沛齊 (PAYX) 2013 Q4 法說會逐字稿

Welcome and thank you for standing by.

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

(Operator Instructions)

Today's conference is being recorded.

If anyone has any objection, you may disconnect at this time.

I would now like to introduce President and Chief Executive Officer, Mr. Martin Mucci.

Great, thank you, and thank you for joining us for a discussion of the Paychex fiscal 2013 year-end earnings.

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

Yesterday afternoon, after the market closed, we released our financial results for the fourth quarter and fiscal year ended May 31, 2013.

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

This preliminary discussion and analysis is not a complete Management discussion and analysis.

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

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

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

On today's call I will review the fourth-quarter and fiscal 2013 highlights and our operations, sales, and product development, and Efrain will review our fourth-quarter and fiscal 2013 financial results in more detail and discuss our fiscal 2014 guidance.

Then we'll open it up for your questions.

Let me start by saying I feel we had a strong fourth quarter and a solid financial performance for fiscal 2013 as a whole.

Efrain will go into, again, more detail.

However, I'd like to provide you with some of the highlights.

Our checks per payroll have improved for 13 consecutive quarters.

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

We did see some moderation in the rate of growth in the fourth quarter.

Our execution and operations has been excellent, demonstrated by achievement of the highest client satisfaction scores in our history.

It is our exceptional client service along with our leading-edge technology that really sets us apart at Paychex.

The dedication of our employees has also resulted in our best year ever in client retention, exceeding 81% of our beginning payroll client base.

Over the past few years, we have increased our focus on sales execution and expansion opportunities and we are pleased with the results for fiscal 2013.

We opened new territories, focused on market segmentation in payroll as well as 401-K.

We also increased our involvement in franchise and banking referral opportunities, creating new, expanded relationships with Subway and Tim Hortons on the franchise side, as well as Citizens and Union Bank, to name a few on the banking side.

From a sales perspective, we had a strong fourth quarter and we are particularly pleased with the new sales revenue generated from our Core payroll sales, Retirement Services, HR outsourcing, and SurePayroll teams.

Our client base in payroll finished the year at 570,000 payroll clients, an increase of approximately 1%.

This growth is consistent with the prior year.

Revenue per client was another positive factor in our payroll revenue growth.

From a technology perspective, we are integrating our leading technology and mobility platform with our world-class customer service through the Paychex Next Generation suite.

This technology creates an integrated workforce management tool for our mid-market clients by bringing together the services those clients need, including our small and mid-market payroll products, and various human resource and employee benefit management services.

We have been positioning Paychex to capture the opportunity arising from an increase in shift to the online SaaS solutions.

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

Our recent acquisitions of ExpenseWire and myStaffingPro.com have SaaS-oriented business models and in addition, our SurePayroll product continues to do well with strong sales and revenue growth.

We enhanced our online and mobile offerings during the fiscal year by adding greater value and convenience for our clients.

We introduced a best-in-class online report center and builder in the fall and most recently added flexible spending account and health and benefit employee and employer information to our mobility apps and we will continue to add more capabilities in the future.

In retirement services, we have also experienced success in driving more sales through our approach to enhance our relationship with financial advisors.

As we move into fiscal 2014, healthcare reform is one of our most important initiatives.

This legislation has far-reaching impacts to businesses across the country and we will see changes in the way businesses handle not only insurance, but also payroll reporting, administration, monitoring, and employee benefit offerings.

We are excited about the opportunity to assist our clients as they navigate the complexity of healthcare reform by providing them with information and support, as well as new comprehensive solutions for their businesses and their employees.

Our new Paychex Employer Shared Responsibility service makes it easier for business owners to determine if the employer's shared responsibility provision applies to them and what actions they may need to take.

We also offer our new Employer Shared Responsibility complete analysis and monitoring services for those clients who want a more robust solution as well.

The Paychex benefit account products will allow employers to offer flexible spending accounts, health savings accounts, health reimbursement arrangements on a single platform with one debit card for their flexibility and we will give employers access to a Paychex private exchange in conjunction with this product.

We have launched a new healthcare reform section on our website designated to provide answers, information, and solutions that will help our clients and employers who need to prepare and take action on healthcare reform.

In summary, I am very proud of the efforts of all of our employees at Paychex on behalf of our clients and our shareholders.

We have a solid leadership team that is clearly focused on sales and service execution, technology innovation, and product expansion to drive our plans in fiscal 2014.

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 with the customary legal disclosures.

You should be you 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.

As Marty indicated, Paychex delivered solid results in fiscal 2013 with improving metrics.

Here's some of the key highlights for the quarter in fiscal 2013.

I'll provide greater detail in certain areas and wrap with a review of our 2014 outlook.

Total service revenue grew 6% for the fourth quarter and 5% for the fiscal year.

Interest on funds held for clients decreased 7% for the fourth quarter and 6% for the fiscal year to $10 million and $41 million respectively.

This result was byproduct of the low interest rate environment that prevailed during the year and was partially offset by an increase in average investment balances.

Expenses increased by 5% in the fourth quarter, and 3% for the fiscal year.

We continue to invest at higher rate in leading-edge technology.

For the full-year period, this was partially offset by an increased productivity within operations.

Operating margin was 35.1% for the fourth quarter, and 37.8% for fiscal 2013.

Operating income, net of certain items, increased 9% to $202 million for the fourth quarter, and 7% to $864 million for fiscal 2013.

In the fourth quarter, we increased our tax provision for the settlement of a state income tax matter for the fiscal years 2004 to 2011.

This additional provision reduced earnings per share by approximately $0.04 per share for both the fourth quarter and the fiscal year.

We do not expect this to have an impact on our effective tax rate going forward.

Net income growth due to factors just discussed was flat at $124 million for the fourth quarter, and grew 4% to $569 million for the fiscal year.

Diluted earnings per share were again flat at $0.34 per share for the fourth quarter, including the tax matter we just discussed and they increased 3% to $1.56 per share for fiscal 2013, including the effect of the increased tax provisions.

Payroll revenue.

Payroll service revenue increased 4% for the fourth quarter and 2% for the fiscal year.

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

Check per payroll increased about 1% for the fourth quarter and 1.6% for the fiscal year, moderating from the respective prior-year periods.

Revenue per check was positively impacted by price increases, partially offset by discounting.

We have been experiencing positive growth in revenue per check through the pricing of our Core products and related ancillaries.

Fiscal 2013 payroll growth was modestly affected by events from earlier quarters, including the impact of Hurricane Sandy and one less payroll processing day overall due to the leap year in the prior year.

HRS.

HRS revenue increased 13% to $193 million for the fourth quarter and 10% to $746 million for the fiscal year.

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

Some highlights of the contributions to HRS revenue growth include Retirement Services revenue, which benefited from growth in clients, price increases, and an increase in the average asset value of Retirement Services client employees' funds.

Paychex HR Solution revenue was positively impacted by growth in clients and client employees and price increases.

The rate of growth was tempered by lower average client employees within our PEO.

During the second half of fiscal 2013, our PEO business stabilized and improved as the year progressed.

Insurance services revenue continues to improve as a result of growth in health and benefit services applicants, though at moderating rates, and higher revenue from other insurance policies.

Growth also resulted from increases in premiums and workers' compensation insurance services.

We expect that healthcare reform will impact our insurance service revenue in the form of rate pressure and that we will see a number of opportunities in assisting our clients in navigating the complexities of the Healthcare Act.

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

Now let's look at investments and income.

We maintain a fairly conservative investment policy.

As you know, our goal is to protect principals and optimize liquidity.

On the short-term side, our primary investment vehicles are high-quality variable rate demand notes [we already in the] bank demand deposited notes accounts.

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

The interest rate environment remained at historically low levels for much of the year, despite the recent uptick.

Our combined portfolios earned an average return of 0.9% for the fourth quarter compared to 1% for the same period last year, and 1% for fiscal 2013 compared to 1.1% for the same period last year.

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.

Investment income decreased 20% to $1 million for the fourth quarter, and increased 4% to $7 million for the fiscal year.

The decrease for the quarter was due to lower average interest rates earned.

This was due to a change in mix in the corporate portfolio, with more invested in short-term securities compared to the prior year.

I will now walk you through the highlights of our financial position.

It remains strong.

Cash and total corporate investments totaled $875 million as of May 31, 2013, and of course we had no debt.

Funds held for clients as at May 31 were $4.1 billion compared to $4.5 billion as of the same period last year.

Funds held for clients vary widely on a day-to-day basis and averaged $3.7 billion for the fiscal year, 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 $35 million as of May 31, compared to $60 million in the prior period.

The decline in net unrealized gain position was driven by the recent uptick in market yields.

Total stockholders' equity was $1.8 billion as of the end of the year reflecting $477 million in dividends paid during the fiscal year.

Return on equity was 34%.

Cash flows from operations were $675 million for fiscal year, a modest decrease compared to the prior year.

The decrease was driven mainly by fluctuations in operating assets and liabilities, partially offset by higher net income adjusted for non-cash items.

Fluctuations in our operating assets and liabilities between periods were primarily related to the timing of collections from clients and payments for compensation, PEO payroll, income tax, and other liabilities.

Settlement of estate tax matter had a related effect on our federal tax liability, which had an impact on accrued income taxes at fiscal year-end.

Now turning to 2014 guidance.

I'd like to remind you that our outlook for fiscal year ending May 31, 2014 is based on our current view of economic and interest rate conditions continuing without significant changes.

Our guidance is as follows -- Payroll service revenue projected to increase in the range of 3% to 4% compared to fiscal 2013.

Projected growth rate is based on anticipated client base growth and increases in revenue per check; HRS revenue is expected to be in the range of 9% to 10%, in line with recent experience; total service revenue expected to increase in the range of 5% to 6%; interest on funds held for clients is expected to decrease in the range of 7% to 9%.

Based on projected rates, we will revisit this assumption during the year.

Operating income, net of certain items as a percent of service revenue, is expected to be approximately 38% for fiscal 2014; investment income net is projected to increase in the range of 0% to 5%; and net income is expected to increase in the range of 8% to 9%.

This growth assumes and incorporates the impact of the settlement of the state income tax matter in fiscal 2013.

The effective tax rate for fiscal 2014 is expected to be in the range of 36% to 37%, as we don't expect the state income tax matter to impact our future effective income tax rate.

As you know, we don't provide guidance on a quarterly basis.

However, we do anticipate that payroll revenue growth in the first quarter of 2014 will be at the low end of our full-year guidance due to timing of payroll processing in that quarter.

From an earnings perspective, we anticipate that the first half and the second half earnings in fiscal 2014 will be comparable.

Okay.

Thank you, Efrain.

And we'll now open up the meeting to your questions.

Stacy?

Thank you.

We're now ready to begin the question-and-answer session.

(Operator Instructions)

Glenn Greene, Oppenheimer.

I wonder if you could first start with the underlying assumptions you have for payroll services growth going into '14, [hiking] through the net customer growth, revenue per check, maybe some of the ancillary whatnot, maybe just help us walk through the high-level thinking to get to the 3% to 4%?

Yes.

So as you know, we ended the year at 2% and so we're expecting that to improve.

We see pricing a little bit better than we had this year.

We expect net client growth to improve a bit and we expect checks per payroll to moderate from where we are.

So in the quarter we saw moderation.

We think that we're reaching -- we're down in terms of what we would expect the contribution for checks per payroll to include and we expect some modest upticks both on client growth and on pricing.

And on the pricing, is it reasonable to think that the net pricing was in the 1%, 2% range and you're suggesting a little bit of an uptick going into '14?

Is that the right way to think about it?

That's probably a little bit low, Glenn.

We were more towards the 2% range and we're expecting it to tick up a bit from there.

And then, just one more and I'll jump back in the queue.

But thinking through the 570,000 customers which -- you grew directionally close to 1%, is there any way to parse how much of that was SurePayroll customer growth versus the Core payroll growth?

Well, Core payroll growth was modest.

We have about five different customer bases in there.

Some were up, some were down.

Core was modestly up.

Sure was up.

And then there were some other older platforms that were down.

Was Sure like what it's been doing, mid-teens or so growth?

Double-digit, yes.

Okay.

I'll jump back in.

Thank you.

Sara Gubins, Bank of America.

Of your payroll services clients, I'm wondering if you could parse out the clients that have around 10 employees or fewer?

Did that grow slower or faster than your overall business?

I don't think it changed that dramatically.

What I will say, Sara, is if you look at sales now in the back half of the year versus the first half, we saw an uptick in the size of Core clients.

So I don't think it's enough yet to affect the base as a whole but we did see an increase that was notable in terms of size of clients.

Yes and what we think of as the small market, the under 50 but really under 20, you could say.

Okay.

And then on the margin front it looks like next year you're expecting less margin leverage in operating income as a percent of service revenue than you got in fiscal '13.

Is that fair?

And can you talk a little bit about why?

No, I don't think it's fair.

So we always go through this discussion around how precisely we're going to guide.

So let me just review what has happened, right?

So if you look at what happened over the past two years, and actually I'll go back three years, we were at 36.3%, 37.1%, and 37.8%.

So when we guided last year, we guided in similar fashion.

We expect it to be north of 38%, but we don't expect it to reach 39%.

So we said approximately 38%.

So we do expect some margin.

I wouldn't book precisely the amount that we got this year but we're going to continue during the year to produce some leverage.

So the approximately 38% just simply is to say we didn't want to call it closer to 39%.

Yes, we're always looking -- as we've said in past calls -- we're always looking for additional margin and different additional leverage as we grow, so.

Thank you.

Bryan Keane, Deutsche Bank.

I wanted to ask about HR Services revenue.

It increased 13% for the fourth quarter.

So it looked like it had pretty good momentum although the guidance tempers that a little bit, back down to 9% to 10%.

So I just want to make sure I understand that?

We had a -- if you look at what happened, particularly in the back half of the year, and Marty mentioned earlier, we had really good sales results in the second half of the year.

We had a really strong back half in the PEO and really good sales performance and very good retention performance.

Part of what our guidance incorporates is we don't see it being quite that strong in next year.

But we are exiting the year with very good momentum on the HRS side.

Okay.

And that's just -- it's not quite as strong just because of the pipeline you see through the sales channel or I just--?

That's it.

And we were rebounding off an easy compare, so the combination of both of those.

Yes, as Efrain said, we are real pleased with where the sales are.

We're just -- one quarter doesn't always make a year, so as we see a strong quarter we're very pleased but [do] we look at the whole year, we'll be very consistent in that range that we gave for the year.

But we are pleased with the second half of the year, and particularly the fourth quarter, and PEO sales, HR outsourcing in general, ASO, 401-K, all had a really good fourth quarter on the sales front.

Okay.

And I was a little surprised that checks per payroll only increased 0.9%.

But it sounds like you expect -- do you expect that to be at similar levels and just any high level thoughts on why that seems to be moderating even though people are hoping for a stronger economy?

Yes, we've been expecting moderation.

And when we look at the data, we're realizing that quarter ends when they end, the day can sometimes influence that number.

I'd just say that going into the beginning of the year, looks like we're a little bit stronger than that.

But the trend is definitely towards moderation and that's what we're assuming for next year.

Okay.

Last question from me.

I know we talked about new client growth being at about 1% to 3%.

Sounds like you expect that to get a little bit better this year.

I'm just curious what gives you that confidence.

Because it's been around that 1%, 0.5% for the last couple of years?

Yes, a couple things.

One, as we stated, the sales in the small market ended the second half of the year stronger.

We came out of the fourth quarter strong so we feel like that's a good signal.

When you look at some of the economic indicators, housing starts are up, prices are up on housing.

Housing is a really important measure for us because we have a lot of jobs around that, a lot of contracting, roofers, et cetera, around that.

All of that is positive.

And so we're feeling like we're coming off the end of the year with some momentum and that that will certainly help us.

We also came out with the best client retention in our history this year on the Core -- on the payroll side.

And so we feel very good about the retention work that we're doing and you put that with the sales, we think that the client growth is going to start to pick up.

What did retention actually end up at?

We said over 81%, which is an historic best.

Okay.

Great.

Thanks, guys.

Joseph Foresi, Janney Montgomery Scott.

I wonder if I can ask a question just on the interest rate side of things.

I know it affects your Business and I'm wondering if you could answer it in two ways.

First of all, what are you thinking not just one year out but maybe two or three years out from the actual impact to the numbers?

And then the second part, have you seen any changes?

You mentioned construction but if interest rates should slow the -- or a tick up in interest rates should slow the pace of investments, are you seeing any changes on the demand front?

So interest rates from a numerical perspective within the model and then on the demand front?

Yes, Joe, so two things on that.

And I saw a couple of notes on this that I wanted to clarify.

In a typical year we're repricing 20% to 25% of the portfolio.

And so we will see the benefit of longer -- the higher rates, I should say, in our longer-term portfolio as we go through the year if we stay at current rate levels.

And I just want to caution, we've seen spikes above 2% before only to have them come down again.

But if we continue at these levels, we'll get some benefit, some uptick.

Some people were asking why we didn't call out a higher number on our portfolio.

We need to see when we invest, whether these interest rates prevail.

I believe they will.

With respect to the impact of interest rates on our clients at this point, it's really early to tell.

Marty said we've been seeing some uptick on the clients in the construction industry.

So that's a positive.

It remains to be seen whether a bump of this magnitude, which is still modest by historical standards, will really have a damping effect on businesses and business formation.

Okay.

And then just one last quick question from me.

On the margin side, you've obviously been clear given the earlier questions about what you're expecting from margins but the historical thought process there was that you're gaining efficiencies in the business and then reinvesting that on the technology front.

Can you just give us some idea of where you stand with that schedule and what could be the potential delta in the upcoming years as opposed to the past on the margin front?

Well yes, we've continued to invest and, as you said, we've taken the efficiencies much from the field operations and the centralized service operations that we've gained and poured them back into the technology and we really feel good about that, has really come to fruition the last two years in particular on all of the products that we rolled out and the success we've had on the technology front.

Where we used to talk about maybe the 100 to 200 basis point range, we've been much more in the 50 to 100 basis point range is what we've talked about, always looking for leverage, always will be part of our DNA to look for it.

But we certainly understood that we had to pour more back into technology and we'll continue to do that, although it is at a decelerating rate now.

We're getting to a level of technology spend where I don't think you'll see as big of an increase in that.

But when you look at our leverage, it will -- we'll continue to look for the 50 to 100 basis points as we grow.

As we grow more, now, you've got to -- I'm sure Efrain will tell you -- if you put that into a different perspective when interest rates go up that's very different equation.

This is more in that flat interest rate, no movement in the interest rates.

Fair enough.

So 50 to 100 is the new normal excluding interest rates, just so we're clear?

Yes.

Okay.

Great.

Thank you.

David Togut, Evercore Partners.

Marty, you highlighted some major new product enhancements that have been made recently, particularly on the mobile front.

Of those enhancements, which do you believe most differentiate you from your primary national competitor?

On the mobility front, the biggest thing is we went after making sure that, one, that any device you used was optimized.

So whether you're on an iPad or whether you're on a tablet or whether you're on a phone, that the screen is optimized and we were ahead of the game on that one.

We were a little behind in getting to the mobility but when we got to it, a year or so ago, 1.5 years ago, we were optimizing first of all the device.

Second, we focused very much on information to the client.

So as opposed to necessarily on a phone, allowing for payroll, you actually to do your payroll, which we didn't find much research that said a lot of people were doing that either from our general research or at looking at SurePayroll's experience, what we found is they want to get to the information and how do they get to it in the easiest possible way with fewest clicks, for example, and that's what we focused on.

So if you look at our application on the iPhone for example, you can get to your employer or employee information very easily and we're continuing to add to that in a very thorough but yet easy way to get, to access the information.

Now, we'll allow you to do payroll, to actually do the payroll on the device in the August timeframe this year but we found it was more important for the simplicity and amount of information and we're the only ones that give the health and benefit information to the detail that we have in the industry.

So we really feel it's a leader out there.

And in terms of product enhancements, what's next from Paychex?

Well, the most exciting thing for us is the healthcare reform.

We're very excited about the opportunity to help our clients navigate through one of the biggest changes in their business in years, whether they're small or large, because they're going to have to react somehow in most cases to help their employees or comply with the law if they're over the 50.

And we're really excited about the products that we'll be rolling out in the fall that not only help them take the information and use it to determine whether they have to comply and how they comply and help them comply, but also then to help them even get to an exchange if they want to go that way, to combine a lot of complicated health spending, health reimbursement, and accounts and health spending accounts that can all combine to one debit card.

So that's probably the -- we're excited about all our products but the response to healthcare reform that the team has done here is really extraordinary and it's going to be ahead of the game in the fall.

And when do you expect the new healthcare reform product to become material to revenue or earnings for Paychex?

Well, it's hard to say because we're just starting out and there's going to be so much confusion over it.

But when you get into the second half of fiscal '14 and then you get into the second half of the calendar year, which is early '15, it starts to pick up speed and, frankly from there on in, because there will still be changes, people will be catching up with everything from a client perspective.

I would say the next calendar year and into the following one.

Got it.

And just finally, did you quantify year over year bookings growth for the May quarter?

No, we didn't.

We don't do it on a quarterly basis.

But we felt good about the -- as Efrain said, the second half was stronger than the first and we really felt -- not just in one area.

The small payroll side was good.

The 401-K was strong, and par, and new business revenue and so was HR outsourcing and SurePayroll.

Did bookings growth improve from the February quarter?

It was comparable, both were very good.

I see.

Thank you very much.

Paul Thomas, Goldman Sachs.

Following up on healthcare reform, you mentioned you expect some rate pressure in insurance from reform.

But it sounds like there might be some opportunities.

Are you thinking about it as a net positive or net negative at this point within your FY '14 guidance?

It's net positive, Paul.

So referring back to the previous question, it's tough to peg when some of these initiatives will become material to growth because we're walking through it the first time.

But we think it's definitely a net plus.

When we call out rate pressure, what we're describing there specifically is we see a migration from smaller clients to larger clients in our base health and benefits business.

We see rates there coming under some pressure for that segment of the market.

But that is going to be dwarfed by other opportunities within the market that really extend across the entirety of our client base.

So the products that Marty just mentioned, we think will have the potential to be an important contributor in the future.

Okay.

And have you seen any change in client behavior yet?

Last quarter you had talked about, you hadn't seen much yet, because it was still a ways off but it sounds like you're getting products ready for the change.

Or what are you seeing on the client side?

What we're seeing at this stage is a lot of requests for information.

So it's getting us in front of clients but I don't think they're -- they're not making -- first of all, the products aren't there yet but I don't think they're making their decisions yet -- the summer and the fall is really where it's going to hit as they get into benefit enrollment.

That's where they're going to really feel it.

At this stage they're still gathering information.

But the information gathering has ticked up.

But not in anything necessarily in making decisions.

Okay.

Thanks a lot, guys.

Jason Kupferberg, Jefferies.

So just wanted to follow up on a question I had initially asked last quarter as far as the longer-term guidance for Core payroll revenue growth, the mid-single-digit figure that you had given last summer and at the time you had said that that [seemed] too high and now obviously, we're into fiscal '14, we have the guidance for this year, it's still below mid-single-digits.

So is now the right time to give us a reset on that longer-term guidance?

Where do you guys think over that three-year forecast period you'll actually come out in Core payroll?

Yes.

Jason, so when you go back to the presentation, there were two parts of it.

One was the long-term thought process, which was contrasted by the next section of the presentation, which was 2013 through 2015.

So in 2013 through '15, this is what we said specifically.

Organic client base growth was going to be 1% to 3%.

Pricing would be 2% to 4%.

And checks would be 0% to 1%.

That's what we said about 2013 to '15.

To get to mid-single-digits and, we've been saying this pretty consistently, you need a slightly different environment in terms of new business formation than what we have.

If you look at the data that we've got at this point, based on the most recent BLS data, which has a lag, basically shows no growth whatsoever in new business formation.

Now we're not using that as an excuse.

We think that we can grow the Business.

We need a little bit better environment to push us solidly into the mid-single-digits category but we think as a long-term proposition, meaning beyond the 2015 range, that's not an unreasonable expectation and target to set.

Now, will we make it?

It depends on those three -- organic client base growth, pricing, and checks.

We think at this point there's a path to get there.

Okay.

It's just it gets pushed out a bit because of the macro it sounds like?

Yes.

All right, now, l was also curious if there's been any changes in terms of your win rate in terms of going after new clients as opposed to renewals.

The reason I ask is obviously the retention is trending very well at record levels, yet the total client base is only up about 1% in aggregate over the last two years.

So anything you can share there?

Yes, it's pretty consistent.

We focused a lot on revenue this year with the sales team in the last fiscal year and so we did a really good job of driving higher revenue per client and they focused a lot on that.

Frankly that took a little bit of the focus off of units -- of selling every client.

So it's a little bit hard to tell in the numbers when we compare year to year but we're doing pretty well.

When you look at it from a revenue -- new business revenue standpoint -- some of our old favorites in CPA referrals, bank referrals, are trending up.

So I'd say overall it's probably about the same and we definitely will see an uptick this year as we did in the fourth quarter.

When we did some incentives more towards balance of unit and revenue, we saw the fourth quarter really pick up, so.

One other thing I'd add to what Marty said, is that if we look at it from a revenue retention standpoint, we typically don't give that number, we're at historic highs, above our client retention rate.

So we've got a number of things working in our favor and Marty just reiterated, we put a lot more emphasis on revenue per client.

We saw as the year exited that we were selling a little bit bigger client, that probably affected units a bit and we probably need to be a little bit more balanced next year.

Okay.

And then just lastly on the float, based on investor conversations we've had since last night it seems like there was a little disappointment that the float income is going to be down more in fiscal '14, a little bit more than it that was fiscal '13.

So can you just clarify which part of the yield curve actually matters most for your float income right now based on the current composition of the portfolio and does the historical rule of thumb in terms of 25 bps change in short-term rates impacting EPS by a little north of $0.01 over the forward 12 months, does that still hold based on your current duration and the rate environment?

Yes, so Jason, let me answer that in two ways.

So we're a little bit north of 50% on the portfolio as a whole.

And on average, we're about $4 billion.

We're north, I'd say 50% in terms of our long-term portfolio.

We're about a little over [$3 billion] in terms of duration.

The impact of the higher rates will be seen in that portfolio, just is not going to reprice immediately.

So -- and as you can imagine we've got a group of Treasury professionals who are trying to figure this out.

In a rising rate environment do you go long or do you stay intermediate?

So we're figuring that part out of it.

With respect to the shorter-term portfolio, we're getting 8 to 10 basis points on a little bit under $2 billion worth of client funds, so the immediate impact would be much more -- would be felt much more quickly on a short-term rate boost, which we haven't seen, which maybe the long-term augurs the short-term rate boost, but the 25 bps and $0.01 is about right, that's about the right number.

So I would just caution that if you don't see it right away, it's simply because as we were putting our plan together we made an assumption about rates that probably was a bit conservative in this environment.

We'll see as we go through the year, if rates continue to rise we should have a bit of upside on the client funds portfolio.

Okay.

Understood.

Thanks.

George Mihalos, Credit Suisse.

Sorry about that.

A question on the client retention.

I noticed it's -- or you mentioned it's a historical highs of over 81%.

Looking into fiscal '14, is that sustainable?

And what's the retention assumption that you built in for the year?

Well, we never look to go backward.

So we certainly feel it's sustainable and we're always trying to improve it.

We've done a really good job with first of all, the quality of the products and the service is very important to clients.

The pricing is right and we've done a really good job on maximizing both of those things, really, the combined performance and the pricing.

So yes, it is, and we would expect -- always expect from our team a little bit better performance.

So, now, how far can it go when you have losses and if sales pick up again, everyone knows that as sales pick up, more businesses start.

If we have that kind of pick-up it may cause some losses because you have more businesses starting up.

But you could expect -- we certainly expect that it's going to be the same or a little better.

Okay.

But the net new client growth for next year, that's going to be much more a function of new sales coming through?

Yes.

For '14 relative to '13, that's a fair way to look at it?

That's a fair way to look at it, yes.

Okay and then just last question for me, you had mentioned about feeling more comfortable about pricing heading into the year.

Is that just a function of being able to bundle more products or is there something else going on in the environment related to pricing?

No, it's just -- we found a good place where -- we've always said the competitive environment is about the same and I don't think it has changed much.

We've got very strong products that compete very effectively and our pricing is [in] good place.

As Efrain said earlier, we don't give out the pricing exactly but you can guess in the range that we're in and we feel that that price will hold as it has in the past.

And when you see the pricing that we've done in the past and record retention, we certainly feel good about the level of pricing that we're doing.

So there's no big change there except that we're able to hold the price well and the environment is going to get -- is getting nothing but better from an overall business environment.

Okay.

Great.

Thanks, guys.

Ashwin Shrivaikar, Citi.

Hello?

Can you hear me?

Yes, I can.

Okay.

So I was a bit curious why you didn't do a buyback.

If you addressed that, I might have missed it?

Yes.

So our authorization lasts through the end of next year.

We wanted to see where we ended up from a share count perspective.

We'll buy back to offset dilution and then we'll see where the stock settles out in terms of price and buy when we think market conditions are right.

I wouldn't say anything more direct than that.

Okay.

Understood.

And then on -- what trends are you seeing with regards to new business creation?

And within the new businesses that do get created that [Thomas] had a conversation with you, are you seeing maybe a greater tendency to use SurePayroll or maybe desegregated product or is it conversations for the bundled product?

With respect to the environment, one of the things that if you went back two years and asked what our assumption was, we would have simply thought that the environment was going to bounce back in terms of business formation more quickly than it has.

It simply hasn't thus far, as we can tell.

With respect to businesses preferring SurePayroll versus Core payroll, it's really more attitudinal than it is its size.

So we see seven-person payroll companies that want an outsourced solution -- fully outsourced solution.

And we see a lot of seven-person payrolls that prefer the SurePayroll so it really depends on the type of customer and what their interest is in terms of the way they want to process payroll.

One thing that I've mentioned to a number of you that is important, we don't constrain the customer or tell them that one solution is better when they search on the web.

If you go on the web you'll see both solutions pop up and SurePayroll competes against our Core product in the same payroll services ecosystem.

We think we want to get the customer, then we're going to offer them a range of additional services that whether they're on SurePayroll or not, they would be interested in.

So it's really more attitudinal than anything else.

Okay.

Understood.

And then just a clarification on the 570,000 client count.

Does that exclude or include SurePayroll, just want to make sure?

Includes.

It includes, right?

And so do you break that out?

This question may have been asked?

No, we don't.

And part of the reason for that is there's a number of client bases within our client base.

To provide an accurate perspective we'd have to give you four or five client bases that are in there and at that point we're giving you proprietary information that we just -- we're not going to do.

Right.

No, but I was just thinking because they are very different business models and one of the things I was trying to potentially back into was, as the SaaS-based solution increases in size relative to the total, what relative margin assumptions should we be making over time?

Is there a margin improvement that you're seeing in that business?

To what extent?

Things like that?

Well it's still very early stage.

There may come a point at which we decide to split it out because it's material to our results.

Right now it's not, Ashwin.

And at current rates, we have a long way to go before it becomes that.

Got it.

Understood.

Okay.

Good luck, guys.

Jim MacDonald, First Analysis.

I'd like to go back a couple questions on healthcare.

Could you give your thinking on setting up a private exchange, how it will work and what type of customer you expect might use it?

Yes, on the private exchange side what it will be for us, it's going to be a partnership.

We haven't announced who that is yet but we'll have a partnership that -- what we're trying to do is help the small client in particular who wants to provide health insurance to their employees.

They don't necessarily have to but they want to provide an opportunity for them by giving them, let's say a pretax -- let's say I want to give you just $200 a month toward -- in insurance -- toward paying your insurance and you're a small business.

I want to help my employees.

I give them a pretax amount.

Then they can go and give them a way to go to an exchange and help buy that product.

So what we'll get more there is a share of the -- what the carrier is giving, which carrier they go to and there will be multiple carriers that the exchange uses, obviously insurance carriers.

We'll get a piece of that carrier commission and then probably some administrative fees as well.

And so what you've got is a small business who doesn't have to provide the insurance under the law, but wants to help their clients -- wants to help their employees and wants to give them a pretax option as well.

So we can give the pretax process and we can help them channel their employee to an exchange to help them select what's the best plan for them.

So do you think your effective brokerage commission will be similar on the exchange versus your traditional methods?

It will probably be a little bit less because there's a middle person there in the exchange that will take a piece of that as well.

That's not quite worked out yet but you can expect that it would be a slightly less because there's someone in the middle that's going to work the exchange.

And just one more follow-up.

You talked about the -- expecting rate pressure.

Any general views of the price increases, healthcare price increases you're expecting to see next year?

Well, it's interesting.

We speak about rate pressure, Jim.

We're really referring to commissions that we receive, not to rate increases we're going to see from insurers.

What we have seen so far is that there's going to be fairly sizable insurance increases, price increases.

Coming from all carriers and all clients.

Yes.

All carriers.

And that's where I was going.

So how do you expect that to impact you when everyone's getting large increases?

Well, here's the answer to that and it requires us to think a little bit about the PEO.

So when we go to a client we've got two options.

We can go in an ASO model and sell them a one-off insurance policy based on their particular characteristics.

They may be good or bad, depending on their history and their -- the type of business they are.

Or the same person can go in and sell them a PEO alternative.

We think the PEO is going to be favored.

At least for a period of time because the PEO will be able to underwrite those risks and they will have an advantage we think early on versus the exchanges.

So it could be a potential win for the PEO.

But we need to walk through that to get a better sense of that.

And just a quick follow-up.

Sorry.

Will you be taking more risk -- you won't just be passing along insurance rates to the PEO, you'll be taking on more self-insurance there?

There's a number of different models.

We haven't finalized that.

We could do both.

So haven't finalized that and you can just -- you can be sure that if we go down that route, we've bound that risk [of pre-titling].

Thanks very much.

Paul Condra, BMO.

I have just basically a basic question, this is probably best for Efrain, but -- as funds held for client balance dropped in the fourth quarter or sorry, dropped a bit, and I'm just curious what makes that move?

Just if you compare it to the third quarter, what makes it--?

Basically, you know what, Paul, it really just depends on literally the day on which we close, how much in client funds we are -- the day we close the quarter, how much in funds we're holding and how much in funds we're holding depends on how much we're remitting.

And it could be anything from payroll to income taxes.

So it varies so widely that there's really no rule of thumb that says if it's a Thursday it's this and if it's a Friday it's that.

But basically what's happening is where are we in the stage of remitting the different funds to the end recipients.

Okay.

That's clear enough.

Thanks.

And then I don't know if you can shed any light on this but when you look at your client base and I'm just trying to figure out what percent of those are just doing the Core payroll and how far you are along in getting them to add additional services and how that penetration is looking?

Yes, well we disclosed a fair amount of that information and if you take HRS in the aggregate, the penetration into the base from a client perspective is less than 10%.

So we -- and we've got that pretty detailed in the MD&A and it's also in the press release.

So you can get a sense of that.

We're still in the early stages of the product penetration into the rest of the base.

All right.

Great.

Thanks a lot.

Tim McHugh, William Blair & Company.

First I want to ask a quick question on a comment you made, I thought.

You said EPS or earnings would be fairly even in the first half versus the second half?

Yes.

Were you talking growth rates or on an absolute basis?

No, on an absolute basis.

Okay can you elaborate on why -- is there something about the expense growth throughout the year?

Because that's unusual relative to your--?

No, not really, Tim.

What I'm saying is, let me just make it explicit.

So I'm saying, let's say your assessment is that we're going to be at $1.69.

We're saying the first half, split it down the middle, that's what the year looks like at this point.

So just gives some more color on what the quarters end up looking like.

This year was -- I'm contrasting that, Tim, to two years ago if you look at it, we were heavily front-end loaded two years ago and this year we returned to a more normal distribution.

Okay.

And as we think about the interest income from client funds, are you expecting the balances to grow roughly in line with payroll growth?

Is that a fair assumption, as we think?

Yes, I think so.

So last year we grew about -- the final number is 4%, 5%.

It will grow with that number.

Okay.

And then last quick one from me, just you mentioned the revenue -- I'm sorry, the checks per client moderating a bit in the fourth quarter.

Can you talk at all about the reasons for that?

Is there a conclusion, or is it reflective of actual hiring trends or just mix or [returns on num]--?

Mix.

Tim, what we saw was a little bit lower check growth in larger clients and a little bit faster growth in smaller clients, when the mix came out it ended up at about 1%.

I'd caution until we've had a couple more quarters -- we have got a lot of volatility this year, if you remember, so we went from 2% first quarter, 1.2%, 2.3%, 0.9%, so we just saw some volatility in the numbers that may have been a result of mix issues and also where we ended a particular quarter.

So we'll get a better beat on where we're at next quarter.

I do think the trend is down, though.

The trend is moderating downward.

It doesn't change -- you actually sound a little more positive on the macro because of construction than before, though?

Is that--?

We're a little bit more positive on the macro because at some point you have to stop using the macro as an excuse and you've just got to get on the Business with growing.

We don't think the environment is that much better.

We think that it's good for the businesses that are in business.

They seem to be -- within our base -- they seem to be healthy and doing well.

We'd like a better environment in terms of business formation but at this point we're not going to keep banging that drum.

Yes, we haven't seen the new business starts reflect the things that you can see coming, that appear to be coming, which is the new housing starts and so forth.

We think that will start to catch up and it will start to pick up a little bit but remember that sometimes that's new businesses starting as opposed to others hiring and so there's a mix in there.

But, as Efrain said, we want to look at a couple of quarters of this because it has bounced around quite a bit this year.

So the fact is, it's still up 13 quarters in a row, which we've never really seen before.

So that's still very positive.

The hiring is just more gradual but continuous.

And we expected it to moderate.

This might have been a little quicker than we thought.

But, again, as Efrain said, there's timing in there and mix and other things and we'd watch that for a quarter or two.

Okay.

Great.

Thanks, guys.

Mark Marcon, RW Baird.

Was wondering, what are the plans for sales force growth for this coming year?

There's a slight increase.

We did a pretty good expansion last year in the 2% to 3% for more territories and also went after different teams on franchises, banking, and so forth.

So we feel pretty good about where they were.

We did some adjustments but it was -- I would say it's below 3%, so -- in the 2% range.

Okay.

So basically just slightly below what the rate of expansion from last year?

Yes.

Okay.

Great.

I'm a little confused with regards to the new sales commentary from the perspective that, in the press release we cite how well we did with the small businesses, but yet it sounds like the average size of a client actually ended up increasing?

Yes.

So Mark, the commentary there is just to say that within Core, as we went through the year, the average size of client sales we got into fourth quarter was a little bit higher than when we began in the year.

It actually was higher.

50 and under.

Yes.

But it's in 50 and under space that we were talking about.

Yes, so this might be the difference between looking at it, Mark.

Small to us -- when we talk about small, we are talking about Core and that's under 50.

Right.

So what we did see is, we saw, as we said earlier, the revenue -- focus on revenue and a little bit larger client.

But that's the different between going after the under 10s, let's say, and the under 20s.

And that brought us up a little bit.

Does that include the commentary around SurePayroll?

Yes, it does.

So even with--?

Oh, I'm sorry.

I apologize, Mark.

No, that's primarily Core.

Yes.

That's our Core Paychex.

That's within -- okay, so within Core Paychex, we ended up seeing a bit of an increase?

Yes, correct.

But if you include SurePayroll into the mix, then the average client size probably went down since SurePayroll was growing at a faster rate?

We'll disclose that.

We didn't -- we haven't looked at --

Is there anything wrong [I'm saying with the logic]?

There's no material difference, Mark.

There's no material difference because at this point they don't influence the client base that much.

Okay.

And with regards to the revenue of the clients, the annualized contract value of the clients that you signed, it sounds like that did increase more than the 0.5% to 1% unit increase that we ended up seeing?

That's correct.

Yes.

Okay.

So that's going out right.

And then with regards to more of the mid-market, and particularly with regards to the new platform that's coming out in terms of your Next Generation platform for the mid-market, when is that coming out?

And how much of an impact should that have?

Yes, we're already seeing some -- we've already rolled out some of that but some major changes come out in the next six months.

Frankly, in the next few months and then again in the December -- November, December timeframe.

So it's just -- we're continuing to roll out releases about every five, six months and the biggest impact there will come in the next month or so and then in the last part of the calendar year.

So that's when more product and functionality is on that application -- on the Paychex Next Generation application and -- but we're also of course acquiring other products to roll in and support that team.

The ExpenseWire, the myStaffingPro, those SaaS-based solutions also support the existing application and the existing client base as well as new ones.

So we expect to see a lot of opportunity for the mid-market space this year.

Great.

And then with regards to healthcare reform, any -- of your 570,000 clients, any rough approximation with regards to how many would be in that, say, 45 and above range, because even companies that are below the limit probably are going to be sensitive to where they need to be?

Yes.

The way we look at it, Mark, is we think it's really around the 30 employees mark that you start to worry about the Act.

And you're probably 25% or more of the base at that point.

Okay.

And why do you think it's going to be next -- second half of the fiscal year when it's going to kick in, in terms of having an impact when the reality of the situation is that the deadline goes into effect on January 1, and you would think that some companies would start shifting to whatever new platforms they needed ahead of time?

I would just say when you think about the absolute -- one, to make a final decision is, it's going to happen for a lot of companies with January 1, when they change -- when the requirements go into effect.

A lot of companies, particularly small, mid-sized businesses don't make a decision on that until the October, November timeframe when they get into benefit enrollment.

They are starting now to ask for a lot of information about it and that's going to heat up over the summer and then we'll start to see a lot of activity in the September, October, November timeframe.

And when you start to think, when does that really start to have any impact on us, that's more into the first half of next calendar year.

That's past January.

So that's when the revenue rolls in.

Yes.

But in terms of the sales and the sales pipeline, that would actually be in the fall and--?

Oh.

Yes.

Okay.

Yes.

That would start more in the fall as they get into benefit enrollment.

Yes, I'm just -- the question was more about when do we start to see an impact.

We'll see an impact in sales.

We're starting to see activity now and more in the fall and then it will start to have an impact.

But our revenue and, you think of the revenue per client, that's going to take a while to make an impact.

That will start more in '14.

Got it.

Thank you very much for the color.

Rod Bourgeois, Bernstein.

So you saw better bookings activity last quarter.

It seems like that continued into the May quarter as well.

And you just posted 6.1% revenue growth for the May quarter.

So it seems that the overall revenue growth trends are, what I would say is, slowly improving.

That said, your guidance for fiscal '14 is 5% to 6%.

In some years you've added some buffer into the guidance.

So really my question here is, is it feasible that your revenue growth could actually improve some from the 6.1% pace as we progress through fiscal '14?

If it has the ability to do that, what would be the likely source of upside or are you feeling right now that north of 6% growth for fiscal '14 is just unlikely?

It's unlikely.

You could see a quarter or two where we went above that, Rod.

I just think we're being -- we're going do be cautious about it.

The likely source would be strong results from healthcare.

That's where we think upside could come.

It's a little bit tough to call it at this point.

So we've got, as Marty mentioned, a number of products out there.

We think not only are they -- some of those products -- applicable to the 30 and above segment of the base but also frankly below 30.

But we need to get a quarter or two under our belt to get a sense of what opportunity is there.

Internally, we would love to see more and hope that we do.

It's tough to plan on it at this point.

Yes and this economic environment -- as Efrain went over a lot of the numbers -- the new business starts still aren't picking up.

So we're feeling honestly pretty good about the growth in the sales we're seeing in this kind of environment.

We're always pushing on every different piece we can to push it even higher and maybe there's some opportunity but we feel the guidance is pretty solid where it is.

And one other thing I'd say, Rod.

As you know, I called out, so I hope everyone was listening is still on, that in the first quarter in particular due to timing we start the quarter -- the year again a little slowly and then build.

So that has a little bit of impact on the year as a whole.

Got it.

Okay.

And you've added some conservatism it seems in your interest rate assumption as you give the float guidance?

That's correct.

And that makes a lot of sense because I know we had [ed sakes] before on the interest rates.

But if you were to take that conservatism out, is that the difference between 0% float income growth next year and the growth that you guided, to the negative growth that you guided to, or how sensitive is your outlook to the conservatism assumption that you've made?

Okay.

That was a really great question which deserves some thought.

Yes, you're pretty close.

Okay.

All right.

I'll follow up more on that one.

Thanks, guys, for the answers.

John Williams, UBS.

So two quick questions.

First was related to the payout ratio, it looks like it's trended in the mid-80%s for the last year or two.

And is that a level that you're still comfortable with or do you expect that might trend differently over the next few years as you see some recovery in the small business environment?

Yes, we're comfortable in that 80% range.

Off of the full-year EPS, which was $1.56, when you look at it we were up in the 84% range.

But on a more normalized basis, if we take out the tax effects, we were down in the lower 80%s.

But we're comfortable in that range.

And we -- and the reason for that is that we have pretty predictable cash flows and predictable results.

The logical follow-on to that is just that if -- capital allocation related -- if the fundamentals don't get back to a point that you guys would consider to be robust at any point soon, would you consider potentially adding some debt to the capital structure or getting a little bit more aggressive on buybacks to do that?

Is that something that would potentially be completely ruled out?

I wouldn't completely rule it out.

So I don't think we have a religious objection to having debt.

It just would have to be for the right reasons and, John, we'd have to couple that with the fact that we're not seeing anything from a pipeline perspective relating to acquisitions that we thought was good.

The opposite is true.

There are interesting opportunities out there that we continue to evaluate, very disciplined in the price we'll pay.

So we'd have to get to a point where we just didn't even see opportunities for acquisition and right now we think there's some attractive opportunities out there.

But we're patient and we're disciplined in terms of the way we approach it.

Okay.

Just one quick follow-up.

I know you guys usually put this in the Q or the K. But just as it relates to rate sensitivity, just an update on where you stand.

You said 25 bps and short, medium, is about $0.02 in the past and basically the duration, three years, are those still pretty close to where--?

Yes, 25 bps on the short end is going to get you about $5 million, so yes, that's about $0.01, actually, after -- a little bit -- $0.015 to be precise.

And three years on the duration?

Yes.

It'll be probably a little north of that, maybe two or so.

Okay.

Great.

Appreciate the answers, gentlemen.

Thank you.

Tien-Tsin Huang, JPMC.

On the referral bank question, Marty you mentioned Citizens and Union Bank, a little bigger than usual.

Curious if that's replacing an incumbent or is this a new product referral for them?

Some were new.

Some were keeping.

And some were taking a little bit more.

Some were shared.

And so we've done a number of these now.

So there are some that are new.

We haven't -- I didn't list them all.

We picked some that were new, some that we kept and some that they were sharing before and we got it.

And one of those was the displacement of our good friend.

All right.

Good.

No because I know that's an important -- could be an important channel.

So my next question then was just on the gross client adds, any change or surprise in how those clients are being sourced?

For example, are they coming from different channels or is it just your sales force being more productive?

Just trying to understand the change, any change in dynamic there?

No, we're still doing a really good job with [CPAs].

We've reached our -- we are in the 10th year now of our referral relationships with the CPAs where they refer us.

That's been going on for 10 years.

That continues very strong.

You're going to see -- the banks have picked up already and will continue to pick up.

Web search is obviously picking up some.

The only thing that was a little bit slower was current clients and a lot of that is because there wasn't the new business growth.

When you trace that back, it's really that a current client didn't necessarily open up a second location or a third location and so that hurt us a little bit, but the activity of the sales force is very good and most of the dynamics are pretty much running the same.

Okay.

Just wanted to make sure.

Just two quick clarifications, I hope.

Just the insurance services clients up 1% in the 8-K filing.

You mentioned PEO, Efrain.

Can you just elaborate again what exactly drove that?

Yes.

So two separate ideas.

So the insurance clients really are separate from the PEO.

Okay.

So there was probably some offset between those two numbers but more importantly, Tien-Tsin, what happened was that as the year started, we made a conscious decision to go upstream because we knew that in the under 10 space, that was most likely to be affected by healthcare reform.

We pivoted upstream, paid a price to some extent on number of clients, applications were up, you saw 8%.

So we got good results.

We laid the platform for being a little bit more up market than we were a year or two ago.

Understood.

So it was just a change in direction.

Okay.

Got it.

Just the last clarification.

The -- I don't know if you mentioned this, the acquisition of what was it, HR Services, and now StaffingPro, how meaningful is that in terms of size?

Well, it's pretty small to start.

But we think they have a fantastic product that has won a lot of awards from a SaaS-based model for talent acquisition and it fits in really well with our mid-market plans and so it's real small to start but it's going to take off for us and help us with not only new sales but retention in the mid-market space.

Terrific.

That's all I have.

Thank you.

Matt Lipton, Autonomous Research.

Good morning, guys.

Thanks for fitting me in here at the end.

Mine is just a really simple clarification as well.

I was hoping you might be able to give us a little more granularity on the offsets to Core payroll revenue.

You called out Hurricane Sandy and the leap year.

Thinking about -- you said pricing earlier -- in response to an earlier question was above 1%, 2%, client growth and checks were both positive.

So when you add all this up, you could envision revenue coming in more than 4%?

So am I thinking about it the wrong way or were those just really material headwinds?

You are in the sense that if you called out -- if you normalized the year, the growth rate would not have been that high.

We called out Hurricane Sandy.

We called out the extra day, the extra leap year.

We didn't necessarily talk about, in the press release again, the fact that the frequency of payroll processing in Q1 was down from the prior year.

One thing to be aware of is that client-based growth, if we say it's 1% we don't get 1% growth necessarily in the year because that is -- that's got a weighted average effect.

You start at 0%, you end at 1%, you get some fraction of that.

And then checks in particular, typically if we've got a 1% or 2% check number, if the contribution to revenue is going to be typically 50% or less of that.

So you have to weight those to get to the right number.

All right.

Thank you for that.

Is that the last question, Stacy?

Yes, sir, there are no further questions.

All right.

Thank you.

At this point we will close the call.

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

Thank you for your interest in Paychex and your participation in this call.

We look forward to talking to you next quarter.

Thank you.

Have a great summer.

This concludes today's presentation.

Thank you for your participation.

You may now disconnect.