沛齊 (PAYX) 2013 Q3 法說會逐字稿

Welcome and thank you for standing by.

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

We will conduct a question-and-answer session during the conference.

(Operator Instructions)

Today's conference is being recorded.

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

I would like to introduce your host for the call today, Mr. Martin Mucci, President and Chief Executive Officer.

Sir, you may begin.

Thank you, Sheri.

Thank you for joining us for a discussion of Paychex third-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 third quarter ending February 28, 2013, and filed our Form 10-Q, which provides additional discussion and analysis of the results for the quarter.

These documents are available by accessing 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 approximately one month.

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

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

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

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

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

However, I'd like to provide you a few highlights from the quarter.

Payroll revenue grew by 2%, due to the increases in both checks per payroll and revenue per check.

This growth rate is up from the first half of the fiscal year.

HRS revenue grew double digit for the third quarter, as we continue to experience success in selling 401k, and HR out-sourcing and other value-added solutions to our clients.

Total service revenue grew 4%.

Checks per payroll has improved for 12 consecutive quarters, and was stronger than anticipated.

Third- quarter growth was about 2.3%, compared to 1.8% for the prior-year third quarter.

Checks per payroll was positively impacted by a higher calendar-year-end bonus payment activity.

Execution and operations remained solid, as evidenced by the exceptionally strong client satisfaction results.

It is our exceptional client service, along with our technology, that sets us apart.

The dedication of our employees has resulted in client retention that remains at record levels, and through the first nine months have us on track for another strong year of retention, and possibly our best ever.

In addition, the operations team did a great job for our clients with year-end processing, and the distribution of our W2s and year-end reporting ended ahead of schedule.

Our third quarter is our peak selling season, and we put a lot of focus throughout the year on sales execution.

We added new territories, focused on market segmentation in both payroll as well as 401k and other areas, and got involved in more franchise and banking opportunities.

We had a good momentum going into our selling season, and we are pleased with our selling results.

We are particularly pleased with the increase in new sales revenue generated from our core payroll sales team and SurePayroll, and the strong sales in our retirement services and HR solutions, including our PEO business.

In addition, we have seen core sales force turnover remain at lower, more historic levels.

We expect to continue 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.

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 of products.

From a mobility platform we have continued to add more capabilities, including flexible spending account information, and including employer and employee health and benefit insurance information being just released tomorrow that keeps our product as the most thorough and client-friendly mobility app for information in the market place.

We have been positioning Paychex to capture the opportunity from the shift to online and SaaS solutions.

We have market-leading SaaS solutions leveraging the latest technologies, and continue to invest heavily in our SaaS and online capabilities, and mobile applications.

Our recent acquisitions have all been SaaS-oriented business models, All of our core clients are on SaaS platform, and we are continuing to build out our platform to accommodate even more functionality for our mid-market clients.

Our SurePayroll product, which is also a SaaS solution, continues to do well, with strong sales and revenue growth.

In summary, year-to-date fiscal 2013 reflects continued progress in growth metrics, and we are very appreciative of the efforts and results of our leadership team and the employees at Paychex across the country and in Germany.

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

Efrain?

Thanks, Marty.

Let me start out with our standard legal disclosure.

Certain written and oral statements may constitute forward-looking statements, and I'd just say that you refer to our press release for the discussion of forward-looking statements and related risk factors.

As Marty indicated, third-quarter results for fiscal 2013 represented good progress.

Here's some of the key highlights for the quarter and nine months.

I will provide greater detail in certain areas, and then wrap with a review of our 2013 outlook.

Total service revenue grew 4% for both the third quarter and for the nine months.

Interest on funds held for clients was flat for the third quarter, and decreased 6% for the nine months, to $11 million and $31 million, respectively.

This result was a by-product of the low interest rate environment, offset by an increase in average investment balances.

Expenses increased moderately, 3% for both third quarter and for the nine months.

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

Note that recent business acquisitions had immaterial impact on quarterly revenue growth and expense growth.

Operating margin was 36.8% for the third quarter, and 40.5% for the nine months.

Operating income net of certain items increased 7% to $214 million for the third quarter, and 6% to $662 million for the nine months.

We expect operating margin for the full year to be in the range of 37% to 38%.

Net income increased 7% to $145 million for the third quarter, and 5% to $446 million for the nine months.

Diluted earnings per share increased 8% to $0.40 per share for the third quarter, and 4% to $1.22 per share for the nine months.

Let me talk a little more about payroll revenue.

It increased 2% for the third quarter and 1% for the nine months.

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

As Marty already mentioned, our checks per payroll metric continued to improve, and was stronger than anticipated, increasing 2.3% compared to the same period last year.

This result was partially due to higher calendar-year-end bonus payment activity during the quarter.

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

Payroll growth was tempered by one less payroll processing day in the quarter due to the leap year in the prior year.

The impact of this one processing day on payroll revenue growth is approximately a half a percent.

As we've said on past calls, payroll revenue is expected to be stronger in the fourth quarter.

HRS revenue increased 10% to $189 million for the third quarter, and 10% to $553 million for the nine months.

HRS revenue growth reflects favorable trends in client growth and price increase.

Some highlights of contribution to HRS revenue growth include the following -- retirement services revenue benefited from client growth, price increases, and an increase in the average asset value of retirement services' client employees funds.

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.

Paychex HRS solutions was positively impacted by growth in both clients and client employees, and price increases.

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

However, we've seen an improvement in both new sales and client retention in the PEO during our peak selling season, and both PEO clients and client employees were higher at the end of the third quarter compared to a year ago.

Insurance services revenue benefited from growth in the number of applicants, though at moderating levels, while workers' comp insurance delivered increases in both clients and premiums.

We expect that health care reform will impact our insurance revenue -- services revenue moderately going forward.

Our E-services revenues were positively impacted by client growth and price increases, particularly as we continue to focus on adding SaaS-based solutions.

HRS service revenue quarterly growth can vary due to the volume of clients and basis points earned on retirement services' client employees funds.

Basis points fee revenue changes are due to the fluctuations in the financial market and the asset value of funds invested.

PEO net service revenue, as we've mentioned previously, also exhibits greater variability between quarters, due to a number of factors, including changes in workers' comp claims experience.

Turning to our investment portfolio, we maintain a fairly conservative investment policy, as you all know.

Our goal is to protect principal and optimize liquidity.

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

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

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

The interest rate environment remains constrained.

Our combined portfolios have earned an average rate of return of about 1% for the third quarter, compared to 1.1% for the same period last year, and 1.1% for the nine months, compared to 1.2% for the same period last year.

Interest on funds held for clients was flat for the third quarter, and decreased 6% for the nine months, to $11 million and $31 million, respectively.

The decrease returned by the decline in the average rate of return, which was offset by increases in average balances of 6% and 4% for the quarter and nine months, respectively.

The average rate of return was also impacted by our allocation of investments to a greater percentage in tax-exempt securities within our short-term portfolio, as our interest on funds held for the clients and corporate investment income are reported before taxes, return appears lower on average, with a greater mix of tax-exempt investments.

Increase in average investment balances was primarily driven by the expiration of the payroll tax cut holiday, which resulted in higher Social Security withholding, favorable trends in checks per payroll, and wage inflation.

Our investment income decreased 11% to $1 million for the third quarter, and increased 13% to $5 million for the nine months.

The decrease for the quarter was due to lower average interest rates earned, and lower average investment balances as a result of the accelerated dividend payment to shareholders in December 2012.

The increase for the nine months was mainly due to higher average investment balances resulting from investing the cash generated from operations.

I'll now walk you through highlights of our financial position.

It remains strong, with cash and total corporate investments of $798 million as of February 28, and we continue to have no debt.

Funds held for clients as of February 28 were $5.6 billion, compared to $4.5 billion as of May 31, 2012.

Funds held for clients vary widely on a day-to-day basis and averaged $3.6 billion for the nine months, a year-over-year increase of 4%.

Our total available for sale investments, including corporate investments and funds held for clients, reflected net unrealized gains of $52 million as of February 28, compared with the net unrealized gains of $60 million as of May 31, 2012.

Total stockholders equity was $1.6 billion as of the end of the quarter, reflecting $477 million in dividends paid during the first nine months.

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

Cash flows from operations were $606 million for the first nine months, an 8% increase compared to the prior.

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

Now turning to guidance, we re-affirmed our guidance for fiscal 2013.

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

Payroll revenue growth 2% to 3%, based on anticipated client based growth and modest increases in revenue per check.

We anticipate stronger revenue growth in our fourth quarter, consistent with our guidance provided in June 2012.

Our HRS revenue growth is expected to be in line with our historical experience, and total service revenue is anticipated to be at the low end of the range of 5% to 6%.

We anticipate minimal impact from prior acquisitions, and our operating margin for the year is anticipated to be approximately 37% to 38%.

This is slightly lower than the margin experienced in the first nine months of fiscal 2013, as our margins are historically lower in the second half of the fiscal year due to more spending.

We do anticipate a continued increase in the percentage of tax-exempted investments in our short-term portfolio, and investment income net growth in a range of 0% to 5% -- reflects the impact of anticipated lower investment rates and average cash balances.

Now I'll turn it back to Marty.

Thank you, Efrain.

We will now open the meeting to questions.

Operator?

Thank you.

We will now begin a question-and-answer session.

(Operator Instructions)

Our first question in queue comes from David Togut of Evercore Partners.

Your line is open.

Marty, you referred to strong bookings trends year-over-year in the third quarter.

Can you quantify what the year-over-year bookings growth was in Q3, both for payroll services business and the HR services business?

No, we don't -- David, we don't get that specific, but I will tell you that it's certainly the best new revenue we've seen in a number of years, new sales revenue, on the core payroll side in particular, and where we've put a lot of effort.

So while we don't give the actual detailed number, we certainly were pleased with the new -- the level of the new business revenue that came in, and in comparison to the last three or four years, it certainly was very positive.

I see.

I believe for Q2 you indicated bookings were sort of flattish or down a little year over year.

Did you actually see bookings growth year over year in Q3?

We certainly have seen growth, and I'd say they were fairly flat.

We did see some improvement in Q2, but we certainly saw positive growth in the third quarter during our peak selling season, and we were pleased with it.

Got it.

Efrain, OpEx was down year over year.

It looks like you did have a re-statement in the year-over-year operating expenses, but is declining operating expenses sustainable, with revenue growing at about a 4% clip?

I noticed in some of the notes people were asking the same question, David.

So here's our view.

We think that the investments in technology should lead to increases in productivity, and Marty made a decision four, five years ago to start the acceleration of IT expense.

What you're seeing there is a result of a strategy, not a result of something opportunistic that we did in the quarter.

I can't guarantee it will be flat.

Marty and I won't do that.

But what we can guarantee is that we're committed to leveraging expenses, and that's what you saw in the quarter.

Yes, that's exactly right.

I see.

Finally, can you bracket for us what the net price increase is year to date in payroll services, once you offset the discounting against the gross price increase?

Yes, and what I've said, David, consistent is we were at the lower end of what we talked about at our Investor Day in the summer, and that range was 2% to 4%.

We're at the lower end of that range.

Got it.

Finally, what would be your expected price increase for payroll services in fiscal 2014?

We're going to be in that range, and we'll talk to you more about it on the next call.

Thank you very much.

Appreciate it.

Sure thing.

Our next question in queue will come from Jason Kupferberg with Jefferies.

Your line is open.

Thanks, guys.

Just wanted to build a little bit on the last question here.

So with pricing kind of running at the lower end of the range, as you guys said, and when you roll that into revenue growth, you're running I guess 1% to 2% so far this fiscal year.

I understand Q4 will accelerate to maybe 3% or so.

You guys had talked about kind of a mid-single-digit guidance for the three-year period, 2013 to 2015, last summer.

Is that something you still are very comfortable you can attain, and how much improvement do you need in terms of new business creation to actually get there?

Yes, I think Jason, to your point yes, we talked about that as a target.

I don't think we committed to saying we'd do that every year.

What we need is unit growth, and we need good price attainment.

You can never say you're comfortable about something, but we certainly think that within this period that's something that we're targeting.

And I guess to your point, that's kind of a CAGR target over that period.

Is that right?

No, I don't view it, and I think it's going to be a little bit difficult, given kind of where we're starting at too.

I think that's what we think is possible in this environment.

Again, as I said, we need some unit growth, we need price to get there.

So that's what we're executing against.

Okay.

So it sounds more like mid-single digits is kind of aspirational at some point during that period, but not in aggregate over that period, is that fair?

Yes, it will be tough to do that in aggregate over that period.

Okay, understood.

What percent of new businesses created that you guys have won fiscal year to date are choosing the SurePayroll product versus the full service offering, and has there been any material change in that mix over the past couple of years?

There hasn't been a significant change in that mix.

What I'd say is that we have consciously been devising strategies, working on our strategies from a sales standpoint, so that those lines get a little bit blurred.

SurePayroll's growing rapidly, and as Marty said, we also had growth in revenue in our core payroll business.

So this was a quarter where we saw growth in both segments of the business.

Remember that, Jason, we still see that as they're getting their share of new business growth that are still wanting to do it themselves or be online only, and we're getting our share of new business growth that is coming to those who want to totally out-source.

So it's not like we're seeing a shift between the two.

We're seeing there's opportunity for both, and I think it's -- we don't really see it as kind of a total pie for us that is now shifting to them or anything.

Both -- SurePayroll is obviously doing well.

There's smaller numbers to grow on, but they're seeing nice growth in their sales and revenue, and we're seeing nice growth in our revenue as well in the sales.

In other words, not cannibalizing the core at this point?

Not really, we're not - no.

One thing I should clarify.

We just finished a marketing study on payroll services, pretty extensive study.

There's no evidence whatsoever that an out-sourcer goes back to a DIY solution.

It just doesn't exist.

So the issue's really kind of capture at the front end, not erosion of existing clients.

So people select a solution and then tend to stay with it.

Lastly on that point, can you just remind us what the average annual difference is in annual revenue between a SurePayroll customer and a client on the traditional full-service platform?

Yes, so SurePayroll is going to be around $1,800, and traditional core -- I'm sorry, $800 -- and a traditional payroll, I should say traditional is the wrong way -- our fully outsourced solution is going to start around $1,800.

Okay, got it.

Thank you guys.

Okay.

Our next question will come from Paul Thomas with Goldman Sachs.

Your line is open.

Just continuing on the new sales for the quarter, any way to size or think about the incremental benefit from new market segmentation, or the focus on franchise and banking channels?

Yes, I think this was -- this growth was more execution than those two channels.

I think what we've done is we've put a lot of effort into that, and we're starting to see that pay off and getting some new bank agreements, referral agreements, and picking up on some key franchises.

But I think that's going to build over time.

This has been in the selling season here that we're more pleased about, I think, it's been execution.

One, the turnover is back to the low 30% range, which we've been historically.

The leadership team's in place, a lot of good things going on that Mark Bottini and the team have done, so I think this has mostly been about execution, so we have upside on the other things that we're doing.

We're also seeing, Paul, some incremental productivity from the sales people that we added.

That will start to become more annualized next year, but we've seen some good results there.

Okay, makes sense.

What's the sense at this point if the Affordable Care Act had any net positive or net negative impact on sales for the upcoming year?

Was there any sense of increased caution on hiring, or more demand for services to sort through the new rules?

I think it's been light right now, but I think it's going to pick up this year.

We've done a lot of work with getting information out to not only the current client base, but social media and what we can provide for our clients.

Being a Company that not only obviously long-standing in payroll, but has health insurance and has been doing this now for four, five years, we can really provide I think some unique benefit to them.

We're getting that message out, and it's starting to, I think, get through to clients that they've got to do it.

But I think there wasn't a lot of that in that first -- in this third quarter in peak selling season.

I think you'll see more of that this year, because that's when it's really starting to hit them is right now that they're going to have to do something.

We're expecting some -- certainly some support from that, that clients will just find this too confusing, and will look for out-sourcer help.

Okay.

Thanks a lot, guys.

Sure.

Our next question will come from Kartik Mehta with Northcoast Research.

Good morning, Marty and Efrain.

Marty, I just wanted to understand.

It seems like you're having success with new sales.

It seems like some of the results you're seeing now are better than they have been in the last three or four years.

Are you equating this to -- is this the economy getting better, or is this that Paychex is just doing things a little bit differently, and as a result you're seeing better results?

It's a great question.

I think the economy is kind of slowly picking up.

If you look at the checks per client continuing to be up, I think that's positive.

The NFIB indexes and things like that, the external measures are showing that it's slightly positive.

I don't think there's -- we haven't seen a big surge in -- certainly in new business start-ups and growth that we still think there will be.

I think this has been a little more about execution, about getting turnover back down to historic levels, about training, about leadership.

I think the market side of it will still be upside to us as that comes back.

It's slowly coming back.

You're seeing housing come back a little bit, prices going up.

Some construction being done in new homes.

That will drive more new businesses.

But that's still a slow tick.

I think what we've seen is better execution and leadership.

Then there's a lot of discussion about using mobile technology and having applications, mobile applications, for customers.

Is there an opportunity to monetize on that, or is it right now you just need to have those so that you can be competitive in the market?

I think to start, you have to have them to be -- to compete in the market.

They're kind of table stakes.

We got into that a few years ago, as Efrain mentioned the investment, and now that's really paying off.

I think we have the best mobile app out there.

We're introducing tomorrow updating the iPhone app for health and benefit insurance information for employees and employers, really giving them a lot of information.

I think it's a place where they can go for information and make it easy for them.

It's not so much about doing their payroll as it is about gaining the information that they need when they need it.

I think you need that to compete.

I'm not sure that a client just goes to it just for that.

As we're seeing, it's more of a hybrid type of thing.

It's going to a full-service out-sourcer who knows what they're doing and will take care of things for them like the Affordable Care Act, but if I need information on my phone, on my tablet, I can get that as well.

I can do it the way I want to do it, when I want to do it.

One last question, Efrain.

You're up to $800 million on the balance sheet, no debt.

How do you use that cash?

Are there acquisition opportunities potentially that you see for the business that could help accelerate the growth rate, or is it about thinking about returning that capital back to shareholders?

Good question.

We have the authorization.

We said we'd buy opportunistically.

The last quarter hasn't presented the opportunistic opportunities to do so, but we'll look to do that going forward.

There's a lot of attractive opportunities out there, and we are very committed to not over-paying for opportunities simply for the sake of growth.

We just are not going to do that.

So we evaluate almost every important opportunity that comes on the market, are competitive on most of them, and pass where we don't think the numbers are right.

We think one of those will land where we want to at some point, and we'll make the acquisition.

In the mean time, what we've been doing is buying smaller acquisitions, smaller businesses that we think have both organic growth capability, and can be easily integrated into our platform.

So we did an acquisition in the expense management area, and also in talent management.

We think that that in the short term is a good way to do it, but if a good opportunity comes up, we want to have the powder dry to be able to do that.

So we're at $800 million as I mentioned, and if we don't see opportunities for some period of time, then we'll look at ways to returning that to shareholders, as we've mentioned in previous calls.

All right.

Well, thank you very much.

Appreciate it.

Sure.

Our next question in queue comes from Jim MacDonald from First Analysis.

Your line is open.

Going back to the new core payroll sales for one last time, it looked like you said that the revenue from those sales was strong.

How about the client numbers from those sales, or maybe you could talk about those two?

Yes, we don't talk as much about units, except kind of once a year and talk about the client base.

We didn't really want to get into that kind of detail.

I will -- I think I will say more has been driven by revenue per unit.

We've seen a nice revenue per unit, which is a nice execution thing on the sales side, where they're selling more product in higher end, more complete bundles.

We think that's a maturity of the sales force and the lower turnover.

There's been some unit activity, but we'll get into that more at the end of the year, so we talk about it once.

Yes and Jim, when we disclose, our anticipation is that we're going to see units up for the year.

That's helpful.

Last quarter you mentioned obviously there was Sandy, tropical storm Sandy impact last quarter.

You said there was going to be maybe some impact this quarter.

Could you talk about that, if there was any impact?

It was pretty modest, if we saw any at all.

I would say this, that given where you saw the sequence of improvement on checks per payroll, you can see that the impact of Sandy was probably a bit higher than we had anticipated.

In Q2.

We had a nice rebound.

I should say just for -- provide a more complete explanation of that number on checks per payroll.

We think that if you take out the impact of more bonus checks at the end of the year, you're probably around that 2% growth rate which we've been seeing for a number of quarters.

Although we have said in the past that we expect that to moderate and we continue to do it, it simply hasn't moderated to the degree we expected.

If you kind of adjusted Q2 for Sandy into just the checks per client per payroll up, and then in the third quarter kind of brought the bonuses down, as Efrain said, I think you'd see continued pretty strong growth consistent now for 12 quarters in checks per payroll.

Just following up on that, is there any major economic difference between bonus checks and regular checks?

No.

No, there's no.

From our standpoint, it's revenue.

Of course, it only occurs once a year at bonus time.

But no, I don't think it was that big of a pick-up in revenue.

Okay.

Just a final one from me.

You were talking about your progress in the SaaS area.

Any more specifics you could talk about, areas where you're really making progress?

Yes.

I think, one, we don't talk about it a lot but our clients are on a SaaS platform now.

We moved our clients a couple years ago over to -- for core payroll, this is -- over to core payroll.

Of course, our mid-market product is hosted, and more of that platform -- Paychex, what we call Paychex next-generation platform -- that the core clients are on, more of that functionality is rolling out basically every few months as we continue to build, and more of that functionality for the mid-market clients will come out this year.

In fact, a significant amount.

So we feel like we're very well positioned from a SaaS perspective.

Even though a lot of our clients are still coming into us from a service model, full out-source service model, they can reach the SaaS platform to do their online reporting, or even do their payroll if they want to do it this week or next week, in addition to having their dedicated payroll specialist.

In addition to that, the point is when we're doing acquisitions, all the acquisitions that we've done for product tuck-ins and so forth have all been SaaS-based models so they can integrate into the platform, particularly for the mid-market space, which will become all focused on integration, on an integrated SaaS product that has not only the feature functionality, but the integration and single sign-on; of which we have, and will be adding to that functionality this year, this calendar year.

Great, thanks.

Our next question will come from Sara Gubins with Bank of America-Merrill Lynch.

Your line is open.

Hi.

Thanks for taking my questions.

I wanted to make sure that I understand, when I look at your payroll service revenue year-to-date it's up 1.4%, but checks per payroll is up 1.8%.

But you have been getting some pricing, so I'm just hoping to understand the difference between those two.

Yes, how do you get there.

I think, Sara, the third piece of the leg and I'm not going to reconcile it to the tenth because I can't do it on the call, is that you have timing changes in between there.

So in the first quarter we talked about the frequency of payroll processing as impacting that quarter's growth, and then in this quarter, we have the extra processing day that impacted that growth.

The other thing I would say is that checks per payroll don't -- so if we're up 1.8%, for example, or 2%, that doesn't equate to 1.8% or 2% of revenue.

It equates to a fraction of that.

Okay.

Separately on the investment balances, can you give us an update of the weighted average duration?

I think it was about three years last time?

Yes.

We're in that 3 to 3.1 time, I guess -- duration.

Okay.

Do you expect that to continue to lengthen, or is this about the right range?

We're -- that's a tough question, and the reason is that what we're doing is two things.

We're looking at -- we're trying to optimize for the right credit quality and the right value along the yield curve.

I think we're not going to see it significantly increase from that.

It could lengthen a little bit.

That may be.

But then it will roll down as we -- as investments roll off.

So I would say plus or minus 0.2%, that's probably where we want to be.

Great.

One last question.

For SurePayroll, when you are winning, who is it that you're winning against?

Is it another SaaS provider?

Is it -- just wondering kind of what the source of the win is?

Thank you.

Yes.

On SurePayroll, a lot of it would be this is new businesses searching on the web for a provider.

I would say the closest alternative to them that they'd look at would be Intuit, would be -- Intuit payroll would probably be the biggest one they win from.

But a lot -- they're coming in -- we don't always know, because they're coming in through a search engine and coming directly to us.

It's not as much like a Paychex, where there might be a head-to-head sales person in there knowing they're competing with somebody.

This is all search engine.

We're not calling out to the clients.

They're searching for SurePayroll and coming in.

But we're very pleased with the work that they're doing to gather the clients in, to get the interest on the web, and then close those sales.

Great.

Thanks a lot.

Okay.

Our next question comes from Bryan Keane with Deutsche Bank.

Your line is open.

Hi.

This is (inaudible) calling on behalf of Bryan Keane.

Just on the fourth quarter, you mentioned that the fourth quarter is going to be strong.

But if my math is correct, the fourth-quarter revenues would have to be up at least -- the services revenues would have to be up at least 7% to get to the low end of the guidance, and I was just wondering if you could provide some color on what would drive that acceleration in revenue growth?

Yes.

First, I think what we've said previously, we just have easier compares, compared to prior quarters.

We have the elimination of a number of unusual things that happened in both first and third quarter -- actually, the first, second, and third quarter -- and then you start to see more of the underlying revenue growth generated by the sales that we've had.

The other thing is that although our payroll revenue tends to be fairly steady quarter over quarter, HRS bounces around a bit for some of the reasons that I mentioned earlier on the call, and it can be stronger in one quarter than another.

We expect that it will be a bit stronger than it was in this quarter.

Okay, thanks for the color.

One quick question.

You mentioned the insurance growth was moderating slightly.

So just wanted to get some color there.

Is the moderation just related to tougher comps, or is there anything else going on there?

No, I think the moderation there is really related to the fact that there have been some adjustments in terms of premiums paid under the Affordable Care Act on some segments of the business, coupled with the fact that we made a decision probably 18 months or so ago that our focus was going to be more on the higher end of the market rather than the lower end of the market.

We think that that transition has gone well, but it's going to impact growth in the short term.

Okay.

One final question on the competitive environment.

Just how is the competitive environment during the key selling season from your large competitors, as well as the regional players?

If you could just provide any color on the pricing environment, the competition?

Yes, I think the good news is we haven't seen much change in the competitive environment from a pricing standpoint or really activity.

I think we've been very competitive with our large national competitor from a pricing standpoint and promotions, and we saw that did not change very much during the peak selling season.

So we feel good about that.

From a regional, the smaller players, I think that we've actually continued to do very well.

Not just in third quarter but through the year, because the technology strength is not there as much, so they don't have as many products or technology and that may be starting to catch up.

So we're winning a little bit more from regional competitors, and I'd say winning about the same or maybe slightly better from the national competitor.

Okay, thanks.

Actually one more real quick question.

This was about the client growth coming from the selling season.

You said that you expect it to be up for the year.

Just wondering if you could provide some color on when you look at the client growth and talk about out-sourcing versus SaaS clients, and how should we think about those for the year, based on the selling season?

No, we don't -- well, we don't really give that much color on how we're doing exactly from each -- from which products and so forth, but I would say as Efrain said by the end of the year we give client growth once a year, we'll see positive growth and we're pleased with that.

It continues to grow, even given still kind of a stodgy kind of economic environment, where there are not as many new businesses starting.

But we'll see positive client growth by the end of the year in total.

I'd say one other thing, because I think there is a perception that there is sharp divisions on both of those.

In our model of servicing clients, we can service clients across a broad spectrum of service needs, and that distinction is starting to become a little less important than it was three, four years ago.

Okay, thanks.

Thanks for the color.

Our next question in queue comes from Joseph Foresi with Janney, Montgomery and Scott.

Your line is open.

Hi.

I wanted to ask just on client growth, can you give us the assumptions that you're using for why that -- it becomes positive through the back half of the year?

Is it fair to say, just backing into it mathematically, that growth, client growth, has been sort of flat to down over the last couple quarters?

Yes, we're not going to go into each of the quarterly growth numbers.

That's why we do it on a year-to-year basis.

Let me just say one time again, Joe, why we don't do that.

Because it is the case in many years that we've been up in the first half and then down in the back half.

Really, we focus on it on an annual basis, and I think it's fair to say that the back half will be stronger than the first half.

Okay.

And in the assumption for the back half being stronger than the first half, maybe you could just walk us through sort of why you -- is it macro related?

Is it the productivity in the sales force?

I think it's as Marty said, it's really more execution-driven, and many of the initiatives that the sales force, that Mark has put in place in sales force, really were geared around the selling season, and reached their peak there, and we're seeing that result.

Okay.

Do you feel like that productivity is sustainable over the long term?

Have we kind of stepped up to higher level, then, on the productivity side?

Well, I certainly don't see any reason why it shouldn't.

We're continuing to add product that is giving -- putting more in their bag to sell.

I think that the -- with the turnover back down to the historic levels, you just add as you add more experience, month by month, to the team.

They're selling and more productive.

I think the average tenure of our sales force, as that continues to increase now, will continue to help us out there.

I don't think the economy's given us a lot of wind behind us, but I think the execution certainly is in the leadership team and the sales force itself.

So we expect it to continue to go up, not by huge jumps, but continue to progressively improve.

Okay.

Would you characterize that as a split between market-share gains versus sort of economic improvement?

I mean, I'm just trying to get a full sense of either (inaudible - multiple speakers) --?

Yes, so Joe if you look at what's happening in the new business starts area, we've got data now through June of last year, and you compare the same period through June of last year to the prior period, and you have 2% growth in business starts, so it was pretty modest.

There's some up-tick going on, so there's an element of that.

I think a lot of this is really about better execution, and the job that Mark's done.

Which would be a little bit stronger winning rate, I think, yes.

Perfect.

Then a last one.

How are you measuring the productivity?

Maybe you could just walk us you through sort of what you've put in place.

I know there's been some sales force adjustments and adjustments to comps.

You've obviously added a new head there.

How are you measuring that productivity, and what has sort of, I guess, re-energized the sales force going out there and making these gains --?

The biggest focus this year on the comp plan, and on the direction in training and so forth and the efforts we put forth was on revenue per client -- really wanted to be sure that we were selling the whole product set, we were getting the most revenue per client, sell the value of the products that we offer and less about just price, and I think that's really started to pay off.

We certainly measure it on both a revenue -- it's primarily based on when you look at a sales rep, they're comped on revenue, the revenue that they're bringing in, and that's net of all discounts and so forth.

So it's the revenue they're bringing in, and obviously as we also are looking for the unit productivity that they're bringing in.

But the biggest focus this year has been on revenue, and then you always find there's some sort of balance that as we look at comp plans for the next year that we'll try to make.

Okay, thank you.

You're welcome.

Our next question in queue comes from Ashwin Shirvaikar with Citi.

Your line is open.

Hi, guys.

My first question is really about net pricing, and you guys have said in the past I guess closer to 2%.

I wanted to see if you can maybe desegregate the impact of maybe competition versus the impact of bundling as you are successfully moving clients to bigger bundles?

How do those factors sort of come into the picture?

Because 2% or close to that is sort of a historical low, isn't it?

Well, so Ashwin, let me take a stab at this and then Marty can talk about it.

Not really, because if you go back probably I want to say five years ago, we put a price increase and then didn't get it.

So we've had years where we put in a price increase, didn't realize any of it, zero, so I would certainly say that 2%'s at the low end.

Again, just to make clear, we didn't say it was precisely 2% but at the low end of the range.

What we did this year was we consciously priced at a level that we thought would yield net price at the lower end of the range, and we wanted to see also impact on -- what impact that would have also on units.

We wanted -- we thought the pricing environment was such that taking a higher price increase was not advisable.

As the year's gone on, maybe we will take a slightly different tack next year, but it's not reflective of our perception that we couldn't take a larger increase.

It was part of a strategy to see what the impact of pricing at different levels within that range would produce.

Just looking at the -- we're not going to obviously get into too detail on pricing from a competitive standpoint on a call like this.

I think that it's -- I think that is at the lower end.

Obviously, that is at the lower end, but as Efrain said, if you go back since the recession it's been a lot more difficult on the net side, but we're still able to get a price increase and hold it, and hold much of it.

Also, we've gotten a little more sophisticated, I think, in the way we price different clients for different packages and so forth.

That's probably the most detail I can give you.

No, this is quite useful.

Just to move on.

One of the areas where you guys have obviously done a much better job than certainly we expected has been on the margin front.

As I look at the elements of cost -- facilities expense and compensation and so on, so forth, should I sort of look at the facility's experience year over year being sort of negative 1% growth?

That obviously I think has to do with some of the real estate actions you took opportunistically in the Rochester area, maybe.

At what point does that sort of taper off in terms of benefit?

How long can you keep compensation sort of flattish?

Clearly there's productivity here, but I just want to get an idea.

Yes, sure enough Ashwin.

I started the call by saying that the leverage on operating expense is a result of a strategy that says -- that Marty put in place four, five years ago, that says we will redirect expenses into IT and find savings in operation in order to fund that.

It is a bit inartfully described in our documents as facilities, but that basically encompasses all of the operating expenses, with the exception of wages, within a branch location.

What we have done, and what we have been doing over a period of years and now you're starting to see it a little bit more clearly, is that where possible, we continue to leverage that expense as our technology gets better and better.

What we are deliberately trying to do is to balance that service component with technology and manage the P&L in that process.

That's what you're seeing.

It is not opportunistic.

We can't guarantee, again as I said before, that we will be able to do that every quarter.

But that is the direction that the entire organization is moving toward.

It's exactly what Efrain said.

It's part of our DNA to continue to try to leverage our cost, and especially as we drove more into the technology.

We have to leverage our cost, and it's not just facilities, so I don't want to mislead you.

It's operating costs.

It's the entire operation, and how do we drive more productivity, whether it be facilities -- which is really a fairly small part of the overall cost of the labor, et cetera.

How do we drive that through better technology that we give people to work with, just really try to drive that productivity a number of ways.

Our operations people do a phenomenal job of this, just really great work.

Got it.

This is quite useful.

I guess would you then take a shot at what peak margins can look like for you guys based on all these actions?

Yes.

Ashwin, we reached 41%.

That was probably our high point when we had $135 million worth of float income five years ago.

Certainly, if float income improves, our margins will get up in the 40% range.

Absent that, all I can say is I won't commit to a specific number, but just say that every year we're committed to leveraging in some form or another in ways that makes sense for the business.

Thank you.

You guys have a nice long weekend here.

Thank you.

Our next question in queue will come from David Grossman with Stifel Nicolaus.

Your line is open.

Good morning.

I was wondering perhaps if we could go back to the equation of revenue growth.

Historically, it's been units or clients and pricing to get -- and retention -- to get some kind of growth rate.

Now the pricing equation has become a little bit more complex because there are three dimensions to that -- it sounds like pricing, obviously checks, and then the bundling of incremental services to drive revenue per client.

With those changes in mind, can you perhaps give us some high level thoughts of how to think about that going forward?

Yes.

Let me take a stab and then Marty can add.

We need to drive unit growth.

I don't want any of the conversation that we've had to indicate that's not important.

It is.

But obviously in an environment where in 2009 there was 728,000 business starts, down from 851,000 the peak mid-decade, and right now we've only recovered to 784,000, you have to figure out how to get the growth.

We recognize that unit growth is going to be a bit more challenged.

What we have focused on is a combination of both driving units and also driving revenue growth as you mentioned through bundling, and also small things that we don't spend a lot of time talking about, but other value-added services, particularly for core clients, like clocks, like other related services.

So I would say, David, the way to think about it is a combination of more revenue per client and also unit growth.

Plus right now it looks like we've got a little bit more staying power on checks per payroll than probably we thought 12 to 18 months ago.

Now, we still think it will moderate, but it's simply been better than we anticipated.

It hasn't -- Efrain has said, it hasn't changed all that much from the old days of looking at client growth price and ancillary growth.

I think the ancillary growth is not just HRS products, though.

The point Efrain's making is even to the core clients there's time clocks now that we sell.

There's background checks.

There's a number of other products.

But you could kind of lump them all into that probably that ancillary growth if you wanted to.

The client growth is the most difficult one right now, but driving up price and meaning price in the standpoint of not just a price increase, but more price for what you get -- I guess what you get out of the price increase -- is certainly one goal, and the ancillary growth is the other when we don't have as much client growth as we'd like from the old days, the 3% or so.

It's still pretty much the same pieces, it's just driving -- right now, the focus is on driving the -- as much revenue as you can per client that we sell.

Obviously, selling more clients, but always driving as much revenue per client as we can sell with ancillaries and additional products and services we have, and then retaining those clients, which we're doing a really good job.

We haven't talked that much about, but I think we're really on a path for an historic best in client retention, which certainly helps, too; because the longer you have the client, typically the more revenue you're getting out of them as discounts roll off, and you sell them more products and services.

Right.

As we look at that payroll line then, and we think about unit growth and whatever the rate per client (inaudible -- technical difficulty) accustomed to this pricing, the straight pricing metric, is it realistic to kind of think of the bundle of pricing and incremental services and some number that we could think of a target in terms of how the business is going to grow when you factor in whatever it is, 2% unit growth, and then the rest comes from this bundle of pricing, checks, and other products.

Look, I think we'll give more color on that when we get to Q4.

I understand what you're saying.

I think that price component is probably going to be a bundle of all of those, of that additional revenue that we sell to clients in addition to the unit growth we assume.

But we're increasingly will be more of a bundle of those services plus the price increase.

That will create a revenue-per-unit lift.

Back to your comments.

I think you mentioned that you were experimenting a little bit with pricing this year, and I understand the reluctance to give too much detail on what you did and what you're going to be doing going forward.

But anything you can share with us on what you learned from that endeavor over the course of the year?

Yes.

What I'd say is that we have pretty sophisticated models around the price elasticity of demand, and we understand the price elasticity of demand better this year than we did last year.

We've just gotten increasingly sophisticated with the algorithms we use, and understand what the pricing in the base -- how the pricing in the base works.

One other thing, I don't want to leave a misimpression on that.

We're on record to have -- we're on a pace to have greater than 81% client retention, so it's not just plugging something into a model, which is part of the work we do, and I think we do a very good job of it.

It's also that we have tremendous service at the front line that's driving that kind of retention.

If you just -- if you don't have that part of the model solved, you can price any way you want.

You won't retain the client.

It's really important to realize that we don't trumpet this nearly enough, but we have thousands of payroll specialists who are out there on the front lines, meeting client needs every way in a very high way.

The stories that we get sometimes are just amazing, and that's part of the secret of our success.

I think the bottom line on that, when you think about what we're saying, we've seen good new business revenue sales.

We've seen some best client retention, and we're headed, I think, to a historic best, as Efrain said.

I think that says that the sophistication, the pricing model, is working pretty well.

We feel quite good about it.

It's holding for us.

Thanks very much.

Our next question in queue comes from Tim McHugh with William Blair & Company.

Your line is open.

Thank you.

First, just wanted to ask about the PEO area.

You talked about better client growth this year than certainly you saw last year.

Can you give us any sort of sense for exactly, I guess, how much of an improvement?

Is it back in line with historical levels or the rest of the HRS business, and I guess trying to get a sense how much of an impact that could have on the HRS growth going forward for the next year or so?

Yes, it's still a fairly small component of the overall HRS revenue.

But what we're pleased about, as you know we had some bumpy times there with health insurance premiums in the business a few years ago now.

This time around during an important selling season and benefit enrollment time, we think that a lot of nice work has been done there over the last year, really year and-a-half, to make us much more competitive.

It proved itself not only in new sales that were up in the PEO significantly, but retention.

Retention the last two years have been a struggle because of the premiums.

I think we've gotten that all calmed down and did really well, much better in retention than we expected.

I'd say, Tim, it's still a small part of HRS, but we're seeing it start to come back, and I do think that the Affordable Care Act and all that around health insurance will help drive those sales as well.

This is kind of just to us the start of positive momentum in the PEO that has finally kind of turned around and we feel it's sustaining, and actually will increase now with the Affordable Care Act.

Great.

Efrain, can you help us think through -- you talked about the impact of moving more into some municipal tax exempt type of securities on the interest income, but the tax rate really -- at least year-to-date -- hasn't moved all that much.

Can that start to have an impact where we can see the tax rate start to move down over the next couple quarters or year or two?

No.

I don't think it's going to make a dramatic impact.

Part of that really, Tim, is just the mix effect.

I'm not expecting to see a material increase in the amount of float income over the next year or so.

As our -- where we're driving higher tax rates is from the mix of our operating income., so the proportion of float to operating is going to be at current levels or below.

That tends to drive the tax rate up a little bit over time, not down.

If I had a different interest environment, I'd give you a different answer.

Unfortunately, we don't.

Okay, great.

Thanks.

Our next question comes from George Mihalos with Credit Suisse.

Couple of things.

One, just looking at the commentary from the sales season and your success it seems like bundling solutions together, should we be interpreting that you guys feel somewhat better about pricing as you're going to be heading into fiscal year '14?

Yes, I'd say so.

I mean, we're very cautious about it, and I think the models would show it's not an economy that you're going to go necessarily to the high end of a range, but I think we feel pretty good about where we're going.

We don't want to, again, I don't want to go too much farther on that.

I think we feel pretty good about continuing to give a price increase and hold it.

That's great.

That's very helpful.

Just two other very quick questions.

Can you just kind of ballpark for us or give us a sense of the growth rate for SurePayroll on a year-over-year basis?

Also you mentioned continuing your investment in IT and new solutions.

Can you also give us a sense of the percentage increase in investment spend?

Okay.

In sequential order, double-digit, double-digit.

There you go.

I'll take it.

Thanks, guys.

Okay.

Our next question will come from Tien-Tsin Huang with.

Thanks, good morning Marty and Efrain.

Follow-up to George's question around the investment spend, double-digit that's good to hear.

Your expense growth obviously staying very good at 2% to 3%.

How much more room this to benefit incrementally from productivity in operations?

I get that it's not opportunistic for sure, but I'm just curious how much more can you do to cover the big spending in product development?

Look, I can't give a precise range.

When we do our Q4, talk about guidance, we'll get a sense of that.

The best I can say is that we will just continue to incrementally improve.

There are always ways to find better productivity.

That's something that is drummed into the DNA of the entire organization.

We understand that.

We're currently in the planning season.

I can say that that mantra continues to be repeated.

We still think we have some opportunity.

Can't commit to specifics about how much we'll do, but it's our intent just to continue to going forward.

The focus is always continue to leverage the expenses, but to not sacrifice the initiatives we're doing for growth.

So the technology spend, the spend to drive more sales, more referrals and things like that.

We're still investing in those things, and it's a balance of -- hey, we've got to come out of this with technology spend for our future growth, sales spend for our future growth, and but still leveraging the expenses.

That's exactly how we work through it.

Okay, fair enough.

Just a couple more quickly -- I know it's getting close to lunch.

The revenue per client maybe I'm thinking here could be a more important metric.

Directionally, there's a lot of moving pieces, right?

You get the SurePayroll mix, then you've got higher attach rates on ancillary.

What's the directional trend?

Is there a lot more room to drive up core payroll revenue per client, with all the ancillaries that you've added through the years?

We have some opportunity to do that.

I think one of the important things to remember here is that there are a lot of people in the market who appreciate good customer service and are willing to pay for it.

We think we deliver world-class service, and we think our clients appreciate that and are willing to pay for it.

We also think there are other tuck-in products that over time aren't currently in the portfolio that we will add.

Finally, the other thing I'd add is there is a under-estimation of the complexity of the ACA requirement that is going to cause people, even people who are probably in a SaaS-based environment, to think maybe out-sourcing is a better option for $1,000 more, because of the penalties for non-compliance.

We think all three of those are factors that probably could tend to push that higher.

What the specific number is, we can't commit for or state what that is at this point, but we think that it pushes towards a higher number.

I think we're at a very good place of balancing that world-class service with the technology now.

A few years ago, four years ago, we were I think a little behind the curve on the technology, but the investments have paid off, and now with the roll-out of product that we're doing all the time and the improvement in the SaaS model and the SaaS investments are really paying off in that it's a very valuable balance of technology and a very competitive service and technology model together. ]

That makes sense, and it jives with your high CSAT and retention metrics as well.

I'll let you go on just one more question.

I think I ask it every quarter, and I apologize.

On the acquisition pipeline, I heard a little about talent management, things like that.

Just any color on just the pipeline itself?

Is there more in the SaaS or the tangential markets or maybe the regional payrolls, is that something you're considering?

I'm curious.

Thank you.

It's definitely SaaS, I think, because we're looking to bring more in.

I think it's not only the product tuck-ins, but it's also new product.

New product and expanding I think are our product set a little bit.

Not really want to go too far into that at this point until we do something.

And it's investments also looking out in geography as well.

We're really trying to increase the speed at which Germany grows, and I think we've put a renewed focus on that, as well.

It's product tuck-ins.

It's additional products.

It's payroll certainly, as well, and it's geography.

We'll be able to tell you more about those as it happens.

But as Efrain mentioned earlier, we're very careful not to just put it on the top line and then impact the bottom line.

So it takes us, I think, a little bit longer to balance and find the right opportunities.

We don't just spend it just to stick it up there on top and not have an impact on the bottom.

We look at very good value-based acquisitions.

Sure, I trust that's the case.

Thank you.

Our next question comes from Gary Bisbee with Barclays.

Your line is open.

Thanks for staying on the call so long.

I'll just ask you two quick ones.

I think you said you thought the health insurance business could be impacted somewhat by the Affordable Care Act next year.

Could you give any more color on how much that might be and what impact?

Not precisely.

What we'll talk a little about, we've been growing upper teens, 20%.

We expect that to slow down a little bit.

What the impact there really is in the 10 and below market where we think those people eventually are going to migrate into exchanges.

There's also a little bit of pressure that's occurring with respect to brokerage fees that we expect to continue.

The combination of those will cause growth rates in the short term to moderate.

We still think there's an important opportunity longer term, and we transitioned -- pivoted the sales force to look at more market opportunities where we think there's still a lot of opportunity.

You still think you'd grow the business, but just at a slower rate?

Definitely, yes.

There's a lot of opportunity here, I think.

Efrain mentioned it earlier.

Even in the payroll side there's opportunity, because I think it will drive more to out-source.

But on the health insurance side, I think we're doing some things product wise that I think are going to -- are really positioning us well to capture that from a client perspective on the payroll side and the health insurance side.

In the short term, you have a little bit of pressure from commissions, from the carriers.

In the longer time I think more clients are going to come to someone looking for an expert to help them, and the combination of health insurance being done by us, by Paychex, and the payroll will make it much easier for clients than those who do it separately.

Great, and then the second question, the float being flattish with the growth offsetting the lower yield, is that a reasonable proxy, or do you think it likely could start falling again as we move forward?

I think the expectation is (inaudible - multiple speakers) continue to slide.

Yes.

We had some gains in the quarter, and we kept the guidance for the year, so I think we're at 8% to 6%, down 6% to 8%, I guess I should put it that way.

That's still good guidance.

Then we'll talk more about where we think we'll end up next year.

But we certainly don't face the head winds that others do in this, unless rates continue to be -- drop from where we are and get worse.

Great, thank you.

Our next question will come from Mark Marcon with R.W. Baird.

Your line is open.

Good morning, thanks for taking my question.

With regards to the profile of the clients, you were talking about this with regards to health insurance.

I wonder if you could talk a little bit about it with regards to on the core.

What are the differences in terms of the profile of the new clients that you're signing now relative to maybe a few years ago?

What percentage are new businesses?

How should we think about that going forward, particularly with the complexity of the Affordable Care Act impacting companies that are a little bit larger to a greater extent than the really small ones?

I think, Mark, I think generally we're not seeing a big -- any significant differences in the new clients we're selling versus the clients that we have in the base.

They're still very much in our sweet spot.

I think on health insurance in particular, we have focused that we think there's a better opportunity for us to expand and do more selling in the 50 and above.

Obviously our mid-market payroll business is up there, and I think there's a lot of opportunity.

What we found is we were selling a lot to the under 50 in the health insurance, and that the even better retention and bigger opportunity might be in that over 50, so we focused some of the health insurance folks on that, and have been going through a little bit of a transition on that.

But as far as really payroll and core payroll in particular, we're not seeing much difference in new clients versus existing base.

What percentage of the health insurance clients are typically in that smaller range out of the existing base?

Yes, I don't think we get to that level of granularity.

I think what we've said is that currently our health care clients as a percentage of the base are under 5%.

It's fairly small.

One thing I don't want to mislead anybody to think that we're not going after that small market for health insurance as well.

We are.

It's just -- obviously, if you look at under let's say 20 employees, probably 50% provide health care, somewhere in the 40% to 50% provide healthcare, so that's an opportunity there.

If you look at over 50, it's more like 90%.

All we're saying is we're kind of adding a focus, not -- we didn't take away from the low end though at the same time.

Then you mentioned that the bonuses helped a little bit this quarter.

Is there any quantification around that, or --?

Yes, what we you saw, Mark, was that bonus dollars compared to -- as well as we can quantify, were up about 20% this year, a little bit over 20% over last year.

There was clearly a lot of bonus activity, and as Marty said before, we said a more normalized rate of growth in checks per client would have been about 2%, so we saw roughly 0.3% or so in terms of checks.

That's an estimate.

I don't want to -- I don't want you to think that's anything more than that on our part.

It's tough to say what's a check and what's a bonus check.

Based on our analysis, it looks like a lot of people made some year-end bonus payments that didn't occur in prior years, for obvious reasons.

Obviously a positive sign with regards to the economy.

Yes.

In terms of the float yield, do you think we're basing at this point?

We're what?

I'm sorry.

In terms of the effective yield on the float, do you think we're pretty close to basing in terms of the --?

basing.

We've reached a trough?

I'm sorry, Mark, I didn't understand what you meant by basing.

I get it now.

We're pretty close.

We're pretty close.

We're getting close.

We should start seeing continued improvements in terms of the overall float balances, no?

Float balances or float income?

Float balances.

Yes, float balances should over time go up.

Yes, absolutely.

I know where you're going.

Yes.

Look, I hope increases.

I think we'll still see down next year just because of the roll-off of some older investments, but we're getting close to the end of the cycle.

Great.

Thank you very much.

Okay, thank you.

Thanks.

Our last question will come from Paul Condra with BMO.

Your line is open.

Hi, thanks a lot.

Just on the bonuses, I think you mentioned those have been up for obvious reasons.

To me that means people trying to front-run the payroll tax increase.

I was wondering if you were thinking about it the same way?

No.

I think what they were trying to front-run was a perception that dividends were going to go up, in all likelihood, and capital gains.

It seems like six years ago, but there was a lot of nervousness in December about cap gains and dividend rates going up.

So I think people got nervous about that, and rates in general going up.

I think we did see some.

I think the overall bonus activity was more about an improved economy and so more checks and so forth.

I think, to your point, we saw more bonuses paid in December than January this year.

So it moved up a little bit.

I'm not sure the overall amount was trying to -- I think the overall amount is up, though, which was a positive on the economy, but we did see it shift some to December versus January.

Obviously, all still in the third quarter.

I guess on the timing.

The front-running comment was what I was referring to.

Yes.

Sure, okay.

Great, thanks.

I don't know if you can kind of remind us just on the HR services the mix of those kind of main four business lines there, and maybe some comments on the mobile adoption or mobile usage.

I'll just end it there.

Thanks a lot.

We don't disclose the exact percentages for each, but within the three lines of businesses that we have in HRS, the biggest is HR out-sourcing, which is our ASO, PEO solutions and what we call HR Essentials -- that's first.

Second is our 401(k) record-keeping and related business; and then third is insurance.

I'll let Marty talk about the mobile.

Yes.

And by the way, feeling good about all of them, particularly 401(k).

We didn't talk much about it on the call, but we shifted and expanded, frankly, a sales force in 401(k) toward the larger market, larger 401(k)s, and that's done -- off to a great start.

I think Efrain and I have mentioned it on previous calls but just started that this fiscal year, so we see expansion on larger 401(k)s as well.

On the mobility question, yes we're seeing a nice fast pick-up in use of the mobility platform.

As we add more feature and functionality to it, and more clients are -- we're pushing that more, so clients are aware of it that's its available and out there.

The feature functionality to the application just continues to expand.

So we're seeing a nice pick-up in that.

Again, it's not really replacing.

For us, it's this hybrid of balancing the service model that we have of the dedicated specialist who is all knowledgeable and can take care of everything for you with your ability to go in and do your payroll if you want online, or just get information off your phone or tablet.

Great, thanks, guys.

All right.

We show no further questions.

Great.

Well, thank you.

Thanks everyone for hanging in.

We appreciate the interest in Paychex, and we're very excited about our future.

At this point, we'll close the meeting.

If you're interested in replaying the webcast of this conference call, it will be archived until the end of April -- April 29.

Thank you for your time and your participation in our third-quarter press release call.

Have a good weekend.

Thank you for participating in today's conference.

You may now disconnect.