product, and they have been very successful at going into banks and offering kind of the other side of this.

And now, as Paychex comes to the banking community, they offer both sides.

We are one of the very few, I think, if anyone, who can say if you want to be a white label product and build it into your online suite of services as a bank, Sure Payroll is your behind-the-scenes player.

If you have a client that wants to be referred out to an outsource payroll provider, that's Paychex.

So you have one person to really deal with and can provide a suite of products for the bank channel.

And we think that's going to be very successful.

We've had a nice start to it, but I think it will ramp up gradually over time.

All right.

So is it maybe something that helps your bookings during this fiscal year, but maybe then becomes a more meaningful contributor to revenues in the next fiscal year?

Yes.

I think that's very fair, yes.

All right.

Thanks, guys.

Thank you.

Thank you.

Our next question now, Jeff Silver, BMO Capital Markets.

Your line is open.

Thanks.

I know it's late.

I'll just ask one.

Based on your guidance for the second half of the year, it looks like you're not looking for much operating expense leverage like you've seen in the first half of the year.

Is there any specific reason for that, or are you just being conservative?

That's a good one, Jeff.

No, no.

We call out -- so the operating model is that Q3 is the big sales and ops activity quarter, so we just naturally have more expense in those quarters.

And then Q4 is a bit of a carry-over from Q3.

So our expenses tend to be higher in the second half, so we're just calling that out.

We obviously will look at trying to leverage wherever we can, and have done a good job.

And part of our expense base is variable, so we have an opportunity to do that.

I guess what I'm asking, is the second half of this year different than the second half of last year?

I guess from an expense -- you know, directionally, I would say no.

Okay.

Great.

Thanks so much.

Our next now, Mark Marcon, RW Baird.

Your line is open.

Hello, Mark.

Hello.

Good morning.

Can you talk a little -- just to follow up on Jeff's question, the leverage on the direct expenses has been, impressive for quite some time, as you've put in the new platform.

How much longer can that keep going for?

Well, I think it's not something that you put in and you kind of leave stagnant.

So as we continue to add more functionality to that, I think the productivity will continue to offset.

It certainly has moderated some.

And so I think while we have it, it will continue to moderate over time.

But we keep adding more functionality to it and keep looking for other ways to increase our productivity, and then really use that to continue to fuel the IT and product development.

So I think you'll see a continuation of it, but it will probably moderate at some point.

But always looking for leverage.

You know, that's where we come from and we'll continue to grow the top line and try to increase the bottom, as well, and gain leverage on everything we do.

It's been impressive.

Can you talk a little bit about what the reporting center, what sort of impact you would expect that to have in terms of that rollout?

Yes, it's -- I think what we'll see is one, on retention, I think clients will -- I think will stay more.

We had some -- the one thing that we would hear about that clients always want is more flexibility in reporting.

And so they always want easier to get to the reports and more flexibility to custom design what they want and download it into their own spreadsheets and so forth.

We believe this does that.

It pulls all of their services together on one report center, makes it very easy to use and very flexible to the client and to the CPA.

So I think, one, it will help the CPA relationships.

I think it will help retention.

Can't tell you exactly how much that will, at this point, but we certainly think it will help us to get to historic best in retention, even better than we have been at our best, and I think it will drive some sales.

It puts another thing in the, again, in the tool bag of a sales person to say, look what we have, is not only great service and good technology, but also all your reporting is even that much better.

And Mark, it also continues to put pressure on the local and regional players, who really just can't match the technology.

And if you look at our results, we see we keep gaining share against them.

Great.

And then just along those lines, can you talk -- just to piece together some of the questions that have been on the call and put them all together.

It sounds like what you're saying is, the sales season's off to a good start.

You're pretty encouraged by that.

In fact, the last two months have actually been pretty good.

We do have the head wind in terms of the processing periods in the first quarter.

And that's going to be a head wind.

But even if we adjust for that, the growth rate is probably going to be a little bit below what we would have expected, partially because the net price is actually lower.

So we're going to see an increase in terms of overall -- there's going to be a positive increase in terms of the total number of clients, but the net pricing actually declined.

Is that correct?

It's not net pricing actually decline.

It's that the price increase we chose to take was lower on a net basis from last year.

Okay.

So--

Because, Mark, as you understand, there's a trade-off between how you price and what units you get.

And we just called it, at a certain point.

We'll see, could have called it incorrectly, but doubt that.

We think we're positioned where we should be.

So net pricing across the board is still up year over year, too.

Yes, it is.

The rate of increase is much lower.

It's not much lower, but it's lower.

Okay.

And can you talk a little bit about mid market, just what are you seeing there, how's the competitive set evolved, and can you just talk a little bit more about what you meant by the mix shift?

I'll just start, and then I'll let Efrain jump in on the mix shift.

I think that, you know, I think it continues to be very competitive, and I think we have done pretty well there.

I think we're seeing continual product enhancements and functionality coming to that market, particularly over the next year.

And what we've done is continue to add other products in, adding -- acquiring Expense Wire is part of the plan of being able to own a product like that, even though it starts out small, but building it into the suite of products in a single sign-on that we have, so that a client has a full based experience.

We have HR online, time and attendance online, Expense Wire.

And we're always -- and of course, we have recruiting partnerships and so forth on the front end of it, on the whole thing.

So I think it's just continuing.

That market is going to continue to evolve and continue to be very competitive, but I think we're well positioned to compete there.

Mark, and the other thing I would say, as I mentioned earlier, is that if you go back to 2010, we didn't disclose this, but we've been seeing increases in employees per client.

And in this quarter, that trend moderated a bit.

Got it.

And with regards to Sure Pay role, you did some increment marketing behind that.

Did the growth rate increase?

I wouldn't say it increased.

It continued to be pretty strong.

We feel good that they are right on track, if not slightly above what our expectations were.

So we're feeling good about what they're doing.

I think it's been a combination -- they do a great job of marketing.

You may have heard them on satellite radio.

Sure enough.

They're testing some things there.

They are doing a number of things to drive in that web-based search for someone who wants to control it and set it up themselves and have the flexibility.

So I think they are doing very well.

Okay.

And one last detail question.

Sure.

Is there any difference in terms of -- a year ago you used to talk about checks per client, and now you're talking about checks per payroll.

No, no, no different.

It's just a more precise definition of what we were talking about.

Okay.

Great.

Thank you.

All right, Mark.

Thank you.

Our last request today is from Ashwin Shirvaikar, Citi.

Your line is open, sir.

Hello, Ashwin.

Thank you.

Hello, Marty and Efrain.

Hello.

Good morning.

Good morning.

I guess one question I have is for every dollar of payroll service revenue, what is the potential value of HRS revenue that you can generate eventually?

Because obviously, if you look at the five, six, seven, eight-year track record, it's been pretty good.

And the clients that do not take those additional services, what do they tell you is the reason?

Are they getting these services elsewhere?

What's going on?

Let Marty handle the second part, and I'll handle the first.

I think what we see is not so much that they are going elsewhere, although that's sometimes on 401(k), it's more that they don't need the service or feel like they need the service at this point.

So we're not losing too much in our client base.

You know, obviously our team and the HRS side, both outsourcing, 401(k), et cetera, go into the base.

And typically, we're selling them on those products for the first time.

So it's not typically -- it's not normal that they are going to someone else.

It's more that we're teaching them the value -- we're helping them understand the value of needing the service, and they may just decide not to take it at that time.

So, we don't lose too much head-to-head.

Now retention, after they have had the product is -- we then have to work to be sure that we're staying competitive with the value that they are receiving.

But it's more not losing it head to head.

It's more teaching them, or helping them understand the value of having it.

I'll let Efrain take the first part.

Yes, the first part, Ashwin, is that if you take a core payroll customer and they had at least some participation in all three of the suite of services that we provide, insurance, 401(k) record keeping, and also HR solutions, that revenue becomes -- can get up to four to five times the original amount they are paying for payroll.

Got it.

And one last question, sort of going back to Tim Willi's comparison with the payment market, the smaller end of the payment market.

I wanted to explore the pricing aspect, because one of the things that happens at the SAS model is price transparency and lowering of price points generally, for smaller clients.

You had Sure Payroll for a couple of years.

Right.

Do you see the lower pricing in that channel begin to affect pricing in the main business?

And if not, why not?

Because it's open choice for clients, right?

Yes, it is open choice.

But we have found, as I mentioned, that we don't see, based on our research, and I think some competitors have said the same thing, that there hasn't been a big shift between wanting to do it themselves or wanting to outsource.

And the pricing difference roughly would be 2.5 times, 2.25 to 2.5 times.

So where Sure Payroll might be around $800, our average client might be around $2,000.

So you don't see a shift just because of price, necessarily, to say that on an annual basis.

It's more of what your preference is.

And we haven't seen those preferences change.

So you either want to control it, or you don't.

And I think even with -- while people are getting more comfortable with technology, the shift seems to come more from manual to someone like Sure Payroll, or Intuit, not necessarily going from full outsource to doing it themselves.

That's based on what we've seen.

We haven't seen a big shift in that market.

The other thing, Ashwin, I would say is that there frequently is an underestimation of the regulatory complexity, the implications of getting it wrong, particularly for clients that are bigger than just two, three, four employees.

Once you're up at that 10-employee range, which a lot of our clients are, there you are getting into a level of complexity that on the surface doesn't seem like much, but when you start adding in all of the changes coming in from the federal government and also at the state and local level, for a larger client, it just doesn't make sense for them to spend the time doing that themselves.

Okay.

Great.

Thank you guys for taking the time.

Happy holidays.

Thank you.

Same to you.

As I have no further questions in queue, I would like to turn the call back to Mr. Mucci for any closing remarks.

Thank you.

At this point, we will close the meeting and the call.

If you're interested in replaying the webcast of this conference call, it will be archived until January 21.

I do thank you for your time to participate and your interest in Paychex, and I wish you all, on behalf of Efrain and myself, a very happy holiday season.

Thank you.

And so, conference is concluded.

Again, thank you, everyone, for your participation.

All lines may please disconnect.