沛齊 (PAYX) 2014 Q4 法說會逐字稿

Welcome, and thank you all for holding.

(Operator Instructions)

Today's conference is also being recorded.

If anyone has any objections, you may disconnect.

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

You may begin.

Thank you.

Good morning, and thank you for joining us for our discussion of the Paychex fiscal 2014 year-end performance.

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, 2014.

We expect to file our Form 10-K by the end of July.

Our earnings press release is available by accessing our Investor Relations page at Paychex.com.

This teleconference is being broadcast over the internet, and will be archived and available on our website for about a month.

On today's call, I will review the highlights for the fourth quarter and fiscal 2014 in operations, sales, and product development areas.

Efrain will review our fourth quarter and fiscal 2014 financial results, and discuss our fiscal 2015 guidance; and then we'll open it up for your questions.

We are pleased with our solid financial performance during fiscal 2014.

Efrain will speak to this in more detail; however, I'd like to provide you some of the highlights from my view.

Our payroll service revenue reached the top of our guidance range, driven by progress in revenue per check, client-based growth, and checks per payroll.

HRS revenue rose at double-digit rate in the fourth quarter, with strong demand for our human resource outsourcing solutions and our 401(k) record-keeping product.

In fact, we were recently recognized by Plansponsor Magazine for the fourth consecutive year as the largest 401(k) record keeper by number of plans.

We're very proud of that, and proud of our sales and operations teams in 401(k) among the other groups.

Our payroll client base finished the year at approximately 580,000 payroll clients, an increase of approximately 2% from the prior year.

This is an improvement over the fiscal 2013 client gain.

Our checks per payroll has improved for 17 consecutive quarters; fourth-quarter growth was 1.1%.

Sales performance during 2014 was strong, and we exited the year with solid performance in core payroll and Paychex HR outsourcing solutions in particular.

Our new sales annualized revenue growth, frankly, reached the highest level it has in seven years; we're very proud of the sales team and the leadership.

Our execution in operations also continued to be excellent, demonstrated by our consistently high client satisfaction scores and our exceptional client service, coupled with our leading-edge technology and products, we really believe sets us apart from our competitors.

The dedication of our service team resulted in our best year ever in client retention at approximately 82% of our beginning payroll client base.

We continue to invest in our SaaS, software as a service, solutions and mobility offerings that position us for long-term growth.

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

This month, we acquired a leading cloud-based time and attendance solutions provider.

Our online time and attendance offerings have experienced strong sales over the last few years, demonstrating the high market demand for these offerings, and contributing to the success of all of our online HR administration products.

The addition of market leader, nettime's SaaS time and attendance products, and development team, will further accelerate our ability to deliver the latest cloud-based time and attendance functionality, coupled with our HR and payroll solutions.

Just last week, we also announced the release of our new Paychex Accounting Online mobile app for the iPhone.

The universal iOS app allows users to access their Paychex Accounting Online account from their iPad, iPhone or iPod touch to keep track of their business finances anywhere and anytime.

In the past few quarters, I've talked about the rollout of new products designed to help our clients manage the compliance requirements of healthcare reform.

This includes our Paychex Employer Shared Responsibility Service, a more robust monitoring service, and 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 our small businesses with these regulations.

The frequent changes in the rules has caused some clients to delay decisions on purchasing products or making decisions on their health plans in the short term.

However, we continue to see healthcare reform as an opportunity, as we are able to provide clients with information, and keep them updated on the latest compliance and requirements.

We continue to strengthen our position as an expert in our industry by serving as a source of education and information to our clients, small and mid-size businesses, and other interested parties.

We provide free webinars, white papers, and other information on our website to aid existing and prospective clients, along with CPAs and other interested parties with the impact of regulatory changes.

The Paychex Insurance Agency Inc.

website helps small business owners navigate the area of insurance coverage.

And both this website and Paychex.com have sections dedicated to the topic of healthcare reform.

During the fourth quarter, in conjunction with IHS, we launched the Paychex IHS Small Business Jobs Index.

This monthly index examines the state of small business employment in the US, and provides information on macroeconomic trends.

By measuring aggregated small business payroll data from a subset of our small business client base, the index identifies and tracks small business employment growth and provides timely, accurate insight into employment trends.

We are encouraged by the recent results of the index, which have shown a trend of sustained, moderate growth in employment for those companies under 50 employees.

We have continued our shareholder-friendly actions as well.

We have maintained a very competitive dividend yield, with our current quarterly dividend at $0.35 per share.

And we have also continued to repurchase Paychex stock, and acquired approximately 6 million shares of common stock in fiscal 2014.

In May, our Board approved a new plan to repurchase stock, up to $350 million worth of shares of Paychex common stock, with the authorization expiring in May of 2017.

In summary, I am extremely proud of our employees' efforts on behalf of our clients and our shareholders.

They have continued to deliver great solutions, high client satisfaction, and record levels of client retention.

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 2015.

Our service revenue has increased over $400 million over the last three years versus very little growth over the previous three.

And even with accelerated product investment and innovation, we have maintained industry-leading operating margins.

We are clearly focused on growth by providing our clients the service and products that will help them succeed in their small and mid-size businesses.

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

Efrain?

Thanks, Marty, and good morning.

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

Refer to our press release that includes a discussion of forward-looking statements and related risk factors: the customary disclosure.

As Marty indicated, Paychex delivered solid results in fiscal 2014.

And just as importantly, metrics improved across almost every category we look at.

Here are some of the key highlights for the quarter and fiscal 2014, and then I'll provide greater detail in certain areas, and wrap with a review of the 2015 outlook.

We introduced new health insurance offering within our PEO during fiscal 2014.

Due to self-insurance provisions within the new offering, we began classifying certain PEO direct costs as operating expenses, rather than a reduction in service revenue.

The change had no impact on net income.

A supplemental schedule was added to the press release to show the impact of the classification change on the fiscal 2014 results of operations.

For this discussion of fiscal 2014 results, I'm going to provide growth percentages that exclude the impact of the adjustment in order to focus on the business drivers and what's currently in your models.

In future periods, all discussions will use results reflecting this change in classification.

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

Interest on funds held for clients increased 2% for the fourth quarter and decreased 1% for the fiscal year to $10 million and $41 million, respectively.

Low interest rates were partly offset by an increase in average investment balances.

Expenses increased by 4% in the fourth quarter, and 5% for the fiscal year.

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 fiscal 2013.

Operating margin was 35.9% for the fourth quarter, and a robust 38.7% for fiscal 2014.

Operating income, net of certain items, increased 8% to $218 million for the fourth quarter, and 9% to $942 million for fiscal 2014.

We are closing in on the $1-billion mark for EBIT, and should surpass that next year.

Our operating margin is typically lower, as you know, in the second half of the year.

Net income growth increased 18% to $146 million for the fourth quarter, and 10% to $628 million for the fiscal year.

Remember that -- and I've seen this in a couple of notes -- that there's an implication that the guidance -- somehow we decelerated from this year.

But you need to remember that we took a $0.04 write-off in the fourth quarter of last year, and that is what's causing the fourth quarter to look high.

Diluted earnings per share increased 18% to 40% (sic - see press release, "$0.40") per share for the fourth quarter; and increased 10% to $1.71 per share for fiscal 2014.

And I would just point out, again, that these numbers include the fact that we increased our provision for a state income tax matter in the fourth quarter.

Looking at payroll revenues, payroll service revenue -- it increased 3% for the fourth quarter and 4% for the fiscal year.

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

Revenue per check was positively impacted by price increases, partially offset by discounting, coupled with the impact of increased product penetration.

As Marty already mentioned, our checks-per-payroll metric continued to improve, and our client base increased approximately 2% from May 31, 2013.

So, the rate of growth on improvement in the client base accelerated this year.

The payroll service revenue rate of growth was lower in the fourth quarter, and this was the result, as I've mentioned throughout the year, of one less payroll processing day compared to the same period in the prior year.

The estimated impact on payroll revenue growth in the quarter was approximately 1%, based on that lack of a day.

HRS revenue -- point out that during the year, we upped guidance on HRS revenue.

And in the fourth quarter, we grew 10% to $213 million, and 12% to $832 million for the fiscal year.

Both were at the top end -- or the yearly guidance was at the top end of the range, as Marty mentioned.

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

Paychex HR Solutions experienced solid growth in clients and client employees served.

You'll notice that we did the disclosure included the press release.

We are up to almost 800,000 clients served, and it won't be too long before we're talking about 1 million clients served by our products.

Our PEO experienced strong demand during fiscal 2014.

HR administration products continued to grow, due to success in sales of SaaS solutions, in particular for our time and our attendance products.

Retirement services revenue benefited from growth in number of plans.

As Marty mentioned, our recent recognition and an increase in the average asset value of retirement services, client employees' funds.

Insurance services revenue growth reflected higher average premiums in workers' comp insurance services.

We have also experienced a modest increase in the number of health and benefit applicants.

Turning to our investment portfolio: Our long-term portfolio, which is primarily made up of high credit quality municipal bonds, has an average yield currently of about 1.6%, and an average duration of three years.

Combined portfolios have earned an average rate of return of 9/10 of a point for the fourth quarter, and 1% for fiscal 2014, consistent with the same periods last year.

Average balances for interest on funds held for clients increased during both the fourth quarter and the fiscal year, due to growth in checks per payroll, and client base and wage inflation.

For the fiscal year, average balances also benefited from the expiration of certain payroll tax cuts on December 31, 2012, which resulted in higher social security withholdings.

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

It remains strong, with cash and total corporate investments of $937 million, and no debt.

That $937 million is despite the fact, if you read the press release, that we spent $250 million in the year buying back shares.

So, we had a really strong year from a cash flow perspective.

You can see that on the statement of cash flows, and I would say our financial strength is second to none.

Funds held for clients as of May 31, 2014, were $4.2 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 $3.9 billion for the fiscal year, a year-over-year increase of about 4%.

Total available-for-sale investments, including corporate investments and funds held for clients, reflected net unrealized gains of $35 million as of May 31, 2014.

Total stockholders' equity was $1.8 billion as of May 31, 2014, reflecting $511 million in dividends paid during the fiscal year.

Dividends paid represented 81% of net income.

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

Our cash flows from operations, as I mentioned, were $881 million for the fiscal year, a 30% increase compared to the prior year.

The increase was driven by higher net income, higher non-cash adjustments to net income, largely due to higher amortization on premiums of available-for-sale securities, and changes in operating assets and liabilities.

The 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, and income taxes.

Fluctuations in income tax payments related to the settlement of a state tax matter in the fourth quarter of fiscal 2013.

Now turning to 2015 guidance, I'd like to remind you that our outlook for the fiscal year ended May 31, 2015, is based on the current view of economic and interest rate conditions continuing with no significant changes.

Our guidance for 2015 is as follows.

Payroll service revenue projected increase in the range of 3% to 5%.

Projected growth is based on anticipated client-based growth, and increases in revenue per check.

HRS is expected to be in the range of 16% to 19%.

This, and total service revenue, reflect change in classification of certain PEO direct costs as operating expenses rather than a reduction in service revenue.

There is no impact to net income from the change.

The impact of the change in classification on HRS revenue will add approximately 5% to the HRS revenue growth rate.

The HRS revenue growth rate by quarter is impacted by the classification of the PEO direct costs, as we did not begin our new health insurance offering until January of 2014.

I'm going to come back to that; it's very important as you look at your models that you understand that implication.

HRS revenue growth also includes additional revenue from 401(k) planned restatements that are periodically required by law.

Total service revenue expected to increase in the range of 8% to 10%.

The impact of the change in PEO classification adds approximately 2% to the service revenue growth rate.

Operating income, net of certain items, as a percent of service revenue is expected to be in the range of 37% to 38% for fiscal 2015.

Again, this is based on the PEO changes to revenue.

That's why that number is lower than it was last year; it does not imply any deterioration in our operating margins.

Net income is expected to increase in the range of 6% to 8%.

Our operating income, net of certain items, as a percent of service revenue is expected to be between 37% and 38%.

The PEO direct costs impacted by the reclassification are all reported in operating expenses as you update your models.

I'll have more to say about that in a second.

Effective tax rate for fiscal 2015 is expected to be consistent with the rate we experienced in 2014.

And interest on funds is anticipated to be relatively flat compared to fiscal 2014.

Don't expect it to be above it; don't expect it to be significantly below it.

And then, while we don't provide quarterly guidance, the PEO impact to revenue requires further detail for you to accurately update your models.

At the close of this call, we will post a schedule on the website detailing quarterly HRS revenue growth expectations for fiscal 2015, as well as operating income margin due to the PEO reclassification.

You need to look at that schedule to understand how to get the quarters right.

The effects on revenue and margin are going to vary by quarter.

The effects will be more marked in the first two quarters, and then are more attenuated in the back half because the plans that we put in place started in January in the PEO.

So, you should consult the schedule as you update your models.

I'm happy to answer any questions you have, and I'll try to get to you if you want to call me today; I'm happy to get to you quickly.

And finally, we anticipate that first-quarter earnings growth will be modest, due to investments in IT and salesforce growth.

And what happened was, compared to last year, we start the year at a higher rate of spending in IT than we did in the first quarter of last year.

That's because we continue to make significant investments in IT, and also we were adding to the salesforce as the year progressed.

We continue to add to the salesforce.

We anticipate that we will be up approximately 5% in the salesforce this year.

We like what we're seeing, and feel now is the time to invest.

So, with that, I will turn it back over to Marty.

Okay, thank you, Efrain.

And now, operator, we'll open the meeting to any questions, please.

Thank you.

(Operator Instructions)

The first question comes from David Togut with Evercore.

Thank you, good morning, Marty and Efrain.

Hello, David.

Morning.

Marty, you indicated that FY14 new sales annualized revenue growth was the highest in seven years.

Can you quantify for us what the sales growth was?

No, David, we don't normally give that detail.

I would just tell you that what we've seen is just continued to accelerate kind of throughout the year as we -- and we ended very strong on new sales revenue growth.

And I think you know, a few years ago, we were fairly flat in the total annualized revenue that we were producing in sales.

And it's started to pick up last year, and it's continued to pick up again this year.

And it is the best we've seen really since recession times, pre-recession.

Can you maybe just broadly bracket for us what the range might be?

Are you talking about mid singles, high singles, low doubles?

It's an advance of our revenue growth.

So that's what we look at.

Got it.

And then, with the new fiscal year kicking off, can you quantify what your pricing strategy is in payroll for FY15?

Did you already put through the price increase?

We do tend to do that somewhere around this time.

I won't say exactly the date, most of you actually know it, but I think our pricing view is what we've said.

We're in that range of 2% to 4%.

What do you expect that to be net of discounts this year, ballpark?

In the range.

Sorry to be too coy.

It's a little early.

But I think based on what we've seen last year and this year, we don't -- it's early right now on the feedback on that.

But I'd say to the low, to the mid part of that range.

Do you expect client count growth to approximate what it was in FY14, or to increase based on the pipeline?

Well look, it is July, hard to believe.

I think we'd like it at least to equal this, but our expectation is it will be better.

Got it.

And just --

By the way, David, on that point, I will say this, that we exited the year in the fourth quarter at a nice clip.

So we feel pretty good about where we're starting the year.

Got it.

And just a quick final question.

Efrain, you highlighted the strong tech spending expected in FY15.

Can you quantify for us the growth in tech spending this year, and perhaps if you could touch on what your top couple of priorities are for that spending?

On the priorities, I'll knock it back to Marty.

But I would say if you go back two or three years, we were saying we were growing at close to 20% in some years.

If you look at where we are in the last six years, we've doubled the total amount of spend in the Company.

As a part of the fundamental changes the Company has undergone, our rate of spend now is essentially twice what it was when we entered the recession.

And that was a deliberate strategy.

We understand this is a technology enabled service business.

And that going forward, we need to continue to spend at that sustained level.

That doesn't imply an increase from where we're spending currently.

It just implies that we continue to spend at a pretty significant rate.

And the thing I'm most proud of is that we do that and we expand margins, which is pretty extraordinary.

So and we think we still have an opportunity to do that.

So I won't detail exactly what we spend.

It was certainly solidly double digit, and each one of those decisions around spending on tech is hard fought.

But I think that an emphasis that the Company has created over the last six or seven years is significant investments in IT, because that's the cost of being in this business.

I'll turn it over to Marty.

I would with say on the product overall, it's integration and performance.

So very broad spectrum of products that we have through both development and acquisition, and our work has continued to be on integrating that.

We've made a lot of strides in that, and we just continue to keep trying to make it easier and easier for our clients to use the multitude of products.

And then, when you do that as well as the integration and the simplicity of using all of the products is the speed and the performance.

And we just keep upping what the goals of what we're trying to do there, and we've had some nice success.

Of course the mobility and so forth, as well.

Everything just keeps moving.

We don't build anything without going right back at it to make it faster and more integrated and easier to use.

Much appreciated.

Thanks for taking my questions.

Sure.

Thank you.

The next question comes from Jason Kupferberg with Jefferies.

Hello, Jason.

Hey, guys, this is Ryan Cary for Jason.

Quick question on checks for payroll.

I know in the past, you had mentioned an expectation checks for payroll would moderate in the second half of 2014.

Is the 1.1% growth you saw in the fourth quarter more or less than you expected?

And then, going forward, should we expect the first half of 2015 to return to the first half of 2014 levels, or more consistent with the current run rate?

Like that 1%, is that going to be the new normal?

Yes, so second question, second verse same as the first.

1% is about what we expected, and we quite frankly could see it moderate a little bit from where we are at this point going into next year.

We don't expect it to pop up.

And with the launch of our small business index, I think we look at that data even more closely than we did before.

And trends just seem to be slowly plugging along at that rate.

It's kind of unchartered territories for after a recession.

It continues to be sustained, moderate growth in employment.

So it�s not been a big jump back, it�s been a slow and steady.

So actually to keep the growth in checks this long has been very different.

So we keep continue to expect it to moderate, but the hiring does seem to continue.

So that's good news.

Okay, great.

And as we think about the quarterly progression of your results going into 2015, are there any quarters we should be aware of that have either more or fewer processing days that could impact comps in either direction?

Yes, thanks, good question.

The answer is no, thankfully.

I think I exhausted all my days explanation, but stay tuned for fiscal 2016.

We'll talk about it then.

Okay.

And then just lastly for me, I was hoping you could provide an update on the progress of the payment processing offering.

How has the update been compared to your expectations?

I'd love any color on how the rollout has gone, and your thoughts about the business going forward?

Yes, it started slow.

And what we found was, using a lot of the field payroll forces -- salesforces to sell it became a little more complex than we thought because of the complexity of the pricing.

And so what we did was last year, around half way through the year, we brought it inside.

So it's referred from the outside salesforce, and now is sold primarily over telephone.

And that has really started to pick up some traction.

So it's still early and very small from our standpoint, but it's really picking up good traction now by selling it for a dedicated team who understand the details of the pricing per client.

And actually, has even given us some payroll leads where we've sold payment processing and saved the client some dollars, and actually then referred to other products and sold other products to them.

So we're feeling pretty good about it.

Finally it's really starting to build some traction, and more to come on that.

Great.

Appreciate the color guys.

Thanks.

Next question comes from Bryan Keane with Deutsche Bank.

Hello, Bryan.

Hello, this is Ashish Sabadra calling on behalf of Bryan Keane.

Quick question on the guidance.

Last year, I believe when you gave the guidance the range was within a percentage.

This time you've given a 2% range.

I was just wondering if there's been any change in your guidance philosophy?

No, not really.

I think it doesn't imply more volatility.

On the HRS side, we went to 3 points simply because attachment rates on some of the other -- on healthcare can sometimes vary.

But we thought just to keep it more consistent -- we're obviously pegging at the middle of the guidance.

That's what we're doing.

But the future is uncertain, and we thought those ranges represented where we could end up.

Okay.

Actually just a quick follow-up on that will be you mentioned your pegging it to the middle of the range.

But just wondering, because at the low end of the range, it would imply a slowdown in the growth rate.

But given that payroll is improving, small business sentiments are improving, what will take you to the low versus high end of the range?

Unforeseen factors that at this point we don't see.

You never know.

I will say this Ashish, so two years ago, we guided to I believe at the time it was around 3% to 4% in payroll.

We ended up at 2%.

And I spent three quarters trying to explain a multitude of external factors that everyone assumed were competition when they weren't, so that stuff can come up.

Q3 was a great example.

So suddenly, we end up with some pretty bad storms and it becomes more complicated.

So stuff like that can happen.

So we're trying to kind of create a more all-weather scenario for where we think our results will be.

But in the absence of those, we don't anticipate being at the low end of the range.

Okay, thanks for that color.

Quickly, when we add up the number of the customer growth of 2% and then checks per client of roughly 1.3 and pricing increases, they don't add up to the revenue growth.

And I was wondering, is that also related to mix in the sense of short payroll, or if you could help us parse out what the customer growth, how much is driven by short payroll versus the core payroll growth, and if the mix also has some impact?

Yes, mix has some impact, but I think you can't just add it.

I've mentioned this to people repeatedly.

Checks don't add up one for one, so 1% checks doesn't equate to 1% revenue.

There's mix within checks, so that might equate to 33% of that, 50% or sometimes a little bit more.

Second, client growth is achieved over the course of the year.

So you can't add [2%].

It at best is half of that, right, because it's a weighted average during the year.

And then you've got to figure out pricing.

So we feel pretty good.

We saw growth across all the segments that we thought should grow in core.

And I would say this, for people who wonder about that issue: if you look at our data, if you look at our data over since 2011, and you look at our revenue retention, we've grown 200 basis points in revenue retention.

You saw client retention at its highest level, Marty didn't talk too much about that, but client retention currently is at its highest level.

But our revenue retention is at its highest level too, so we feel pretty good about where we're at.

And that's great.

One final question for me was the HRS, the growth slowed down a bit in the fourth quarter.

Was that mostly tough comps, or were there any other factors?

No, it was primarily tough comps.

We had a really, really strong Q3.

And actually, last year we had a real strong Q4, so a little bit tougher comp.

It was really not too much else going there.

Okay, thanks for the color.

Next question is from Sara Gubins with Bank of America Merrill Lynch.

Hello, thank you.

Are you seeing any change in the average client size for payroll services?

You talked about that being about I think it was around 17 or so before?

Yes.

Is that changing at all?

I'm going to update that, Sara.

It looks like we skewed a little bit higher this year.

Okay.

So we'll update it.

I don't have the exact number in, but our preliminary data would suggest we were up closer to 18.

But we'll get that info out.

Do you think that there's -- I might be pushing this a little bit, but do you think that there's anything related to the strong growth in HR services, as I would assume that there would be a greater propensity to buy from slightly larger clients?

Maybe a little bit.

But I will tell you that what we're finding is that we're definitely selling more of the products even more of the products down market.

Everything is coming down, and it's giving us a nice opportunity to sell to the even the under 20 space many more products.

So I wouldn't say it's probably that, because what we're finding is these products are even selling more down below 20.

Great.

And then just last question on share count.

Could you maybe help us think through the balance between the share repurchases that you did over the course of the year, and not seeing the share count decline close to that magnitude?

Just talk about the issuance?

Yes, good question.

So I guess the way I'd characterize it this way is if you look at Q4, our share count finally went down in Q4.

So vis-a-vis, Q4 of last year and this year, you started to see it come down.

We had a fair -- when the stock ran from let's see, low $30s up to $45, we had a lot of exercises and pent-up demand because there was a significant amount of shares still out there.

So we had about $3.3 million or so, I apologize, 3.3 million shares that were exercised.

So long story short, we saw that and we wanted to buy to offset dilution, and that's why you don't see necessarily a significant reduction in the number of shares.

Thank you.

Sure.

Next is from Joe Foresi with Janney Capital Markets.

Hello, Joe.

Hello, good morning.

This is Jeff Rossetti in for Joe.

Thanks for taking my questions.

Just wanted to see on the margin side, I think, Efrain, you had mentioned that you're expecting salesforce increase of about 5%.

I just wanted to see how that ended up with how the year-ended.

And just wanted to see how when we think about your guidance for margins, should we assume some SG&A to increase as a percentage of revenue, and there's still to be some operating leverage with respect to operating expenses?

Yes, so I'd say this.

It's going to be lumpy in the first half of the year and you're going to have to look at the schedule we've got because it's very difficult to talk about leverage, Jeff, without referring to that schedule.

It won't look like there's leverage.

It will look like we're deleveraging and you're going to see that really frankly through the first three quarters and then you start to level out a bit in Q4.

So you've got to look at that schedule.

If you look at it and you don't have the data, but if you were to look at it without that, yes, you would see some leverage.

It would be modest.

We made a decision that probably cost us approximately $0.01 to increase -- put more into increasing the salesforce.

We thought that made sense, and so we decided that investment was the right one to do.

Okay, thanks.

And maybe, just could I get some additional color on the SaaS penetration that you've seen recently?

And was also wondering, I think Marty had mentioned that there's still some slow decision makings on healthcare-related plans.

I just want to see if that changed at all in the last three months.

I think maybe some more commentary was given three months ago.

I just wanted to see how you see any changes going forward.

Thanks.

Yes, I'll start on the healthcare one.

I think we've continued to see that.

I think, particularly, and that may happen through the Summer until you get more closer to the Fall as benefit plans start rolling out and people start seeing rates and so forth for January 1st starts.

I think what we're finding is just there's been so many changes in healthcare reform and dates that the clients are more sitting back a little bit.

So even though we had the products out pretty early, we are getting some traction on the products because clients have to start to understand right now what changes they may have to make in part time/full time, when they hire the next person, what kind of impact that's going to have to them, particularly if they're around the 50 mark.

And so, I think it's going to pick up a little bit toward the end of the Summer, but it's still been slower than we expected.

And I think that's because of the changes.

So we haven't seen a lot of change there.

On the SaaS, it continues to increase.

We don't really give a percentage, but you can see everything we're doing pretty much is an investment is in SaaS.

The acquisition in nettime, it was also for SaaS.

So we're seeing a big pick up in SaaS-related products for the HR services and support, HR administration, benefit enrollment, time and attendance, expense tracking.

Everything, frankly, that we offer is pretty much now on a SaaS basis.

And in that, we're seeing a large pick up on it.

So that will just continue to grow, and frankly, it won't even be a discussion of non-SaaS.

It will be just SaaS.

Thank you.

The next question comes from Gary Bisbee with RBC Capital Markets.

Hello, good morning.

Hello, Gary.

Just want to understand exactly why the accounting change or the change in how you're presenting the data, you're not taking any insurance risk.

There's nothing like that that forces you to recognize this, I'm assuming.

And if that's right, then why make this change?

Thank you.

Yes, so, Gary, let me just explain this.

And without going too far down a hole with the way you account for costs in the PEO, we, in certain markets decided that it made sense for us to go to something called the minimum premium plan where your risk is capitated, but you do take some risk based on the book.

And within the PEO, and most PEOs do this, you are taking risk also on worker's comp.

So you have to do some underwriting, you have to be pretty good at underwriting to do it.

That is not all of our PEO plans, but it is some of them.

When we did that, that tipped us to now represent that portion of the revenue as gross, essentially include the cost of insurance.

So I would say yes, we do take a bit more risk, but it's capped.

Okay.

And if -- you would have an insurance provider that would be offering you the equivalent of -- you'd be capped out at a number per occurrence, or -- ?

Right.

That's correct.

Okay.

And should we think about this as something that might modestly increase the volatility, or are you pretty confident in the underwriting and the history of the data such that you have the strong ability to predict this?

Which volatility?

Top line or bottom line?

Well, if there's ever a difference between what the actual insurance costs are relative to what you've forecast.

Because you're taking more risk, you've got to make up for that.

Yes, thanks for the question, because I think it's a great question.

So the short answer is, it really shouldn't have a dramatic impact on income unless you really don't do your homework and start taking risks that are inappropriate.

So I think we understand.

One of the really terrific stories over the last three years is that if you remember the calls we were having three, four years ago we were talking about how the PEO really wasn't doing well.

And behind the scenes, we decided that we needed to put a major effort against fixing it, and we did.

So we do a really good job now of understanding what our risks are in the PEO.

So you shouldn't see significant amounts of fluctuation based on earnings, but the rates of attachment of all these plans can swing sometimes the top line.

So you could have a little bit more volatility on the top line.

That's why we've called out in a schedule that we're publishing shortly what the revenue will look like.

It will even out as we get into next year.

So you could see a little bit more top line volatility, but shouldn't dramatically affect the bottom line.

Okay, great.

That's helpful.

And then just a follow-up question, can we get a sense of the mix of the good new sales performance in fiscal 2014?

And I guess product, any highlights good or bad you'd mention, and then how much of it's concentrated on new customers versus selling more to the existing base?

Thank you.

Yes, the sales performance I was talking about was really new customers.

We have done a good job, I think, in selling more product.

But for the most part, it's been selling new customers, and I would say it's in the payroll side, the core payroll side, and particularly the PEO and HR Solutions.

HR support products have been very strong.

But across-the-board, we really had a good year.

Our best in many years from a sales performance perspective, and I think that's great execution on the leadership team.

It's been a new leadership team really for a number of years now, and Mark Bottini had come in and run all of the sales.

And about three years ago, has built the new team of leadership.

And I think it's just been -- it was a very good execution as well as a little bit of the economy coming back slowly as well.

So, I think we've just gotten better and better at the comp plans, the support tools, the leads, and everything across-the-board.

So I'd say primarily, the strongest has probably been the core payroll and the HR Solutions.

But really across-the-board, it�s been pretty good.

Okay.

And then just one last one.

The 5% sales headcount growth for fiscal 2015, how does that compare to what the actual sales headcount growth was in fiscal 2014?

Thanks a lot.

Pretty modest.

I'm going to say maybe couple percent last year.

And we just thought given where we're at, time to step on the accelerator a little bit.

Great, thank you.

Thank you.

The next question comes from Jim MacDonald with First Analysis.

Good morning, guys.

Hello, Jim.

Can we talk a little more about the strategy for going self-insured?

How that helps your competitiveness, and how broadly it's been picked up so far?

So the long and the short is that in certain markets, Jim, essentially minimum premium plans where you cap your liability is basically what you need to do to be competitive in that market.

And as those of you who have covered the Company for a while know, we didn't do that in the past, but thought it was important, number one.

Number two, I would say that the stage of maturity of our PEO is at a point where we feel pretty comfortable about our ability to underwrite and understand that risk.

And obviously it was discussed pretty extensively.

And the third thing I would say is, that we recognize that there's a nice opportunity in the PEO, and we want to put ourselves in the best position to capitalize on it.

And just finally, so how many markets is it in?

What kind of percent take up do you expect?

So the majority of our plans still are in the hands of third parties, so we are in currently with one State that's got a minimum premium plan.

Okay.

And is the PEO becoming more competitive because of this?

And kind of the flip side of that, is that impacting your brokerage business which was you said was flat?

Well I think as Efrain said, I think it is becoming -- we really felt good about the execution of the PEO team, and I think this makes us more competitive, particularly in certain markets.

So we've kind of tackled this by market.

As Efrain said, we're in one major market for us where a lot of the PEO sales have been, and that's where we did this because we felt frankly it was more competitive.

We had better flexibility to compete, and there was better opportunity for us.

And the timing was really right from both internally from our execution perspective, and externally from the opportunity size that's out there.

The PEOs obviously have a very good opportunity, and particularly with healthcare reform and so forth now, things were really picking up.

So this was the right time to do it, and we felt very good about managing the risk and the underwriting as well.

And, Jim, with respect to the insurance business, I'd say that there's two aspects to that.

We had a super strong year on worker's comp insurance.

It really -- they really did very, very well.

And on H&B, we anticipated that the under 10 market was going to gravitate towards exchanges.

That's what we're seeing.

So client count is a little bit deceptive in that sense, because that's reflective of a lot of smaller plans gravitating downward.

We think that will settle out, and we'll get back into a pattern of better growth there because we pivoted that salesforce.

We made both an investment in that salesforce in numbers, and also we have redirected them towards selling in the above 10 employee space.

Just one more.

We haven't talked much about the middle market.

Could you just give us an update on what you're seeing there?

Yes, I think the competitive environment hasn't changed a lot.

Even though there's been a lot of talk about it in IPOs and so forth, we haven't seen a big change there.

I think what they're looking for is exactly what we've been working on the last few years, which is a breadth of product in integration, very much a SaaS focus, and we feel good about that across-the-board.

The products that we have, I think that we'd like to see even more growth there.

But I think this is going to be a good year for us on the mid market side.

I'd say last year was good, it wasn't as great as we'd like to see, but I think we were still kind of integrating all of the product set.

But we have a very strong product set, time and attendance and HR administration online in particular, had really taken off, and that's why we went after the acquisition of nettime.

Because we felt that the opportunity for time and attendance is really big.

Not only in the mid market, but moving down.

But we thought that that was a great product, and great development resources, frankly, to keep the product very competitive.

So I'd say mid market, this is going to be a good year for them and last year was good, and it could be even much stronger this year.

Great, thanks.

Next question is from David Grossman with Stifel Financial.

Hello, David.

Hello, good morning.

It sounds like you're expecting some acceleration in the HRS segment.

So, sorry if I missed this earlier, but can you help us better understand why you're becoming more optimistic, and the key segments that you think will drive that incremental growth?

Well I think we're optimistic, David, because we had good success this year.

We've seen the PEO has done very well.

The HR Solutions, the ASO model on the other side has also done well.

I think what we're finding is that the opportunity for HR outsourcing has really continued to grow, and we're very good at it.

We've been doing it a long time.

We have over 400 HR specialists out there handling more and more clients each, and I think we've really got the model down extremely well.

Whether it's a PEO or ASO, that salesforce is both -- sells both products.

So they look for the needs and the value to the customer, and sells it that way.

So I think the HR Solutions frankly is just we had a stronger year than we even expected, and we think that's going to continue.

And we've made moves like the MPP plan that with the PEO to give us even greater flexibility, and to capture the opportunity from a profit standpoint.

So we feel very good about that, and in there too is a lot of the acquisitions that we've done, ExpenseWire, myStaffingPro, a number of products.

And now we're getting them integrated even more tightly with our payroll processing, and I think that's all very good news across-the-board.

We're starting to capitalize on the investments and acquisitions that we've done.

And can you at all, A, segment how much of the growth this year will be acquired growth?

And then I guess I was also thinking perhaps the Affordable Care Act may be, at least for the moment, a catalyst for small businesses to embrace and outsource solution at least at the front end of all of this, as everything seems to keep changing.

And just looking for external support at least, again, at the front end of this change.

Yes, it definitely is.

It's been slower than we expected on the healthcare reform, because of all of the changes.

We've put some very good products out early on helping you track hours, helping you tie in your time and attendance, to measuring how many hours and full time equivalents, and all the things that you'd need.

And we have very good products on that side, but it�s gone a little slower than we expected because the government, the Federal Government, keeps changing the dates, and the rules, and who it applies to.

And I think that's made people more cautious about deciding.

But I do think that's going to, as we get into 2015, that's going to come more and more to a head, and people will start -- and more businesses will make more decisions.

So I do think that's a bit of a catalyst, and it's been a catalyst frankly just to get in the door to talk to more prospects.

Because they're wondering how it applies to them, do they need to do something or what.

And I also think that's going to help on the PEO and total HR outsourcing, ASO and PEO models as well.

Because once they start making decisions on healthcare, I think they're also seeing opportunity to just outsource their HR.

Because the compliance requirements, frankly and besides healthcare, there's just a ton of compliance requirements that just keep coming out by State for things that they're going to have to do.

So, I think that that's where we see continued opportunity there.

And, David, the nettime acquisition is less than 1% of revenue, and less than 1% of HRS revenue.

So it is relatively modest.

What we liked about it was it is the leading SaaS time and attendance product of its type on the market, and there are not a lot of those products on the market.

We like the technology.

We like the team, and feel we're really, really well positioned in a part of the market that shows a lot of promising growth, both inside our base and outside it.

I see.

Well thanks for that.

And I'm wondering if I could just go back to the conversation about check growth and client growth, and perhaps I've got a bit of a dated view of this.

But my understanding has been, historically, that during periods of low client growth, your check growth would go up because you typically add at the low end.

Right, in terms of new business creation, fewer employees basically.

So I'm wondering if you could help us make the connection between what has been perhaps stronger than expected check growth, and relate that to what you've seen in terms of client growth and perhaps the moderation related to better client growth next year?

And then secondly, help us understand if there's any impact on pricing as the mix shifts from kind of selling more if you will into the existing base versus taking on new clients.

Okay, so let me take a stab at the first one.

So I understand what you're saying.

So if you -- if in a given year you're adding a lot of clients that are call it under four -- typical new start up is 3.5, it's going to have a diluting effect on your checks per payroll.

And so if you have a lot of adds, you would see checks per payroll decline.

That's in a steady state environment though, David, where employers weren't necessarily adding a lot of employees.

And I think that what we didn't model very well was, if you look at the last five years, no surprise, we didn't add clients there for a period of time.

So that did have an impact on increasing checks per client, if your client base was growing.

So you had a rapid acceleration of client based growth starting around 2010, I shouldn't say client base, client employee growth.

That's what the data suggests.

And now you've kind of leveled off a little bit more on steady state.

I think when you put all that together, we anticipate that checks per payroll are going to start dipping below 1% some time over the next several quarters, and then it won't be worth having too much of a discussion on it.

It will just be steady state, and our adds on the client side will start to really dilute that so it doesn't really become that important.

So a lot of things have changed over the last seven years to kind of change that equation a bit, but I think that's fundamentally what's going on.

And then I apologize because I don't remember the second part of your question.

It was on pricing.

Does that dynamic, as client growth accelerates and checks per client decline, and I don't think the checks are as big an issue.

But as you do more business with newer clients, how does that affect the pricing equation, if at all?

I think it's still -- the pricing -- we've still had pretty good pricing power.

Now this one, it's still a little early to tell.

We need to get through first quarter to get a sense of it this year, but we've really been able to stay in that range, the 2% to 4% range that we typically talk about on annual pricing, and we're getting it on new clients.

The new clients where you're on a competitive standpoint has been pretty good.

We haven't seen our discounting go up a lot on new sales.

It's been fairly consistent.

So I think there's always competition there.

But, and frankly, if we're getting it from our referral sources, then there's less competition and more just coming with us which gives us even more pricing power.

So on average, for new client acquisitions, we haven't seen a lot of discounting go up much.

Okay, got it.

And then just lastly on the float income, can you remind us how much of the portfolio turns over this year, and the related yield compared to the reinvestment rate assumed in your guidance?

Yes, okay, nice.

That was a very succinct way of putting a lot of pieces together.

So about 15% to 20% of the long term portfolio is going to turn over this year.

I think I mentioned we're at about -- we were at about 1.6%.

We'd probably get somewhere close to that.

Although, I always caveat that, because rates have just been very volatile.

So, as we speak, we're probably in the [$255 million] to [$260 million] range on the 10 year treasuries, and we were up at [3.1%].

But that's a sense of what happens.

And then, David, the other part is that we're typically 45% to 50% short-term.

So essentially that's turning over every day, and we're getting eight basis points.

And I think that our disclosure in the K is that the 25 basis point move is going to create about $4.5 million worth of additional income to the bottom line.

So just one point, not to complicate it any further, but based on where you expect interest rates to be, you can modify the portfolio either longer or shorter.

We're staying a little bit in the middle neutral at this point, because we think that something is going to happen with the Fed some time reasonably soon.

So you're saying that the embedded rate of 1.6% is relatively -- is comparable to what the reinvestment rate right now is on the long term piece?

It's probably a little bit higher, but it doesn't really, it's not going to make a big difference.

And I assume you have some visibility on this, so can you give us an idea of how much the portfolio turns over in FY16?

2016, it's very similar, about 15% to 20%.

It's always around that range.

Okay.

All right, guys, thanks a lot.

Thanks, David.

Next is Glenn Greene with Oppenheimer.

Thank you, good morning.

Just sort of a couple questions left here.

I was wondering if you could give us a little bit of an update on the traction you're getting with short payroll?

Maybe a sense for what the customer growth was out of short payroll this year.

And what your expectations is for industry growth, how that SaaS industry will traction the industries growing out at this point?

And how you did relative to the industry?

Yes, Glenn, we don't -- of course we don't break it out anymore, but we've been very happy with their growth.

Their sales have been very strong, retention has been good, and they've continued to build partnerships as we have with banks for referrals, and so forth, and banks for their white label product.

Which, we actually go into the banks now and have been very successful going in together.

So either you want to give referrals to us, or you white label a sure payroll product for the number of banks.

So we're very pleased with it.

We don't want to break the growth out, because it's becoming more and more of an integrated part of us.

But we're very pleased with their growth, and they've reached some nice milestones this year.

All right.

And then on the margins, the 37% to 38% guide for 2015, down a little bit from this year.

And I think, Efrain, you talked about a few things, IT investment, sales growth of 5%.

The other thing would be, with the reporting change, the change in the HRS reporting, is that a meaningful drag or not too significant, or anything else we should be thinking about as it relates to the margins?

Hello, Glenn.

If I wish I could have just had a one thing when we put out the press release, we couldn't to my indeference to my good friends on the West Coast, we released before.

So they don't have to get up at 7:00 AM.

We probably, in the future, will just simply release the day of, because a lot of notes just had it wrong.

You need to see the schedule, so the point you're making is a very valid point.

The reason why the margins are down is because of the reclassification on the PEO costs.

We are still continuing to leverage.

During next year, it's going to appear lumpy until we get to close to Q4, and then it starts to normalize.

So the answer is no, our margin isn't deteriorating.

It's simply the reclassification of these costs.

Please, if I can --

Can you quantify that?

It might just be simple.

We'll see the schedules, but is that 50 basis points or something like that?

Yes, you're looking at a quantification of about 100 to 150 basis points.

But it will be pretty explicitly stated on the schedule.

And I wished I could just put it all out there, but it was just going to be too confusing.

And for those of you who are -- who have any questions whatsoever, please give me a call or have one of your associates give me a call and I'll walk them through that if you have any confusion on it at all.

And look, we can't have a pre-call to say we had a change in terms of the way we did the accounting, but thanks for asking the question.

And just one more on the share repurchase.

You obviously upped the authorization in May, but would you think you'd be sustaining the same level of appetite to repurchase shares this year as relative to FY14?

And should we see a benefit in the share count going down more so than in 2014?

No.

I would say we're just going to keep it relatively flat, and purchase to offset dilution at this point.

If we make a change there, we'll chat with you.

Okay, great.

Thanks a lot.

Sure.

Next is from Jeff Silber with BMO Capital Markets.

Thanks so much.

I know it's late.

I'll just ask one quick one.

Looking at the client growth acceleration in payroll services, were there any types of clients where you saw faster growth maybe focused a little bit more on your sales effort there?

No, I'd say across-the-board, we had pretty good growth there.

And really, one of the things we forget is we still have an Advantage Payroll base that we purchased back in 2003 that we haven't really been selling, continuing to sell in that market.

That drops off, that continues to just drop off because we're not selling new.

But across the board, whether it's the sure payroll, core payroll et cetera, international, we've had nice pretty good growth.

Some up and downs, but pretty good growth across-the-board.

Okay, great.

Thanks so much.

Welcome.

Next is from George Mihalos with Credit Suisse.

Hello, guys.

Most of my questions have been answered.

But just quickly, if we look at the outlook for HSR revenue growth, the 11% to 14% on an adjusted basis, that compares to the 11.5% that you did last year.

Is all the acceleration an attachment of ACA related products that could potentially kick in?

No, it's not.

It's basically, George, it's just really strength in the HR Solutions portion of the business, and also the other products that we sell.

It's across-the-board, but you'll see the biggest growth part of that is still going to continue to be the PEO and ASO HR outsourcing business.

But 401k continues to grow, and across-the-board and insurance and so forth.

Okay.

And should we be thinking that growth would be a little bit more back end loaded throughout the course of the year, or fairly uniform?

It's a little bit.

George, what I would suggest is you look at the schedule, because you'll see while if you look at our EPS between first half and second half, there's not a huge amount of difference or the implied EPS.

What you can see is the growth is a little bit more back half weighted.

Okay, thank you.

Next is from Tien-Tsin Huang with JP Morgan.

Thanks, good morning.

Thanks for taking my question.

Just on the -- I wanted to ask about the float to income growth.

It seems conservative at flat, given what you showed in the fourth quarter, and how you did better than what you said last year.

Anything unusual there?

I caught the rate commentary you gave to David about how float fund balances would help you get to positive.

Yes, we could get to positive.

I think, Tien-Tsin, what's happening is every quarter when we reinvest, we're looking at a different interest rate scenario.

And I would say, we looked at four different interest rate scenarios last year.

Meaning that what we saw in the market, differed every quarter.

And so we have to make a decision in that quarter, do we go long or do we go short?

And our bias now is to stay a little shorter because we think that longer we're going to see a pop.

That's where we're at, that's what the guidance implies.

Understood, okay.

So obviously, that will be fluid and we'll get updates as we go.

Makes sense.

Then just one more clarification.

Just -- I know there's a lot of talk about PEO.

How does the mix shift to PEO, if that's indeed what's happening, how does that impact your payroll service revenue at all, and does it impact your payroll client count?

Because I'm not sure how those things get treated, if you follow my question.

Good question.

So if we add PEO clients, they are included within our payroll client number.

I would say the numbers weren't big, so don't think what was driving it was PEO.

But I think I'd just use that question to highlight something important.

People think of Paychex as or typically have thought of Paychex as self-payroll and attach ancillaries.

And what's increasingly occurring in the Company is, the way that we capture a client can be through a PEO, sometimes we attach payroll after an HR sale.

It's the breadth of offerings, and that breadth of offerings combined with mobile technology that pulls all of that information together that I think uniquely positions us in the market.

So going in through one single sign on, which virtually no one has, through one integrated suite of products off one database, which is what we have been doing from investment standpoint, permits you to enter either through the PEO, through the ASO, through a 401k, and back into payroll too.

I think we're really uniquely positioned there, so sales are occurring in a lot of different ways.

Understood, it's very clear.

Have a good long weekend, guys, thanks.

Thanks.

Next is Mark Marcon with Robert W. Baird.

Thanks.

Good morning.

How large is the salesforce now?

I think we are over -- feet on the street, over 2,600.

Over 2,600?

And how many are running at typical quota?

In terms of what used to be targeted back prior to the recession?

Well last year --

All of them.

Last year, a lot of them.

Remember that typical quota is going to vary by product.

But if you look at it at the core, I would say we did very well last year.

Yes, I don't think we typically have broken that out or anything.

We've talked around the edges for some people could kind of get to it.

So it sounds like we have enough that are running at that level that it really does necessitate an increase in terms of the salesforce?

Yes.

And we definitely we've, as you know, Mark, we've kept that on the low side of adds.

And then as we saw more productivity, and we saw the execution across-the-board, and the opportunity I think growing, now is the time to add to the additional reps in various areas.

Great.

And then with regards to major markets, how should we think about that particularly given some of the discussions, isn't that an area where we're going to be investing a little bit more?

Yes, we continue to invest.

It's had good investment.

Now the interesting thing is, is that that investment really spreads across.

When I would say, years ago, hey these time and attendance offerings for example, or HR online offerings, are for the 50 plus, it really has come down quite dramatically.

And so we think of the investments, frankly, as almost the entire base anymore.

Maybe not under 5 or under 10 on some, but definitely under 20, you're selling time and attendance solutions.

Whether it's our simple time clocks, or whether it's the new solutions, they're selling a lot more broadly.

So you start with the over 50, but you're definitely seeing it all come down.

The needs are definitely -- and it's because of the simplicity, the integration, the SaaS, and the adoption is really taking it much further down market.

How are you thinking about the upper end of what you've traditionally targeted with regards to majors?

I think we're still -- I think we're doing well there.

And you'll continue to see that the investments we're making will help us on the I'd say [$250 million] to [$500 million] range as well.

I think we're competitive there, but certainly our focus and the majority of the client base has been lower.

And we'll continue -- the things we're investing in will continue to help make us very competitive on the [$250 million] to [$1,000], but I would say primarily [$250 million] to [$500 million], to [$600 million] to [$700 million].

We do very well there.

Okay, great.

And then, so just going back to the margins, so if we were to adjust this past fiscal year under -- where would the margins have been?

The margins would have been between 38% and 39%.

I'm sorry?

I meant FY14 which just ended?

Correct, yes.

If we wouldn't apply a similar treatment to what you're going to do prospectively --

Oh, prospectively.

You'd be -- Mark, you'd be 50 to 100 basis points higher.

So let me explain, because the silence is deafening.

This year, we called out our margins were approximately -- they were between 38% and 39%, about 38.7%, 38.6%.

Yes.

They were 38.6%

If I apply the same logic, so I'm not inflating the top line with the -- not inflating, that's not fair.

I'm not grossing up the top line, I'd be between 50 to 100 basis points higher in prospectively.

Okay.

So in other words, if we take a look exclusive of float, you've basically been running incremental margins north of 50% for two years now.

You're right.

That's correct.

Yes.

What you're basically saying, if I'm interpreting things correctly, is despite the increased investment behind the salesforce and technology, the leverage is still there.

Oh, yes, absolutely.

Other than this change, and so the reality is, we would still see incremental margins that would be in the similar range?

That's correct, Mark.

And to put it another way, this year is going to be lumpy and choppy because we've got these additions to revenue.

Right.

By the end of the fourth quarter -- and by the way, I'd just repeat for those who are still here on the call, there is a schedule out.

Hopefully, it's out by now on the website that details this, and helps you to really refine the model.

But by the time we get to the end of 2015, you'll see that margins start to normalize.

But you're doing it on a higher level of revenue.

You can't get even to the levels of margin that we're talking about if we weren't leveraging, so there's leveraging in the model I guess, and we will continue to do that.

Got it.

And is there an anticipation that in the fourth quarter of next year or in the third quarter of next year, that the add that we had for this treatment that we would end up seeing a higher add?

In other words --

No, no, it levels out.

Mark, and what I would suggest is look at the schedule.

You'll see it, and we can talk about it in detail.

But the first two quarters are where you see most of the revenue add, third you see some, and then by fourth it really diminishes.

Just out of curiosity, why wouldn't you just within your next press release just -- at least until things level out, just include a paragraph where it's like if we had treated things in a similar manner -- ?

Yes, that's good feedback.

We may do that.

By the way, it is in our current press release.

I know, and I appreciated that.

That made it a lot easier.

Yes, we're going to continue to do it.

Yes, it's a good idea.

We'll take a look.

Because I think the biggest thing, as Efrain mentioned, was the margin really it was probably the one thing that's been misunderstood.

It didn't go down 100 basis points or so.

We have not gone down in margin.

It's just putting more revenue up in the top line.

Mark, we'll either put it in or I'll just talk to it.

Yes, because if somebody is just going through the math and just making an adjustment to say the last quarter, the way it looks is if we make that adjustment the 37% to 38% that's being guided to doesn't seem to imply any sort of margin improvement.

Which would imply that your incremental margins are going down, which is something that you're not -- which is clearly not going to be the case.

But again, what I would say is that look at our supplemental schedule that we're posting.

Because you can't understand the numbers without understanding how much in each quarter we're adding revenue by this change.

Great, thank you.

Okay, thanks, Mark.

The next question comes from Michael Baker with Raymond James.

Yes, I just wanted on the new health insurance offering understand if in FY16, could we continue to see some impact as you potentially rollout to more markets, or is this just a one year impact?

Well I think -- you're saying on the PEO piece of this, right?

When you say this insurance offering.

Yes.

I think it's something we continue to look at.

Right now, we have one plan in a major area of our PEO, and we'll continue to look at this from a competitive and opportunity, competitive nature and opportunity perspective.

And there could be more, which could produce more changes, and if that's the case then we'll go through this.

We'll probably get even better at refining exactly what the impact is, but it could.

At this point, we don't plan on it, but we're continuing to look at our markets and find that if it makes sense to do more, we'll do more.

Okay.

And then in the market where it exists, can you give us the underlying healthcare cost trend assumption that you're using for the product?

No, but it's probably close to national averages.

Okay, appreciate it.

Thanks for the color.

One other thing I want to say just to refine that.

That underlying cost trend is going to be a function of your ability to underwrite the people in pool.

So if you're good, you hopefully can beat that trend by getting the right people in your pool, so that's subject to a little bit of managerial effort.

Right.

And just to that point though, you could actually see what we'll call favorable trend as well.

In other words, people are more focused on the risk side of it, but theoretically, at least within the year, you could experience favorable trend and then factor that into your pricing next year?

That's correct.

And obviously, you'll cover the PEO.

That's part of the strategy that you use in a PEO.

Right.

And I guess the other concern that's out there is that because we've seen what can happen to the pure play that's self-insured, there's just that element of uncertainty there.

Is there any potential down the road to like you do for interest rates give at least some sense, and I know there are other pieces because you have what we'll call stop loss or some form of cap on it.

Just to ease some of that, because normally what happens is the concerns tend to creep up what we'll call back half of the year, given some of the [high deductible], and when I mean back half of the year I mean the calendar year.

Yes, I heard what you're saying.

So yes, I think we'll call that out.

Subject to -- there's other competitors in the market, and we try to level set the disclosure we provide on what everyone else is doing.

So, long story short, if we see some trend changes, we'll talk about it.

All right, thanks.

Thank you.

Thank you.

Tim McHugh with William Blair.

Hello, Tim.

Good morning.

It's actually Steven Sheldon in for Tim.

Just wanted to clarify, is the 5% salesforce growth expectation, is that for core payroll or is for that overall salesforce growth?

That's for overall.

Overall.

Okay.

And then I think you said that acquisitions would add less than 100 basis points to overall revenue growth?

Yes.

In 2015.

But just wanted to ask, is there any assumed impact from acquisitions on your margin guidance?

Well, it has a slight negative impact.

But again, I didn't call out either, because frankly, there's rounding errors.

Okay, thanks.

Thank you.

And our last question comes from Ashwin Shirvaikar with Citi.

Hello, Ashwin.

Hello, guys.

Thank you for keeping this open so long.

Most of my questions have been answered.

I just wanted to see, and I hopped off the call for a brief bit, so I apologize if this was asked.

Do you have any clarity on the number of processing days in each quarter for this fiscal year?

Because I know that last year it kind of created some ups and downs.

It did.

It created noise.

I could have done a better job on that one.

But yes, the exact same days.

So there's no date changes.

So on a year-over-year basis, just to clarify, it's going to be the same days each quarter?

Yes, the same days each quarter.

Got it.

Okay.

Well that was the only clarification I had.

I just want to say happy 4th to most of you.

Thanks, same to you.

And to everyone else on the call.

Thanks.

I am showing no further questions.

Okay.

At this point, we will close the call.

We appreciate your participation.

If you're interested replaying the webcast, it will we be archived until August 4th.

Thank you for your interest in Paychex, and again, your participation in our FY14 year-end conference call.

Have a great Summer.

We'll look forward to talking to you next quarter, and have a great holiday weekend coming up.

Thank you.

Thank you.

This does conclude the conference.

You may disconnect at this time.