沛齊 (PAYX) 2014 Q3 法說會逐字稿

Welcome, and thank you for standing by.

(Operator Instructions)

Today's conference is being recorded.

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

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

Go ahead, sir, you may begin.

Thank you.

Good morning, and thank you for joining us for our discussion of the Paychex third-quarter FY14 results.

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 ended February 28, 2014.

We also filed our Form 10-Q, which provides additional discussion and analysis of the results for the quarter.

These documents are available, of course, by accessing our Investor Relations page at paychex.com.

And 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 share my thoughts on our results, and update you on how we're doing in operations, sales, and product development areas; and Efrain will review our third-quarter financial highlights and discuss our full-year guidance.

And then we'll open it up for your questions.

We are pleased with our results in the third quarter.

We continue to make progress, driving new business revenue, and selling more value-added services, and increasing revenue from our client base.

We released additional enhancements to our online and mid-market products.

And, in fact, we will be releasing the next version of our mobile app user interface this week.

Along with these technology enhancements, we remain focused on providing industry-leading service to our clients and their employees.

Efrain will go into more detail on the financial results and comparisons, however, I'd like to provide you with some highlights of the quarter.

Total service revenue showed good growth of 7% for the quarter.

Payroll service revenue growth of 5% was supported by solid results in the core payroll product.

HRS revenue increased 12% in the third quarter, as we continue to benefit from demand for human resource outsourcing solutions and strong execution highlighted particularly in the PEO business.

Checks per payroll have improved for 16 consecutive quarters now; third-quarter growth was 1%, moderating a bit from the first half of the fiscal year.

From a sales perspective, we continued to experience good new business revenue growth, particularly in core payroll and Paychex HR outsourcing solutions.

Our execution and service operations also continued to be excellent.

The team did a great job for our clients with year-end processing, including the distribution of our W2s and year-end reporting ahead of schedule.

I also want to note that our business continuity plans have performed extremely well through severe Winter conditions that many of our clients experienced, ensuring that our clients' needs are serviced even in the worst conditions.

This is probably one of the toughest Winters that we've gone through from a service perspective, and we've just done an excellent job, particularly on the east coast as we went through a number of storms.

I'm proud of the partnership and the service commitment demonstrated by our employees that continue to result in client satisfaction and client retention results that remain at very high levels.

This effort is really a testament to the strength of our client service model, always putting our clients first.

From a technology perspective, continued investment in our SaaS solutions and mobility offerings position us for long-term growth.

We have market-leading SaaS solutions levering the latest technologies, our online HR administration, and time and attendance products, are integrated with our Paychex next generation offering.

We are experiencing increased demand for our SaaS solutions across our client base.

We continue to invest significantly in our online capabilities, as well as our mobile applications.

And whether you're a client or a client employee, our mobile app provides clean and efficient access to all of [your] information with one to two clicks.

We give clients the ability to start, edit and submit their payroll with the best mobility app in the marketplace.

And as I mentioned, we'll be introducing the latest version of the mobile offering this week.

During the third quarter, we officially initiated our operations in Sao Paulo, Brazil, and enhanced our portfolio of value-added products and services with the official introduction of Paychex payment processing services.

This is a full suite of payment processing solutions, including credit and debit card processing, mobile and online payment services, and point-of-sale solutions designed to meet the evolving needs of today's small businesses.

This service is being offered in partnership with Elavon, a leading global payments provider.

In the past few quarters, I've talked about our new products designed to help our clients manage compliance requirements of the Affordable Care Act, or more commonly known as healthcare reform.

We continue to execute on the rollout of those product offerings in this area, including our Paychex Employer Shared Responsibility service, a more robust monitoring service in our Paychex benefit account.

These products, while new to the market, represent an opportunity for us, as we are uniquely positioned as both a payroll provider and insurance agency to help small businesses with these regulations.

The frequent changes in HCA rules have caused some clients to delay decisions on purchasing products or making changes to their healthcare plans.

However, we continue to see healthcare reform as an opportunity for us, as we are able to provide clients with the most up-to-date information on the latest requirements.

We also continue our shareholder-friendly actions.

We increased our dividend back in July to 6% to $0.35 per share.

And we continue to repurchase Paychex stock opportunistically, and we have repurchased approximately 5 million shares of common stock in the first nine months of FY14.

Finally, last week we announced that on April 1, 2014, just next week, in conjunction with IHS, Inc., we will launch the Paychex IHS Small Business Jobs Index.

This is a new monthly index that examines the state of small business employment in the US.

By measuring aggregated small business payroll data from a subset of our small business client base, the index will identify and track small business employment trends and provide probably the most real, timely, accurate insight into national and regional employment activity, as well as report on state and metro employment trends for many of the country's largest states and metropolitan markets.

This index does not indicate Paychex's financial results.

In summary, I am pleased with our results for the third quarter, and I appreciate the great work of our Paychex employee team across all organizations from sales to service.

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

Efrain?

Thanks, Marty.

I'd like to remind everyone that during today's conference call we'll make some forward-looking statements that refer to future events, and as such, involve risks.

Refer to our press release for a discussion of forward-looking statements and related risk factors.

As Marty indicated, our third-quarter financial results for FY14 represented good progress.

There are some of the key highlights for the quarter and nine months that I'll talk about now.

I'll provide greater detail in several areas, and wrap with a review of the 2014 outlook.

Total service revenue grew 7% for both the third quarter and the nine months to $626 million and $1.8 billion, respectively.

[Interest on funds held] for clients decreased 3% for the third quarter, and 1% for the nine months, to $11 million and $31 million, respectively.

This result was due to lower average interest rates, partially offset by an increase in average investment balances.

Expenses increased 5% for both the third quarter and the nine months.

The increase was mainly in compensation-related costs, with higher wages and higher performance-based comp.

Wages were impacted by our investment in product development and supporting technology, and new sales initiatives implemented in FY13.

For the nine months, we also experienced higher sales-related costs attributable to new business revenue growth.

We maintained strong operating margins of 38.4% for the third quarter, and 39.7% for the nine months.

Operating income, net of certain items, increased 12% for the third quarter and 9% for the nine months.

We expect operating margin for the full year to be approximately 38%.

Net income increased 11% to $160 million for the third quarter, and 8% to $482 million for the nine-month period.

Diluted earnings per share increased 10% to $0.44 per share for the third quarter, and 7% to $1.31 per share for the nine months.

Turning to payroll service revenue, it increased 5% for the third quarter and 4% for the nine months.

We benefited from increases in checks per payroll, revenue per client, and client base.

As Marty already mentioned, our check-per-payroll growth metric continued to improve with the rate of growth moderating from earlier in the year, as we expected.

Checks per payroll increased 1% for the quarter; and for the nine-month period 1.5%.

Revenue per check grew as the result of price increases, net of discounts, coupled with the impact of increased product penetration.

For third quarter, payroll revenue growth was bolstered by one additional payroll processing day in the quarter compared with the same period last year.

The estimated impact on payroll revenue growth is in the range of 0.5% to 1%.

Note that payroll revenue growth is expected to moderate in the fourth quarter due to one less payroll processing day compared to the prior year.

And we anticipate that payroll service revenue growth in the fourth quarter will be at the low end of the full-year range.

HRS: HRS revenue increased 12% for both the third quarter and the nine months.

We continued to experience rapid growth in both our ASO and PEO, as well as in our online HR administration products.

HRS revenue increase reflects client growth, primarily in HR Solutions, retirement services, and online HR administration products.

Our online HR administration products continue to grow due to the success in sales of SaaS solutions.

Within HR Solutions, the PEO continued to show strong growth in the number of client employees served.

Retirement services revenue also benefited from an increase in the average asset value participant funds.

Insurance services revenue growth reflected higher premiums in workers' comp insurance services, and an increase in the number of health and benefits applicants.

HRS revenue growth was tempered modestly in the nine-month period by higher direct costs in our PEO.

Note that HRS revenue quarterly growth can vary due to the volume of clients, PEO workers' compensation, and basis points earned on retirement services client employee funds.

Basis points change due to fluctuations in the financial markets and the asset value funds invested.

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

Turning to our investment portfolio: In the short-term portfolio, our primary investment vehicles remain high-quality, variable-rate demand notes and bank demand deposit accounts.

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

Our long-term portfolio has an average yield of 1.7%, and an average duration of 3.1 years.

Our combined portfolios have earned an average rate of return of 0.9% for the third quarter, compared to 1% for the same period last year.

For the nine months, we earned 1% compared to 1.1% for the same period last year.

Average balances for interest on funds held for clients increased during both the third quarter and the nine months due to growth in checks per payroll and the client base.

For the nine months, average balances benefited from the expiration of certain payroll tax cuts on December 31, 2012, which resulted in higher Social Security withholdings.

Let's turn to the highlights of our financial position.

It remains strong.

Cash and total corporate investments totaled $964 million as of February 28, 2014, and we have no debt.

Funds held for clients as of February 28, 2014, were $4.9 billion compared to $4.1 billion as of May 31, 2013.

Funds held for clients vary widely on a day-to-day basis, and averaged $3.7 billion for the nine months, a year-over-year increase of 5%.

Our total available-for-sale investments, including corporate investments and funds held for clients, reflected net unrealized gains of $39 million as of February 28, 2014, compared with net unrealized gains of $35 million as of May 31, 2013.

Total shareholders' equity was $1.8 billion as of February 28, reflecting $383 million in dividends paid during the first nine months.

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

Cash flows from operations were $706 million for the first nine months, a 16% increase compared to the prior year.

This increase was driven by higher net income, higher non-cash adjustments to net income, mostly higher amortization on premiums of available-for-sale securities along with higher depreciation and stock-based comp costs, and changes in our operating assets and liabilities related primarily to timing.

I'd like to remind you that our outlook, turning to FY14 guidance for the remainder of the year, is based on our current view of economic and interest rate conditions continue with no significant changes.

As I had mentioned, the growth rate for payroll services revenue is expected to be at the low end of the full-year range in the fourth quarter, as a result of one less processing day compared to the same period last year.

Our payroll service revenue growth is expected to be in the range of 3% to 4% for the full year, and at the high end of that range.

HRS revenue growth is also expected to be at the low end of the full-year range for the full fourth quarter for similar reasons, and because we believe there will be a moderation in HR Solutions performance.

Overall, HRS growth is expected to be in the range of 10% to 11% for the full year.

Total service revenue is anticipated to be in the range of previous guidance, although at the high end of that range.

Net income growth is anticipated to be in the range of 9% to 10%, adjusted up slightly from previous guidance.

A reminder that in the fourth quarter of last year, we recognized an additional tax provision for the settlement of a state tax issue, which impacted diluted earnings per share.

Our operating margin for the year is anticipated to be approximately 38%, and, as I've mentioned to many of you, 38% can be anything up to 38.5%, and we don't call it to the nearest 0.5%.

This is slightly lower than the margin experienced in the first nine months of FY14, as our margins are historically low in the second half of the fiscal year.

Finally, thanks to those of you who participated in our Investor Day survey.

Based on survey feedback, we decided to move it later in FY15, and we will provide further information as we finalize details.

Thank you very much.

Let me turn it back over to Marty.

Great.

Thanks, Efrain.

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

Thank you.

(Operator Instructions)

Our first question comes from Jason Kupferberg of Jefferies.

Go ahead, sir.

Your line is open.

Hello, thank you, guys.

Appreciate you taking the question.

Can you just give us a sense of -- now that the key selling season is over -- how your sales force did relative to the quotas that they have during the key selling season?

And are you still expecting to be -- or I should say, where are you expecting to be in your 1% to 3% target range for organic client growth this year?

Now that you did get through the key selling season, I'm guessing you've got some better visibility on where you might land in that range?

Yes.

Jason, it's Marty.

We don't necessarily -- we don't give the client growth number until the end of the year, as you know, because we want to get through the whole year.

But I would say from the sales execution and selling season, continued solid performance there.

So, particularly in the HRS side and core payroll and HR small business, and in the HRS side, particularly in the PEO.

As we've said in some comments, feel really strong on the PEO -- came in really strong in the year.

I think that's healthcare reform.

I think that's just a real resurgence there, and that's been good.

But really, overall, very continued solid execution from a sales perspective.

And, Jason, just to add to what Marty said, we don't give the specifics, but we feel very comfortable that we're within that range.

Okay.

That's helpful.

And I think, in the past, over the last several quarters or so, when you guys have been asked where pricing is running in core payroll -- it seems like you've indicated it's been closer to the lower end of that longer-term 2% to 4% range that you had laid out at the analyst meeting a couple years ago.

Was that the case again during this quarter?

Yes.

We're still feeling good retention from a client base and from a revenue -- I guess I'd say capture perspective -- feel good about holding the price increase that we did last year.

And I would think -- we never really changed that range going forward, and wouldn't want to get any more specific than that coming up.

Okay.

And then, just last question.

I think you mentioned some good traction on the SaaS side of the Business.

Can you give us any sense just in terms of mix of new sales -- how you've seen that shift; presumably the SaaS mix there has been increasing.

But any numbers you could give us, just to help convey how much demand you've seen for SaaS, perhaps relative to the classic full-service outsourced model?

It's an interesting mix.

I'll give you a comment, then let Efrain pick up, as well.

Our model is: We're giving -- over the last few years with all the technology investment and what we've rolled out, we see a much bigger impact of clients moving to the online apps, but it's with our service tied into it.

So, what we like to -- the way we positioned this was deliberately to say: Hey, you have a dedicated person, they're available to you, but we have a much more robust online payroll, time and attendance, HR administration solutions for you, as well.

So, if you want to do it online through the SaaS solution, you can do that.

If you want support and use your dedicated person, you can do that.

And what we're really starting to see is very much what we hoped, which was a mix of both using the solution and -- so, many more online clients signing up for online, but then using their service person as well, when they need to.

This week I may put in my own online payroll.

I may call for something I need.

But I'm putting it in myself.

The next week I may go to the payroll specialist.

But we're seeing the biggest push -- online has continued to grow very much, but the biggest push also has been in the time and attendance, and HR, solutions -- the administration that our SaaS products online, and we're seeing, across both small and mid-market, some growth in those products, that's picking up in penetration and sales.

So, I wouldn't give exact numbers, but we're certainly seeing a better penetration rate on the new sales -- our attachment rate, and a better penetration overall into the customer base.

Jason, I'd just add to what Marty said.

When we say SaaS products, we're talking about a suite of products that not only includes core payroll, but includes things like time and attendance, HR administration, online, those are doing very, very well for us.

They're both sold to our core base and also in the mid-market space.

With respect to the low end -- the micro-enterprise space, SaaS -- it's doing very well.

It has continued to do well.

That part of the market, the low-end SaaS, is very attractive to that portion of the market, and SurePayroll plays very, very effectively there.

Okay.

Thank you, guys, for the color.

Okay.

Our next question comes from Kartik Mehta of Northcoast Research.

Go ahead, sir.

Your line is open.

Hello, good morning, Marty and Efrain.

Good morning.

Efrain, you said client growth -- you don't want to give out client growth numbers, but you're comfortable within the range you've set.

Is there a difference you're witnessing between maybe the SurePayroll type of clients versus what I would consider your traditional Paychex type of client in terms of net client growth?

We look at both, and I think we are satisfied with the performance of both segments of the market.

I think, Kartik, the answer to your question is that we see growth on the low end, and we've seen growth in our core client base also.

And then, Efrain, you had what I consider a very good margin quarter; it seems like good growth year over year.

Anything specific as to why margins were really strong this quarter, or is it that just one extra day and maybe just management of the expenses?

Was there anything else in terms of sales or sales execution or commission that might have impacted that?

I think, Kartik, it really -- our model has a significant component of variable expense associated with it.

And when we deliver strong top-line growth, the marginal expenses associated with that top line are relatively small.

And I think what you see in the model is that when we have strong revenue quarters, like we did this quarter, a lot of it flows to the bottom line, and that's the way the model is built.

So, the more top-line growth we deliver, the better leverage we see.

So, I guess I'd characterize it that way.

In other words, we didn't -- we did everything we were thinking of doing in the quarter from an expense standpoint.

There was nothing unusual about our spending pattern.

Okay.

And then just one last question, Marty.

Have you seen any change or difference in terms of what's happening with your healthcare insurance business?

I know at the beginning of the year, you thought there might be some impact because of the Affordable Health Care Act.

I'm wondering, because of all the changes that are happening, or the delays that have been announced, if that has impacted the Business any differently than what you had anticipated?

I think it certainly has moderated it a bit.

I think that what we're finding, as I mentioned in the comments, Kartik, was kind of a lack of decision making on some parts of small business, and really mid-sized business, because the rules keep changing.

And so, I think the employers are not sure what to do exactly.

So, I think that has slowed a little bit from what we had expected, or hoped for.

The good news is: The products are out there, and the products that we've rolled out, giving the tools to the employer, are very helpful.

We're finding a lot of confusion from the small business and mid-sized business space, and we're able to help them.

So, the good news is: It's continuing to get us our reps in front of them with different products.

I guess I'd say the moderate news is that they're not buying as much insurance because they're not sure if now it's been pushed off a little bit.

And I think you might see that pick up more again toward -- into the Summer and the Fall as they look at benefit plans and start to see some -- could be some healthy premium increases, and they may look for alternatives from folks like our insurance agency who can give them those tools.

Thank you very much.

Appreciate it.

All right, thanks.

Our next question comes from Tim McHugh of William Blair & Company.

Go you ahead, sir.

Your line is open.

Yes.

Just wanted to ask: You've talked about seeing, in the payroll growth, I guess, better attach rates.

What solutions are included within the payroll services growth that you're attaching?

And, I guess, the follow-on there, or associated question also is: Can we look at the revenue-per-client growth that's helping payroll growth partly reflecting that you're seeing faster growth within the mid-market necessarily than with smaller clients at this point?

Or is that not a good conclusion to draw from the data?

I'll start on the product, and then let Efrain take that last part.

I think, Tim, primarily what we're seeing is time and attendance solutions picking up, and from a SaaS product standpoint anyway, we're seeing time and attendance solutions that we would have felt were more mid-market are actually sliding down as well, into the -- what we think of as the under 50, the small business market, and that's been a nice pickup for us.

So, our time and attendance online solutions, as well as some of the HR administration, but mostly time and attendance, are picking up into the small business.

So, they're showing up in the 20 to 50, where we were thinking they would be more seen in the 50-plus.

Now we have a small [in clock] as well when we purchased the Icon Time Systems, very basic clock, and that's the work in the under 10.

But we're seeing even better pickup on the SaaS solution for time and attendance over 20, I'd say.

I'd say, no, I don't think you can draw any conclusions on mid-market growth rates.

And I think that, Tim, what you're seeing is a bit better client base, a bit better pricing, a bit better sales execution overall, is really kind of driving what's going on in payroll service revenue.

In payroll service revenue, we don't include the SaaS products that Marty just mentioned.

So, time and attendance, and HR online administration, are reported in HRS.

Although we're attaching, you're seeing some of that growth occurring on the HRS side.

Now, core payroll is -- I should say payroll is basically payroll services, tax pay, employee deposit.

We're just executing better this year than we were last year.

Okay.

And then, I guess, just given, you had another SaaS-based competitor come public, there's another one that's on file that -- I guess, just give us updated comments on the competitive environment as you see it from -- particularly in the small to mid-market right now?

Yes.

I don't see a lot of difference.

Whether they go public or not, obviously, won't -- I don't think changes a lot.

It gives them a little bit of -- some name out there to get going public.

But we don't run into them too much.

We're still running into mostly the national competitor.

They're not going to be able to offer as much from the service model perspective across the country.

They're not going to offer quite as much from a technology perspective in as broad a category, from small to mid-sized, I don't think, as we do.

So, I think we're seeing kind of still the same level of competition.

And I think our investments, from a technology standpoint, combined with the service, has been particularly strong right now.

So, I guess I would say from [one standpoint] I'm really glad that we invested where we did, starting, I'd say, four years ago, and really put a lot into the mobility app and the SaaS solutions, because they're competing very well, and it has positioned us nicely for the competition that's coming up.

But there's still more regional competitors from that standpoint.

Efrain, anything you want to add to that?

I'd just say, Tim, that we know them very well.

We know them in detail.

We know their weaknesses and their strengths, and we take all competition in this space seriously.

Okay.

Thanks.

Our next question comes from David Togut of Evercore.

Go ahead.

Your line is open.

Hi, David.

Good morning, Marty and Efrain.

Good morning.

Marty, you mentioned some very recent enhancements in the mobile and SaaS product areas.

Can you perhaps lay out the broader new product road map over the next 12, 18 months -- what we should expect from an innovation perspective from Paychex?

I think the biggest thing is, and we've talked about in the past, but I think we're seeing it come to fruition, which is very much exactly what the clients want, which is an integrated experience for the way that we're delivering the entire product.

So, we started seeing a few years ago that really the mid-market and sometimes even the higher-end small market is selling more to an HR, or a time and attendance, need of the client, and then payroll is part of that.

So, what we worked on was enhancing products that we either purchased or built over the last five to -- four to seven years.

And then enhancing them to integrate the experience, put a revised look to them so that there's a combined -- there's a single sign-on, there's a combined UI, the user experience and user interface for them.

And you'll continue to see a more -- I guess I'll say, in that market, you'll continue to see more integration and more UI and additional functionality that is more sophisticated and integrated, like job costing and so forth, that's giving them everything.

And you're able to update, for example, in the past we would have issues where you could update people's -- employees' information in multiple places, and sometimes that was confusing to the client.

We now have one kind of people section that applies to time and attendance, HR, and payroll, and you can update in one place that updates everything.

And it's a much smoother, seamless approach for the client.

And you'll continue to see that integration and usability improve and modernize.

In the mobility, like this week, it's making the user interface more -- even more modern.

And we just released this -- the last UI, I would say, 12 to 18 months ago.

Now we're releasing kind of an updated UI for the mobility platform.

So, the changes are going to be more frequent, and they're just more modern as we see what the competitive market needs.

That makes sense.

Just as a related question: Could you update us on the performance of some of your recent acquisitions and new products like ExpenseWire, myStaffing and CashU?

myStaffing -- extremely strong performance from an organic -- they sell directly to clients, as well.

And there's some indirect partners -- sellers there -- indirect partnerships.

That's selling very well, and selling into our base, as well.

There's just a huge need for talent, from applicant tracking through talent management, and so forth, and doing well.

ExpenseWire is performing fine, from an expense management, again, integrating -- we're pulling more and more of those acquisitions into the overall mid-market product, so that there's more of a seamless integration along with our time and attendance, and HR administration, so that the client has a full suite.

And then, from a CashU perspective, on the Paychex accounting online app -- very recent.

So, we're getting good sign-ups.

We're getting a lot of attention.

We're kind of learning how to drive more and more of the -- not only the sign-up, but then the adoption, and actually registering and signing up the client.

So, we're working with CashU.

And then, of course, the private label version, our own, as to how do you drive -- we're doing pretty good driving activity in.

Then it's: How do you get them to register and sign up for the product.

But it's very early, so we're kind of learning a lot in that market.

But we're happy with it.

We like the product, and we're continuing to roll out, with them, additional enhancements to the Paychex accounting online.

On the topic of CashU, Intuit, on its recent quarter, reported 95% growth in their payroll processing business.

Are you seeing that at the level of CashU?

Is that a little bit above or a little bit below from a client-size perspective?

So, you're saying they're seeing a big jump in their payroll -- in the payroll processing service?

Right.

I know they're targeted typically at very small businesses.

It may be below your average client size.

But I'm just wondering if you see them at all in the market from a competitive standpoint?

Oh, okay.

I think mostly we'll see them -- SurePayroll will see them, and SurePayroll continues to perform very well.

So, that's the other acquisition that we would talk about.

Three years now, we feel very good about SurePayroll continue to have good growth, and more even in their direct channel than the indirect channels that they've done a lot of white labeling with banks and so forth.

But even the direct channel's even stronger than we had expected.

So, we feel real good about their growth and their continued competitiveness against Intuit and others.

Just a quick final question.

I thought in your comments about the strength in new business sales in the quarter.

You called out every area as being strong except the mid-market.

Do I have that correct?

Or was there another message you were trying to send on mid-market payroll?

I think what we said there, David, was: We just called out the ones that were the strongest.

We could have called out a number of different sales areas.

And we called out the ones that were strongest.

Okay.

Thank you very much.

Okay.

Our next question comes from Gary Bisbee of RBC.

Go ahead, sir, your line is open.

Hi, good morning.

Hi, Gary.

I think in the comments you said that, for the nine months, sales commissions was one of the drivers of growth, but didn't specifically say that that was a big driver of cost growth this quarter.

Should we read into that a change in the trending or growth of new business this quarter versus early in the year, or am I reading too much?

I think you're reading too much into it.

Actually, sales expenses for the nine month are up with sales growth for the year.

So, I think you're reading a little bit too much into it.

Okay.

All right.

(multiple speakers)

By the way, so, as Marty said, we continue to have very solid sales execution for the year, and expect that to continue.

Okay.

The next question: You've talked a lot about new product launches over the last two years, and certainly all the product development investments you've been making.

Could you give us a sense, either numbers or sort of anecdotally, how much of those efforts are to upgrade existing offerings that are going in and supporting the same revenue that you've been getting from customers versus driving incremental revenue through new sales or actually being a separate service?

Yes.

I guess I would say, certainly -- because when you look at the offering as a complete offering, and we're seeing that more and more come down in the marketplace from people who wanted payroll years ago only in tax pay and direct deposit to: Hey, I'd like something for my HR administration, and time and attendance in particular.

I think what you'd see is the development has helped -- it's both.

It is shore up the existing product base, but it's certainly getting more revenue per client in the addition of the time and attendance offerings.

When you look at our product development work, it's been about building mobility, so that clients have more choices to how they get to us and do their payroll.

So they have a better online product now, and they have much better mobility -- I think the best app in the marketplace, for us, from a payroll standpoint and combined service.

So, those kind of shore up the existing products for what clients expect now from a competitive standpoint.

So, if we didn't have mobility, for example, I think it would have hurt sales and retention over time, particularly as the two national players compete, and some of the regionals can't do as much in that standpoint.

Then there's also -- when you take something like time and attendance, we didn't offer as robust a product a few years ago as we do now.

And so, that's been new revenue streams that have helped the HRS growth in time and attendance, HR administration online, both SaaS products, BeneTrac, benefit enrollment, products that we added there, and so forth.

So, it's a combination of shoring up and keeping you very competitive, and then also adding more products to it.

Okay.

Great.

And then, just one more question about the competition.

And I totally realize that you grow your revenue in dollar terms more in a year than the size of most of these new upstarts -- so, looking at the growth rates is unfair.

But there just seems to be an awful lot more press -- my very unscientific review of banner ads on the web and other things is just showing a lot more discussion around some of these upstarts.

So, in light of all that, have you changed the mix or sophistication of how you're marketing and attracting customers, doing lead-gen efforts to compete with what seems like some more brand awareness and probably somewhat more tech-savvy new entrants trying to come after your market share?

A couple things on that.

One, I think one of the positive things about all the press on some of these regional players doing IPOs, or partial IPOs I guess I'd say, is that they bring more awareness, to the market, of the products.

And so, there's a little bit of a plus there for all of us.

And then I think when you look at Paychex, or another national competitor, hopefully clients see a much bigger strength there of being around for 40 years, and producing consistently solid results, retention, service numbers, et cetera.

So, I think there's actually a little bit of a plus there, and we already had the competition, so it's interesting.

From a marketing perspective, we definitely have pushed a lot more on the web.

We're picking up a lot more leads from the market search, and that's been a bigger part of our approach.

We also have found a much better way to handle those leads.

We've evolved into much more real-time handling of the leads themselves that come in.

So, I think our marketing has picked up some.

Always can do, I think, more, but it's a balance of where do you spend the money?

Is it on marketing or on sales, which we kind of put in that category.

And we'll always tend to give more on the sales side, and put more on our actual execution of the sales team, and put more money there, for supporting the sales team and their execution.

But I think the marketing -- our marketing has picked up.

Our website is much stronger.

Our whole process of handling the lead is stronger, and I guess that's how I'd look at it.

And I appreciate that you do talk about looking at absolute numbers of growth as opposed to percentages because that certainly means a lot to us.

The amount of growth of what 5% to 6% means for us is a lot bigger than sometimes the entire company that someone else might be looking at.

Gary, one other thing I'd add to what Marty said.

We don't talk a lot about the efforts that support sales, but we have an entire organization where we've made significant investments in national sales support office here, both in terms of technology and numbers of people.

And I would say -- I would put our ability to both generate and convert leads up against anyone.

We can put a person, feet on the street, within hours of getting a web lead, which I don't think many people can do.

And we also have both SurePayroll -- as I mentioned to some of you -- SurePayroll and our core sales competing.

We let them compete head to head in terms of web sales leads.

So, we don't feel like we're missing anything that's occurring in the market.

We just don't toot our horn with respect to that either.

I think to be in this game long term, not short term, but to be in it long term, you have to have a compelling service proposition and a compelling technology position.

And what we've been doing is we've been improving both.

Some people in the competition have not been doing that.

We think, long term, the right solution that works is the one that combines -- that creates a sustainable advantage by maximizing both, not just one.

Thank you.

That's very helpful.

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

Go ahead.

Your line is open.

Hi, thank you.

A question about checks-per-payroll trends, and the 1% growth in the quarter.

I know that your comparison was more difficult, and you had highlighted that it would slow.

But I'm just wondering what you'd expect going forward, and if there's any potential mix impact on that?

You know, there's a little bit of mix impact always.

Just to kind of refresh recollection: We're not doing a same-store comparison.

We do a little bit of validation to make sure it's not too wacky, but it's not a same-store comparison.

We're just taking the amount of checks we [emitted], and comparing them to a prior period.

So, you get some mix effect in there.

I think, Sara, what happened -- we had a pretty strong Q3 last year.

There was some Sandy overhang; there were bonuses in there, we think, that may have affected that number.

Now we're normalizing down.

I would say that we're down in the 1%, 1.5% range; that's what we've seen during the year.

Our assumption is that that will continue to moderate, but we'll see.

We haven't called it precisely correctly.

So, you're going to get some variability there.

And our expectation is: We're at 1%; we'll be probably moderating slightly down from there.

Okay.

And then separately, could you talk a bit more about the new payment processing service with Elavon?

And I'm wondering how that fits into the chain of client acquisition, since I generally think of clients signing up for credit card processing first, and then maybe adding on payroll solutions after that?

I think, Sara, you're right.

I think when we went into this and we started trialing it, we really had kind of looked at that we're getting in pretty early on a new business.

And that we had -- because we had feet on the street, we would get to the new businesses as they started up, and would be successful in signing them up for the first time.

And what we found in trialing it in a number of zones around the country was that wasn't always the case, and that -- so, we actually changed the sales model around, and we sell more of that now basically over the phone and into the client base, and we're having more success there.

And so, what we found -- and it's kind of its own animal.

So, if you -- you have to know the pricing.

You have to know how to price it per transaction, the different kinds of businesses.

And what we found was a little bit more of a specialized team over the phone and concentrated could sell into the client base more successfully than 1,200 reps going at brand new clients the first time.

So, we trialed that around, found the best way, we think, to sell it, and now we've kind of officially introduced it.

And we're just starting to get some traction and results on it.

But we're definitely starting to get some traction.

So, we feel, with over 500,000 clients under that on the small business side, that we've got a nice opportunity there.

Elavon -- obviously, so, what we're doing is setting it up.

We're getting to the client base who have the strength of knowing the Paychex brand and knowing that they already use us for money flow and so forth, and that by trusting us that they will sign up with us with competitive packages, and all the solutions that Elavon brings, and then we get a piece of that action on a go-forward basis.

Thank you.

Okay.

Our next question comes from Jim MacDonald of First Analysis.

Go ahead, your line is open.

Hi, Jim.

Good morning, guys.

Back when you used to report HR client service employees on a sequential basis, you sometimes had a more moderate growth over year end, given the high attrition and stuff.

It looks like you had a really good quarter.

Does that mean you actually had pretty good client employee growth over year end this year?

I think we had good growth over year end, but I think, Jim, we just really had strong sales in HR services overall.

It's been a good sales year from that perspective.

And, sorry, does the processing day impact next quarter?

You said that HR services wouldn't be at the low end next quarter of growth rate.

Is that as affected by processing day or is it something else there?

No, there's a little bit of impact on there.

But I also called out -- we had a very, very strong quarter in terms of HR Solutions.

And, look, we'd love to have every single quarter look like that, but at this point we don't think that will repeat quite to the extent it did this quarter.

And just one final technical question.

Last quarter, your SG&A jumped a bunch, and this quarter it was -- the increase wasn't very much at all.

Anything going on there that I should know about?

Not really.

What ends up happening -- what's ending up happening in SG&A is that we are adjusting, as we go through the year, variable elements of comp.

Sometimes we get it right.

Sometimes we overshoot a little bit.

And we develop a view of kind of how it's going to project quarter over quarter.

I would say, in terms of the year, we think it will be pretty close to what we expect.

Maybe it shifted a little bit from one quarter to another.

And then, rate of IT spending also has an impact on that.

So, it can shift a little bit, but it's not dramatically beyond what we expected when we started the year.

Great.

Thanks, guys.

Our next question comes from Ryan Davis of Credit Suisse.

Go ahead.

Your line is open.

Hi, guys.

This is Ryan calling in for George.

I had the first question about the selling season.

It sounds like you guys had some positive comments around it.

Is it surrounding like the overall selling environment being better, or is it maybe a product of market share gains, or a combination of the two?

I think -- well, I think the overall environment is okay.

I think it's still -- we would say from a new business start -- one way to gauge it is it's still fairly sluggish.

I think new business starts are up a bit, but it's nothing to kind of write home about.

It's not back to pre-recession levels yet that we've seen.

Employment is up a little when we look at checks per payroll and so forth.

I think it's just kind of continued good execution on the sales side, more than that the environment has suddenly swelled or anything.

I think we've seen some positive in the environment, but it hasn't been anything to be overly excited about.

We see it kind of a steady improvement in the small business environment.

Efrain, anything you want to add to that?

As I think I said, the execution has been consistent and good there.

So, I think it has been just as much that -- more that than the environment itself.

Yes, I would agree with that.

Okay.

Fair enough.

Now, focusing in on the margins, ex (inaudible), they've been on a nice upward trajectory over the last several years.

Is there a point where these -- it kind of takes a breather, given commentary, I guess, of accelerating new sales growth 2014 over 2013.

And some of the acquisitions, integration cost -- is it fair to assume the margin could take a breather?

I think we'll talk more about that when we get to the fourth quarter and talk about plans.

The rate and the extent of leverage is a function, in part, of top-line growth, so, as we grow the top line more, we get more ability to leverage.

So, we have to go through the plan and look at it.

I would just say what I say to everyone on this point, which is that when we go into a plan, we look at trying to get leverage, and when we get the leverage, we try to beat it during the year.

That's what you're seeing.

Okay.

And just one quick model maintenance question -- sorry to do this.

That's okay.

It looked like there is a negative swing in the net change in funds held for clients off the cash flow and balance -- pretty significant.

What is that from?

Not sure what exactly you're pointing to.

So, year over year, it looked like there's $1.4 billion negative change in funds held for clients.

Oh, I'm sorry.

Yes, yes.

Well, it's -- I would urge you to really think about average funds held for clients.

It really is very dependent on when a particular quarter closes, how much we have in funds, how much we've disbursed on that day, or that quarter.

On average, if you look at our Q, I think the nine months we call out the balance -- the average balance is $3.7 billion.

So, that's really what you need to focus on.

We're up about 5% for the nine-month period.

Quarter to quarter, it can really, really swing, and it's really a function of when the quarter ended, what funds we were holding, what payments needed to be made.

Okay.

Thank you.

Sure.

Our next question comes from Ashwin Shirvaikar of Citi.

Go ahead, sir.

Your line is open.

Thank you.

Hi, Marty.

Hi, Efrain.

I guess my first question is with regards to the impact of new partnered products that you introduced, and some of this you've covered, but there's been a range -- payments, accounting, payroll cards -- there was a new announcement recently.

What is the revenue implication in terms of ramping revenues off that?

And also, given they're partnered products as opposed to your own products, how does that work with regards to margins and split of economics?

Well, obviously, we wouldn't give too much detail on it from a competitive standpoint of what we're doing with the partners exactly.

It's pretty small to begin with.

We think that there's a nice value-added advantage we have of getting into the client base.

And we've decided, instead of -- certain things like payment processing -- instead of going out and acquiring a global payments processor, or a regional payments processor, it was better to just get a commission on the sales there and the ongoing transactions.

And so, it's positive, but it's going to be pretty small compared to our overall revenue.

We certainly hope it will grow as the client base -- as we penetrate the client base more, but it's a little bit early to tell.

When you look at the accounting, remember that that's a partnership with kind of an investment in CashU, and then labeling our own products.

So, a piece of that -- it will be pretty small for a while until we start converting clients and getting them to register.

And then over time, we may make a bigger investment there, and then it starts to show up as a bigger impact on our revenue stream.

So, again, these tend to be small, longer-term investments that we think have a great opportunity to become significant, but over the longer period of time.

The other thing, Ashwin, I'd say, and just echo what Marty said: It is a longer-term play.

But in the shorter term, what we know is that the more products the client has, the stickier they are.

That's part of what we're trying to do is build multiple touchpoints with the client, so that they are stickier within the base.

Right, thanks.

Understood.

With regards to one of the product lines that you had for some time now -- healthcare -- how big is it?

And with regards to ACA being, I guess, for the small business segment, below 100 being pushed out by maybe a year.

Is that affecting growth in the segment, or are people looking forward and saying this is something they need to do?

I think, from a size perspective, I think we publicly said the agency is over $100 million in revenue, and that we have over 100,000 clients for our insurance agency.

And I think specific to the health piece of it, as I mentioned earlier, it has moderated a bit because I think clients -- it's been a good opportunity for us to get in front of clients and support them with the products that we have already rolled out, which help them decide -- there's tools there as to whether, on a monthly reporting and monitoring service, whether it applies to them or not.

But I think all the confusion and the delays of -- now the 50 to 100 don't have to have insurance for their employees in 2015 -- I think all of that has moderated the sales of some of the products in the short term.

I do think as you approach the Fall and people start looking at their annual premiums going up, I think they will -- we'll be well positioned to offer them options and expertise to combine both -- because we offer that payroll company all the other solutions that we have, added services and an insurance agency -- I think it will position us well.

But it kind of pushed it out a bit as the rules have been -- and the requirements have pushed out.

Right.

And just so I understand: Are these -- the people that your sales force that were selling it, was it a specialized sales force, and does it now have to be refocused on other things or is it more fungible than that?

No, it's a specialized sales force on the health and benefits side, and the workers' comp insurance and other insurances side.

We are a full-service agency.

They're a specific sales force that are licensed and sell those products in the field and over the phone, and they're still out selling, and there's good execution there.

It's just not quite as big of an increase as we expected.

We think it's more moderate, but it will continue to -- it's continuing to grow, that's for sure.

Okay.

My last question is with regards to the index that you introduced.

How much of that is more of a branding exercise versus is there a lack of information in the public domain today that you will focus on bringing out?

What sort of information is there, [at everything] in public domain?

There's a number of indexes out there.

But I think we felt, and we've talked about this for a number of years internally about whether to do it or not.

We think that we're kind of uniquely positioned, because the one thing that we keep getting asked is -- looking for more real-time data on small business growth.

And we're taking basically a subset of our overall client base, about 350,000 of the clients under 50, and creating an index that same-store sales -- that same store -- that kind of shows year over year what the worker growth is for those clients.

And the conclusion we came to was: Hey, we have some unique data here.

Typically, you would get that kind of data from federal indexes that are -- or federal sources that are kind of lagged three quarters.

And that we were getting a push for: Hey, how about some real-time data from some of your clients.

We felt that we had something unique here.

It's real-time.

It focuses on under 50.

And I think we have some of the best data in the business, and so we produced an index that we think will add something a little bit different to the marketplace.

Okay.

Thank you, guys.

Good execution on the margins.

Thank you.

Thank you, Ashwin, that's high praise.

Our next question comes from Smitti Srethapramote at Morgan Stanley.

Go ahead, sir.

Your line is open.

Hi, good morning.

Just a couple of quick questions on pricing.

You talk about offering a blend of the core payroll product with some online solutions -- what does pricing look like there?

Is there a higher revenue-per-client solution, or does it fall somewhere between the core product or just the pure SaaS product?

No, it's really -- when you don't count SurePayroll in there, if you look at just the Paychex offerings, there's no real difference.

It's a complete offering for the small business under 50.

You're looking at a complete offering with both online and -- that's part of the full suite.

You're getting full service, dedicated service, and you have the online and mobility.

It's all part of shoring up that product.

The good news that we've seen is: We're continuing to grow the revenue per client, as we've said, and we think that that's been part of higher retention and better new business revenue being higher.

So, a stronger -- I guess a stronger offering that is driving up the revenue per client.

And, again, we've said that the price increases are holding, as well.

So, we think that's all part of a complete offering.

When you look at SurePayroll, it's a different offering.

It's roughly a third, typically, on an average client that we see.

We've said that.

And that's continuing to hold up very well on a price perspective, as well.

Got it.

And on the HRS side, you mentioned in the release that you're getting higher average premiums in workers' comp.

Is that going to translate into higher expected claims costs, or is it all passed through?

No, that's just the underlying rate that we've negotiated with carriers.

It really doesn't have to do -- and on workers' comp, by the way, at least within our agency, that's brokered business, so we're not taking any risk on that portion of business.

Got it.

Okay.

Thank you.

You're welcome.

Our next question comes from Jeff Silber of BMO Capital Markets.

Go ahead, your line is open.

Thanks so much.

I know it's late; I'll just ask one quick one.

Efrain, on the guidance, and looking at the operating margin, I know you said 38% -- could be 38.5%.

But even at that level, it does imply some margin contraction for the fourth quarter.

Is my math correct?

Is there something going on that we should know about?

You're right, Jeff.

If you look at every fourth quarter, kind of going back probably three years, you see we have pretty significant contraction in the quarter.

And it's just a higher spend quarter in general.

And part of that, just to get kind of one level deeper, is that IT spending, typically, has been going up double digits.

This year is no exception.

And that ramps through the year, so that we exit the year at higher spending.

And then, there's other sales-related expenses that occur in that quarter that typically kind of burden that margin a bit more.

But would that still imply margin contraction on a year-over-year basis compared to fourth-quarter last year?

I haven't looked at the quarter over quarter.

I'm just sticking to guidance.

It shouldn't, Jeff.

Even if we're between 38% and 39%, we should be a little bit better.

I have to look at it specifically.

Okay.

Great.

I can follow up offline.

(multiple speakers)

[I'm focusing] on an annual guidance.

But go ahead.

All right, thanks.

I can follow up offline.

Okay.

Our next question comes from Tien-Tsin Huang of JPMorgan Chase.

Go ahead, your line is open.

Hi, good morning.

Yes, just want to ask about retention.

I'm sorry if I missed this, but did you give any color around what retention looked like in the quarter?

Tien-Tsin, just that it continued to be very strong.

I think we're still looking approximately at the highest levels of retention we've had in our -- in history -- certainly five to six years.

So, we still feel very good about the client retention that we're seeing in the client base.

All right.

That's good to know.

I know you got a lot of questions, not surprisingly, about SaaS and some of the changes going on in the public marketplace.

But can you just give us a quick, high-level thumbnail sketch on just right now, today, point solutions versus service bureau, given all the stuff that's going on in the world with ACA and what have you.

What are you seeing on the ground in terms of preference between the two sides, because I know there can be some push and pull at different periods of the cycle?

Not seeing any drastic change.

I think we've continued, because of the investments we've made, and what we've rolled out, we feel good about the SaaS offerings that we have, both small market and large, that we're well positioned on the perspective from the offerings, from small business to mid-market, the time and attendance, the HR administration, the benefit enrollment, all real SaaS solutions.

But our focus has been very much offering the combination of that with the service.

That's what folks are not seeing as much when they're -- usually when they're going somewhere else -- we're still trying to give you that dedicated model and focusing that you have all the technology, you have all the SaaS and cloud-based solution that you want all online now.

We're not selling software that you're putting on your system, and haven't been really for some time.

It's all SaaS based, and everything is becoming more and more integrated across the product set.

So, we feel very well positioned there.

So, even with all the hype, we probably, as, I think, Efrain mentioned earlier, we don't hype that as much, and people look at us more as a service bureau, but we're very much a SaaS-based with the service model is how we look at it.

Yes, that makes perfect sense.

Just lastly, and I'll let you go -- just the PEO stuff, a lot of good commentary there.

Are you making some incremental investments in the PEO, given some of the commentary around pickup in demand?

Yes, well, we did previously, probably last year they went more to the SaaS model -- the new online Paychex next gen product.

And so, I think what we are seeing is that paid off -- that's been paying off very nicely because not only did we always have good service in the PEO model, but as the PEO kind of came more in favor -- back in favor in the marketplace, we were really well positioned to execute on the sales side, not only for the need but because we had the technology and the service level.

Great.

Great quarter, guys.

Appreciate it.

Thank you.

Thanks.

Our next question comes from Mark Marcon of RW Baird.

Go ahead.

Your line is open.

Hi, Mark.

Hi, Efrain.

Hi, Marty.

Congrats on a great quarter.

One strategic question: As we continue to see an expansion in terms of the solution set, how are you thinking about build versus buy versus alliances, as you optimize your solution set?

You've had a couple of experiences.

How are you thinking about that?

Yes.

I think -- we look at that a lot.

It's always -- we're very proud of the investments that we've made, and that we're feeling good about them paying off, as we've kind of talked about through the call.

But we're always on an eye to a year out, two years out, three years out, and how well positioned are we in the various markets?

And we're very open to build or partner, and always kind of looking pretty closely at that.

We think we have a tremendous distribution model still.

Our field sales team -- close to 3,000 salespeople in the field -- have continued to execute.

And so, it's all about how fast can we give them more to sell, and what is the best way to do that?

And obviously, you've seen on kind of the smaller end, when we look at payment processing, we think there's an opportunity there, we partner.

When we look at a new product like accounting online, we partner.

If we think that in various markets we're better off partnering, we'll look at the economics of that and the opportunity to grow, and we're very open to it.

Great.

And then, with regards to some of the sales initiatives that you have put in place, such as going after franchisees, can you just give us a little bit of a sense for what areas have seen the strongest results in terms of the initiatives that you laid out at your analyst meeting?

Yes, I think, one, the banking channel for us has been something that in the past we're much stronger on the CPA channel, not as strong in the banks.

I think that Mark Bottini and the team there, building a team that really dedicated more focus on the banks and the support of the bank channel has led to a number of referrals and sales there.

And we've seen that.

We think that's been very successful, particularly in certain markets.

And because we just focused better on it, that was one of the initiatives.

The franchise has picked up as well, I would say even more successful in signing up the franchises.

And now we're kind of learning how best to service those franchises.

There's connection to Subway.

There's connections to Yum!

Brands.

There's connections there.

Now we're learning who has more kind of clout in those organizations because you're still not -- you're not requiring them to sign up with you, but you're driving influence from the headquarters type of thing.

And so, we're learning a lot how best to partner with the headquarters and with the franchisees.

But we're -- that's something we continue to invest in, and I think that team has been very successful in building the relationships and signing up new franchisees from a corporate standpoint.

And now we've just got to pick up the pace on closing those franchisees.

And we're finding different ways to sell into the market once we have the agreements, as well.

So, the initiatives on banks, franchisees and so forth, we feel are doing good.

They're picking up momentum, and so, we're feeling pretty good about them.

That's great.

And then one last question, with regards to the expense performance this quarter -- it was basically isolated to the other line.

What are some of the areas that fluctuate within that?

The other line?

Yes, so, when we go through the Q, as an example, you break out expenses between wages and compensation.

You're looking at it by natural categories.

Yes.

I think -- yes, I'd say this: That our P&L is variable, and we have a fair amount of ability to manage expenses intra-quarter.

And, obviously, based on what we're seeing in the year, we can make adjustments as we go forward.

So, there's nothing unusual popping out in that category.

We have higher IT expenses, and we did a really good job on operating expenses, controlling that growth as the financial statements indicate.

So, there's nothing strange going on there.

I was just wondering if you could keep that up?

Oh, you know what, look, if you ignore the natural category expense breakdowns and look at what we're doing, step back a bit, what we're doing is we're leveraging operating costs and we're continuing to invest in IT.

So, SG&A, growing faster than sales, primarily driven by IT, and ops expenses growing slower than sales.

That trend -- that macro trend -- ?

Yes.

-- irrespective of where it falls from a natural expense category standpoint, is a trend that we expect to continue.

Great.

Thanks very much.

Thanks.

Our next question comes from Bryan Keane of Deutsche Bank.

Go ahead.

Your line is open.

This is actually Sabadra on behalf of Bryan.

Hi.

Most of my questions have been answered.

Just a quick one on the CPA channel.

I was just wondering if you could provide a quick update on that one?

That continues to be good for us, pretty solid across the board.

We maintain those good relationships.

And I think the only thing that is -- would moderate that some is just the new business growth, as we've said, continues to be a bit sluggish, and a lot of the new business referrals came from the CPAs.

So, that has probably tamped that down a little bit.

But the relationships and the approach for the CPAs and our referrals from them continue to be okay.

Great.

And just one more quick question on the partnership model.

Is there an opportunity for you to partner with other technology vendors and provide services on top of that?

These could be into a segment where you've not currently tapped them -- could be much more the big mid-tier clients or other HR solutions that you currently don't have in your portfolio?

I was just wondering if you could just comment on that?

We're always -- I might have mentioned earlier, we're always open to that.

We think -- we're not going to go too far flung from what we do, but in providing strength to the employer/employee relationship, and if there's a technology need or a market that we think we can be very successful in and leverage the great 3,000 salespeople that we have out there that execute well and we can bring them something else, we would certainly be open to that versus building.

It's always a matter of looking at the economics of that, and certainly what we think is our level of success.

We're certainly open to it and always looking at those alternatives.

Okay, thanks.

All right.

Our next question comes from Joseph Foresi of Janney Montgomery.

Go ahead.

Your line is open.

Hi, Joe.

Hi, how are you guys?

I've got a ton of questions.

How much time do we have left?

(laughter)

(laughter) I'm just kidding around.

So, just two quick ones.

Hopefully, they're quick.

How do you measure the progress of the technology upgrades?

In other words, I'm wondering: Do you measure that per usage, and if there's any color?

If not, that's fine.

And then, just one quick follow-up.

I wouldn't say as much on usage at this point, as it is the selling.

So, are we selling it, are we competitive, and, again, with good continued sales execution, we feel good about that and increased penetration.

So, we're seeing increased attachment and increased penetration in those SaaS solutions.

So, we feel that that's a good marker for us.

And then, certainly, retention.

And we see good retention of the products that we're rolling out from a technical standpoint.

And so, we closely monitor that.

We look at, obviously, all the surveys that we're doing on top of that, and are constantly tweaking and changing to keep competitive.

So, I think that's -- it's more of a measurement of that than usage necessarily of the product itself.

Okay.

And then, secondly: It sounds like the Business is better after sort of slogging away at it for quite some time here, yet the traditional catalysts like small business starts haven't necessarily picked up.

Should we start thinking about that differently?

Are you finding new catalysts within the Business that could pick up the slack even though we haven't seen the traditional ones pick up speed?

I think that's fair.

We still have a good percentage of our Business -- sales that come from new businesses.

And while that's sluggish, it certainly is up from where it was last year.

It's not back to pre-recession levels.

So, I do think -- I don't want to mislead you and think that new business still isn't a strong part of our Business.

We're still very good at that, and get referrals from CPAs on new business and banks and so forth.

But I do think that we -- knowing that we were -- that that continued to be kind of sluggish coming back, we've looked for new ways to attract, to get referrals.

We've looked at new ways to retain clients.

We've looked at new products, and investing -- a lot of the technology investment has been that.

We also, I think, have gotten -- have done a nice job in building the revenue per client.

So, even getting better at saying: We've got a lot of product here to sell into the client base, and we're not going to wait around for the economy to be super strong.

Let's just sell into the client base, as well as bring in new clients, and I think maybe that mix is changing a little bit.

Efrain, anything you want to add?

I'd agree, Joe.

I think that the execution you're seeing is a result of our ability to extract value from the distribution base we've got, and there's a long way to go in that process.

I think we've also found new ways to refinance.

If you take like our initiatives on 401(k), we were always sold into the small market -- what we would say small market for 401k -- very successful.

But we started looking at how do we increase that over what we've always been doing?

And we found a way to go into the large market, larger assets for clients, and we really sent -- built a sales team just focused on that; built a team -- a small team focused on financial advisors and getting more leads from them.

So, we're not just going the traditional route.

We've really worked hard to find new ways to grow what we've always been good at.

Thank you.

Our last question comes from David Grossman of Stifel Financial.

Go ahead, sir, your line is open.

Hi, David.

Hi.

Sorry, I'm late here.

I actually got on the call late.

So, if this has been answered, we can take this offline.

But just really quickly, I had a quick question about the exchanges.

Where are you -- I know you had announced a partnership with one of the small business exchanges.

Just kind of wondering where you are in that process, and what impact you expect the exchanges to have on your Business, both near term, as well as out two to three years, based on what you know right now?

I think Evolution1 was the partner we are in with, and we have that set up.

One of the things that we were trying to do there was help businesses -- small businesses who are under pressure to give -- who don't have to do small business group insurance -- small group insurance, but want to provide something to their clients to do some pre-tax and then go over to the private exchange and use that.

Unfortunately, some of the changes in the healthcare reform kind of took away that benefit, at least at this point for pre-tax benefit.

So, if I'm a small group employer and I want to just give $300 a month to my employee pre-tax, that's not really necessarily an alternative anymore that is going to be pre-tax and so forth.

So, it's slowed kind of that whole thing for us on the private exchange piece.

We still have the partnership, we still offer it, it's just not quite as attractive as it was previously.

That may still change as these rules kind of solidify over the next year or so.

But I do -- and then the exchanges in general -- we have not seen as much of a loss, I would say, to the exchanges yet that we thought we might see on the small business side.

And we haven't -- we've seen the sales -- to those who need insurance, we've seen that moderated, as I mentioned earlier, just we haven't seen as much of a decision-making process from the clients because they're kind of confused and they realize that like the 50 to 100 don't have to do anything now in 2015; they have till 2016.

I'd say, overall, the whole exchange piece hasn't caused any major disruption.

It also hasn't accelerated anything.

It's been a more moderate kind of thing, and we expect we'll see more of the opportunity, and maybe the impact, in the next fiscal year as they approach 2016 really will be the bigger impact.

Right, great.

Thanks very much.

Okay.

You're welcome.

All right, David.

And there are no further questions at this time.

Great.

Thank you.

And at this point, we'll close the meeting.

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Have a great day.

This concludes today's conference.

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