沛齊 (PAYX) 2015 Q1 法說會逐字稿

Welcome, everyone, and thank you for standing by.

(Operator Instructions)

Today's call is being recorded.

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

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

You may begin.

Good morning.

Thank you.

Thank you for joining us for our discussion of the Paychex first quarter of FY15 earnings release.

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

This morning before the market opened, we released our financial results for the first quarter ended August 31, 2014.

Our earnings release and form 10-Q will be available on our investor relations page at Paychex.com.

This teleconference will also be broadcast over the Internet, and will be archived and available on our website for approximately one month.

On today's call I will review the highlights for the first quarter of our sales, operations, and product development areas.

And Efrain will review our first-quarter financial results and discussion our full-year guidance.

Then we'll open it up for your questions.

We're off to a good start in FY15.

We're pleased with our progress toward our growth goals and we begin the year with momentum in both sales and new product enhancements.

Client satisfaction and retention also remain at high levels.

Payroll revenue is trending well with growth of about 4.5%, due to increases in revenue per check, client base and checks per payroll.

HRS revenue grew double digits for the first quarter as we continue to experience success in selling HR outsourcing solutions to our clients.

Total service revenue grew 9%.

The positive momentum we saw in FY14 in sales execution has continued into 2015 as we experience solid performance in both new sales revenue and units.

Our payroll and Paychex HR services in particular continue to do well in Q1.

We also quickly brought on board the increase in sales reps we planned so that we are fully staffed and have been successful in adding new bank and franchise referral arrangements, in addition to our strong CPA referral channel.

Our partnership between our selling organizations has never been more efficient, as they have moved down-market to be sure our clients are receiving the full value of the breadth of services that Paychex has to offer them.

Our execution and service operations has continued its standard of excellence, demonstrated by strong client satisfaction results and client retention levels that remain consistent with recent highs.

Our innovative leading-edge technology and products, coupled with our exceptional client service, we believe is a differentiator in the market.

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

We have market-leading software-as-a-service solutions, leveraging the latest technologies and continue to invest significantly in online capabilities and mobile applications.

We recently introduced mobile applications for both our Paychex online accounting services and our expense management solution.

In addition, our online payroll application was recently awarded a 5-star rating by a leading publication, the only major payroll provider to receive such a rating.

We completed the acquisition of nettime solutions, a leading cloud-based time and attendant solutions provider, adding yet another powerful offering to our software-as-a-service portfolio.

This acquisition pairs Paychex's exceptional customer service and onboarding team with the SaaS time and attendance technology of a market leader.

In summary, we are off to a solid start for sales, service, product strength, and financial performance for FY15, and I greatly appreciate the work of our Paychex employee team across the country.

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

Efrain?

Thanks, Marty.

Good morning.

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

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

You may remember that during the latter part of last year, we introduced a new health insurance offering within our PEO, for PEO clients and work site employees.

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

This change had no impact on operating income.

This new product offering had an impact on our first-quarter results, since it was not initiated until the second half of FY14.

As Marty indicated, our first-quarter financial results for FY15 represent a strong start to the year.

Here are some of the key highlights for the quarter.

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

Total service revenue grew 9% for the first quarter to $657 million.

Interest on funds held for clients increased 2% for the first quarter to $10 million.

This was driven by a 3% increase in average investment balances.

As I've discussed with some of you, we're getting to the point where we've bottomed out in terms of decreases on our interests related to our client fund portfolio.

Expenses increased 12% for the first quarter, but this was primarily in competition-related costs and the PEO direct costs.

The increase in the portion of PEO direct costs is the result of the new health care offering, as I mentioned previously.

The increase in compensation-related costs was driven by higher performance-based compensation costs, employee benefit-related costs and sales head count.

We talked a bit about our increase in sales head count.

We're up year over year in sales head count.

We continued our investment in our product development in supporting technology, which has been growing at a faster rate than our total expenses.

Operating income net of certain items increased 5% to $257 million for the quarter.

We maintain strong operating margins and anticipate that our full year will be within our guidance range, which I'll discuss shortly.

Diluted earnings per share increased 7% to $0.47 per share for the quarter and net income increased 5%, to $171 million.

Diluted earnings per share were positively impacted by software purchases we made in the first quarter and in fiscal 2014.

On the payroll revenue side, service revenue exceeded 4% for the first quarter, to $413 million.

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

I saw a note that indicated what were checks prepared, but we didn't call it out specifically.

It was about 1%.

As we drift in that range or slightly below, we won't call it out specifically.

So checks per payroll up about 1%.

Revenue per check grew as a result of price increases, net of discounting, along with the impact of increased product penetration.

And as I mentioned, checks per payroll are growing but at a more moderate rate, as we expected.

On the HRS side, HR services revenue increased 17% to $244 million for the first quarter.

The increase reflects strong growth in both clients and work site employees of Paychex HR services, and an increase in PEO revenue as a result of the new minimum premium health care offerings started during the second half of last year.

The increase from the new PEO health care offering represents approximately 2.5% of total service revenue for the first quarter.

Just so you hear that again, increase from the new PEO health care offering represents approximately 2.5% of total service revenue for the first quarter.

On line HR administration products contributed to the growth through sales success of our SaaS solutions.

And retirement services revenue benefited from an increase in the number of plans and an increase in average asset value of participant funds.

Turning to the investment portfolio, our goal as you know, is to protect principal and optimize liquidity.

We are conservative in the way we manage our portfolio.

On the short term side, primary investment vehicles are bank demand deposit accounts.

If you look at the balance sheet, you'll see that we had a fair amount of cash in the quarter.

That's because of timing and we didn't choose to invest all of that and BRD ends in Q1.

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

Our long-term portfolio has an average yield of 1.6% and an average duration of 3.3 years.

I would just say that we are positioned where we want to be to take advantage of rising interest rates should they come at some point soon, hopefully.

Our combined portfolios have earned an average rate of return of 1.1% for the first quarter compared to 1.0% for the same period last year.

That's the first time in a while we've said the compare is positive.

Average balances for interest sum funds held for clients increased during the first quarter.

This was driven by wage inflation, along with favorable trends in our client base, and checks per payroll.

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

It remains strong, with cash and total corporate investments of $956 million.

And no debt.

Funds held for clients were $4.1 billion compared to $4.2 billion as of May 31, 2014.

Funds held for clients vary widely on a day-to-day basis and averaged $3.6 billion for the quarter, the more relevant comparison.

That is a year-over-year increase of 3%.

Total available for sale investments, including corporate investments and funds held for clients, reflected net unrealized gains on the portfolio of $41 million as of August 31, 2014, compared with a net unrealized gain of $35 million as of May 31, 2014.

Total stockholder's equity, $1.8 billion, reflecting $138 million in dividends paid during the first quarter and $38 million of shares repurchased.

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

Cash flows from operations were $263 million for the first quarter, which moderated from the prior year.

Change was a result of fluctuations in operating assets and liabilities, offset by higher net income and non-cash adjustments to net income.

The fluctuations in operating assets and liabilities between periods were primarily related to timing of collections from clients, and payments for compensation, PEO payroll and income taxes.

It really was primarily as a result of timing of a large income tax payment we made in the year-prior period.

It is common for us to have some significant fluctuations of working capital between quarters.

With respect to guidance, we've reaffirmed our guidance for FY15.

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

Total service revenue, as we've previously said, is anticipated to be in the range of 8% to 10%.

The ranges for payroll and HRS is consistent with previous guidance.

Net income growth is anticipated to be in the range of 6% to 8%.

And operating margin and tax rate for the year are expected to be consistent with prior guidance.

And now I'll turn it back to Marty.

Okay.

We will now open the call to any questions.

Operator?

(Operator Instructions)

The first question today is from George Mihalos with Credit Suisse.

Thanks for taking my question and very nice start to the year.

Thank you.

Wanted to kick it off on the payroll growth side.

A 4.5% number at the high end of your 3% to 5% range.

Just curious, is there any reason why you wouldn't be narrowing the range, say to 4% to 5% from the 3% to 5%?

The 3% seems conservative, even if we're only in the first quarter.

Just wondering if you're seeing anything like that.

Yes, George, thanks.

I guess it is a philosophy issue.

I should state what the philosophy is.

What we try to do when we come into the year, is say what do we think the ranges are for the year as a whole, so we don't have to revise every quarter guidance.

We try to call out if somehow a quarter is a little bit unusual in terms of the guidance.

So yes, I would say at the bottom end right now, 3% is pretty conservative.

We obviously started a little bit better than that number, but we still feel comfortable with the overall guidance range.

Okay, great.

Thanks for the color there.

And then wanted to switch gears as it relates to your payroll card program or initiative, the partnership with Skylight that you have.

Any color you can provide there as to demand for payroll cards.

Wanted to get a sense, is a payroll card more profitable to Paychex than a standard check?

I wouldn't say it is more profitable.

It's not necessarily more profitable, because we have a partner, obviously, involved in providing it.

I'd say the demand for it, George, has been consistent but not huge.

I think, we were one of the first to have a payroll card over 10 years ago.

It has a small grouping, those that are unbanked, for example, and so forth.

While we've seen that go up and down a little bit over time, more and more people want one card if their banked.

They want one card; they don't want a separate payroll card.

So I would say that the demand is consistent.

We really like the product that we're involved with now, and think that that may pick up demand a little bit.

But it is one of those things where we just like to offer a full wide range of offerings to the client as to however they want to receive their pay.

Okay, great.

Thanks.

Thanks, George.

The next question is from S.K. Prasad Borra with Goldman Sachs.

Thanks for taking my question.

With regards to your investments and sales force, when do you expect to see the benefits come through?

Is it more second-half weighted?

Or we should start seeing more benefits in the first half as well?

As I said, I think we got off to a good start.

I think the new head count that we've added in the last quarter, I think you'll see more of those benefits the second half of the year, as they get -- We have a great training program, but obviously they get trained, they start building their relationships with CPAs and other channels.

I think you'll see that more the second half of the year.

But we feel like we're off to a very good start.

We continued in from Q4 and feel good about both sales units and revenue from the perspective, particularly, of payroll.

And probably just a follow on, on that.

What's the split between the sales force assortment in payroll and HRS segments?

As far as what the additions were?

Yes.

The additions were a little stronger on the payroll side.

We felt that that was starting to pick up again in the second half of last year.

And so much of the adds -- we don't break it out exactly -- but much of the adds were on the payroll side.

Because we felt we were very well positioned on the HRS services side.

Thanks for taking my questions.

Okay.

The next question is from Smitty Srethapramote with Morgan Stanley.

Great, thank you.

Wanted to get some more color on the PEO segment, how it's tracking.

Maybe you can give us an update in terms of how pricing is developing on the PEO side.

I would say we felt really strong about the last half of the year from a competitive standpoint.

We feel very competitive.

They have done very well with the carriers.

The new plan, as Efrain mentioned, we think has put us in an even better competitive position in the Florida area.

So we feel very good.

The big monster coming in now this quarter is what's coming up for the benefit plans and so forth.

But we feel very strong, fully staffed on the sales side.

A lot of experience in that team.

And of course we offer both the PEO and the ASO versions.

So what's good about the way I believe we offer it is, whatever the client needs to get the most value out of the service we have to offer them.

Feel very good about the PEO side and our opportunity here coming up, particularly this second quarter, as we see benefit plans get subscribed to.

I'd just add, Pramote, that we're positioned certainly as in the market as well as we have ever been positioned.

The addition of the Minimum Premium Plan really helps in Florida.

But we are seeing good demand across other markets.

The only caution or caveat I'd put on that is that third quarter is a big quarter for PEO and that's where you see how much you're winning the battle.

So we feel good about where we started.

Still the year needs to play out a bit more.

Got it.

And just a follow-up on nettime solutions.

Can you just give us some more color in terms of the level of traction that you're getting with that new offering?

Compare that to your legacy team e-product.

And are there any other product sets that you're looking to build or buy to improve your overall product portfolio at the moment?

Right now, we're feeling very good about the portfolio of products.

The nettime was an opportunity that we felt we had.

There was a real market leader there, and that the team would fit very well and would fit into our SaaS products.

We are seeing good traction really out of the gate as we integrate it into our payroll offering, which will come in stages.

And then there is organic growth that we've continued at nettime itself.

So we feel good about their organic growth, which they'll sell directly, and integrating it into our payroll platform.

We've already had a number of sales.

We're training everyone on our team on the product, and so you will see a good combination of sales from the organic and the tie-in to Paychex.

The integration takes a little bit of time, but that will be coming up in the next quarter or so.

So we are very pleased with the product.

The whole management team is in place at nettime.

The leadership is taking a very strong role and is just a great cultural fit with the Company.

We feel very good about where this is.

The legacy product has been very strong.

We had a good strong year last year.

And we will just phase -- the legacy product has a little more, for us, integrated bells and whistles on it, which we're introducing, actually, even this quarter and next quarter.

You will see not only Web-punch online, but complete mobility punch as well.

Time punches.

And so we will still be building on the legacy product for a little bit until we get nettime fully integrated in.

But we're really pleased with the product and everything that it offers.

They had a really nice track record of growing that business over 60% over the last three years.

It's a good example of the kind of acquisitions we like.

Smaller, we buy them to grow them, not for growth.

And good products at good management, and they're off to a good start.

Thanks for that.

One last quick question.

If you can give us an update on the retention ratio, retention rate that you're seeing in your business.

Very similar to last year.

We're really ahead from our perspective on retention.

So very strong.

It probably, still historic best for the Company from a payroll retention standpoint, we feel very good.

So not only are the sales have great momentum but the retention is right up there with our historic best.

And we haven't seen any change in that.

Obviously, big quarters coming up here, with year end.

But so far, we are feeling very good about the retention.

Great.

Thank you.

The next question is from Jason Kupferberg with Jefferies.

Hi, guys, thanks.

I wanted to ask a little bit about new business formation.

Get some general observation from you guys on whether you think we're stable, or is there any improvement there?

I know it is obviously an important source of new sales and growth for Paychex.

So Jason, two answers to that.

It would be great if we had realtime data on what is going on in the economy.

In the absence of that, we've noticed a trend ticking up on our sales to newly-formed businesses.

It seems like over a number of quarters now, we seem to be picking up in that area.

And if you go back a couple of years ago, we weren't seeing that trend.

That now seems to be evident.

It looks like you're getting better business formation.

But of course, we're an indirect -- or our observation on that is indirect.

Our sales to new businesses are up.

Okay.

Is there any way to get a feel, either qualitatively or quantitatively, whether or not that's reflective of any kind of share shift in terms of who is winning new businesses?

Or is there not enough data to really call that out?

There really isn't enough data to pull it out.

It's very difficult to get that granular for new business sales.

I would tend to ascribe it a little bit more to some underlying growth in new businesses.

And then I think we're getting better at execution, too.

I think we have felt good about the win-loss ratio against competitors though.

We are definitely seeing an uptick in the sales from competitors.

We look at it from a net gain from competitors, and we're definitely on an uptick and a positive at this point, as we started to see that the second half of last year, too.

While Efrain is right, we're still not at the full new business creation that we were pre-recession.

It's certainly up, but it's not where it was, based on everything we see.

But as Efrain said, sales to new businesses are up, and definitely the gain from competitors is up.

So we're feeling very good about that.

Okay.

And then on pricing.

Are you still trending closer to the lower end of your 2% to 4% range?

I wanted to get a feel in terms of contract renewals in general.

What percent of those are currently being done with a unit price increase, versus how many are flat and how many have a unit price decrease?

Has there been any change in those relative percentages over the past year or so?

So Jason, so what we've said is 2% to 4%.

I would say we're floating off the bottom of that, a little bit closer to the middle of it.

We do not give uniform price increases, so that's experienced a little bit differently by different customers.

And we also don't have contracts.

One of the things that does differentiate us is that virtually across every single customer that we have, if we don't earn our keep from a service standpoint, you can get to walk without penalties.

We do a little bit of that in the mid market, but that's a relatively small part of our business.

So I would say the pricing environment is easing somewhat.

Yes, we feel good about, now that we're through that first quarter, we have not seen a lot of fallout from the price increase.

And so that's always a good determining factor in that first quarter.

We would see it typically in the July-August time frame, and we haven't.

Okay.

My last question.

Any updates you wanted to provide on the Brazil JV?

Or what's happening overseas in Germany?

And your payment processing offering as well?

I'd say Brazil is off to a good start.

There was a delay in some of the electronic filing requirements that we had expected, the government had put in place.

They delayed for a year, but we're off to a pretty good start.

We don't give exact client growth, but we feel very good about the start that we've had there since January.

And in Germany, sales are above plan.

So they're continuing to do well.

And we're always looking for other ways to grow Germany even faster.

And the other, Brazil as well.

Okay.

Appreciate the comments.

Thanks, guys.

The next question is from Kartik Mehta of North Coast Research.

Good morning, Marty and Efrain.

Efrain, as you look at the results that are reported for the first quarter, would you say, were they in line with your internal plans?

Or were you a little bit ahead of internal plans?

Crickets, right?

(laughter) We felt pretty good about the first quarter.

All right.

So Efrain, the balance sheet looks amazing still.

You have a lot of cash on hand.

Any thoughts as to what you would like to do with that cash?

I know you have a share buyback in place and I'm just -- beyond that.

We do have an opportunity to buy shares back.

We have bought, to date, including last year, about 7 million shares.

We've purchased those significantly below where the stock is trading.

We obviously thought that made a lot of sense.

Where we see opportunities to go in and buy, we will do that opportunistically.

We think that makes sense.

But the other thing is, we have a good pipeline of acquisition opportunities.

We want to keep our powder dry.

We are, as all of you know, we don't tend to do stupid acquisitions just to grow.

And we like some properties out there.

Now whether there's going to be something that we see over the course of the year, we'll evaluate that.

And if we're getting to the end of the year and we have a significant cash buildup, then we'll have to have a discussion with the Board about what the next steps would be there.

And then Marty, on the Paychex accounting online business, how it's progressing, where you are, if you think you need to change the business model at all.

Well, I think the biggest thing we're learning is how to really acquire the clients and get them -- and I guess to even step back farther -- get them to realize it's a great accounting product that we've invested in with CashU.

This has been out there for a while.

It's a strong online accounting product, more of a bookkeeping type of software-as-a-service.

But they still come to Paychex for payroll benefits and outsourcing.

And while the reputation is very strong there, they're not always -- it's a different marketing game to teach them about the accounting or bookkeeping online that we have available to them.

So I think the biggest thing, I wouldn't really change much.

We may get a little more aggressive as far as getting to our own clients in getting them to understand that we have this nice offering that I think is going to be a real benefit and value to them.

So probably more from a marketing standpoint, we're trying to see if we can get the knowledge that it's out there, and that it's us, and it has all of the power, the strength of Paychex behind it.

That's the biggest thing.

Other than that, we're really pleased with the product.

I think we're just finding that the marketing is a little bit different in the approach and so forth.

And we expect that to start to pick up.

Thank you very much.

I appreciate it.

Thank you.

The next question is from Joe Foresi with Janney Capital Markets.

Good morning, this is Jeff Rossetti in for Joe.

Thanks for taking my questions.

Just wanted to see if I could get an update on the sales force hiring.

I know were you targeting 5% growth on the sales force hires for the year.

Just wanted to see how Q1 shook out.

I'm not sure if -- there was confusion.

We're probably more in like the 3% type of growth rate.

We felt very good about that.

We've been fairly flat the last few years.

Didn't grow a lot in the sales force, given the economy and some of the results and things that we were doing in sales.

This year we committed to a good strong 3% growth and that all got completed very quickly.

We hired up between the fourth quarter and the first quarter and we're fully staffed.

A lot of training has already been done, and I think they're hitting the ground running.

So feel very good about that.

We've been more cautious the last couple of years.

This year we started getting back to the old trends of adding 2% to 3% to the sales force in the year.

Just, Jeff, one other add to that.

While, as Marty said, we're going to add 3%, we're actually up over that when you compare where we were in Q1 of last year.

We came in a little light last year in Q1, started the year, built up, and then added 3%.

So we're actually above the 3%.

Okay, great.

And I know you had, last quarter, you had called out some increased investment in the first half of the fiscal year.

You were above your operating margin guided range in the first quarter.

Is there any push-out on your increased investment on the IT side or sales force heading into Q2?

As Marty said, I think we did a lot of the hiring we were going to do on sales force in Q1.

IT will ramp a bit as we progress through the year.

I don't think we're way off what we were expecting.

Okay, thanks.

And one final question.

We've discussed delayed decisions on the health care reform side.

Wanted to see if there was any update on that with clients addressing compliance requirements.

Thanks.

I think, Jeff, we're still getting a lot of interest.

It gets us in front of a lot of clients.

But I think that this quarter, we'll get a better sense of it, again, as the benefit plans -- people come up, some are getting off exchanges.

Some of the smaller clients are going to be moving to the exchanges.

I think we'll get a better sense.

I think we've still seeing a -- I wouldn't say a freeze, but a hesitation to know what to do.

Of course, the delay in some of the requirements for the 50 to 99, the under 100 -- 50 to 100, basically has pushed off that decision for a few more.

We still feel okay.

We've got a very strong health insurance team out there.

They're getting in front of a lot of clients, but we are still seeing a little bit of hesitation, I think.

We got great products to help them monitor whether it applies to them, how it applies to them, give them realtime information.

But we're not seeing a big uptick, at least at this point.

We do expect it will probably pick up a little bit more the next few months.

Thank you.

The next question is from David Togut with Evercore.

Thank you.

Good morning, Marty and Efrain.

Good morning.

Marty, you highlighted an uptick in competitive take-aways recently.

Could you flesh out those comments a little bit?

Why do you think your competitive take-aways are increasing?

It seems that there has been an increase in innovation, generally, across the payroll services industry.

I think we've been a big part of that innovation uptick.

When you think about where we were just a few years ago versus today, online product, very strong, and we are seeing a big push from clients looking for online products.

We have a very good online product; we are continuing to add to that constantly.

And the report writer and report builder products are very strong for us.

Then have you mobility; I think we have the best mobility product out there from a combined product breadth for the clients.

So you can have everything on your -- you can get to one to two clicks, you can do your own payroll.

Your employees use it for certainly their pay stubs and W-2s and 401(k) information.

So I think we've been part of that.

I think that's helped us.

Between that and the great service that we have always been known for, I think has put us in a very good position.

And I think the sales team has really hit their stride in execution, particularly the last half of last year, and then continued into the first quarter this year.

We're just doing very well.

We've also gone after -- not only we've had very good referrals from CPAs over the years, but we have gone after making sure we are getting to CPAs that we hadn't in previous years.

With a lot of work that Mark Bottini and the sales team are doing, with more direct hitting CPAs that haven't necessarily referred in past years, and getting into those.

And the bank channel has picked up for us, as well as franchise referrals.

So we have signed up not only the support of like Subway and Tim Horton's and Yum!

Brands and Midas.

But also from banks, Union Bank and SunTrust, of course, and a number of others we all have strong relationships.

So I think all of that is helping us beat the competition a little bit more than we have in the past.

Along the same vein, your primary national competitor has talked about completing their entire small business base over to a SaaS-based platform by the end of June of next year.

Do you think that will have any impact on your head-to-head competitive success versus them?

You know, I don't think so.

I think for those clients who want a SaaS-based offering, we have a very good one.

And what we, I think, combine very well is the dedicated personal service with that offering.

So you can have a great online offering, and I'm sure our competitors do.

But I think we have an extremely competitive offering that we've invested in for a number of years, and knew this was coming.

And on top of that, have always provided that great dedicated service, very personalized to the client.

And I think that helps a lot.

What we like to show a client from a sales perspective is, if you're getting on with us from payroll, particularly in that under 20 range, look, you can do your payroll on your mobile phone.

You can do it online, you can do it through a payroll specialist.

You can change up, you can call us when you need to.

You always have a dedicated person available to you.

I think that, on top of having the innovation, has prepared us very well, even as clients move to a SaaS-based offering.

We have a very strong one.

A number of our clients, a great number of our clients are on a SaaS-based offering already.

And David, what I would add to what Marty said, is that when a client is interested in payroll and they're searching, particularly over the web, I have said this to many of you, we don't steer them one way or the other.

If what they want is a SaaS-based solution, they want to get up and running quickly, sure payroll is there and they do a phenomenal job.

Not every client wants that.

Some clients want more service.

Service matters, make no mistake about it.

We know that from research.

We know at what size client service matters.

If you leave yourself in a situation where you are only offering a SaaS, you've exposed some vulnerability.

Because clients do value, and are willing to pay for, service.

Understood.

Thank you very much.

Okay, thanks.

The next question is from Glenn Greene with Oppenheimer.

Thank you.

Good morning.

Clean quarter.

Just a few number questions, the first one for Efrain.

On the HRS revenue growth of 17%, could you help us parse the benefit from the acquisition?

And then also the premium health care product, I know you called out what it was as a percentage of total service revenue.

If my math is right, it's $6.5 million of revenue, but what I was trying to understand is what the contribution to that 17% revenue growth in HRS was, along with the acquisition benefit.

The acquisition benefit is negligible.

It really wasn't very much.

So essentially nothing.

On the service revenue, you said $6.5 million.

That's not quite correct.

I said 2.5% of total service revenue, so it's more in the $60 million range than the $6 million range.

Yes, that's what I -- I said, $16 million, I must have misheard.

Yes.

So that was the benefit from the accounting change.

But you restated the prior year, though, too, right?

Correct.

Yes, we did.

So that the growth contribution is less than the $16 million, right?

No, we didn't have it in the first half, though.

No, Glenn, in the first quarter, the numbers include some element of the adjustment.

Because the first quarter of last year as restated, has worker's comp gross.

So the right apples-to-apples is an addition of $16 million for the change.

Okay.

That's helpful.

And then on the margin expectations throughout the year.

You were asked this question before, but obviously typically your first quarter is the strongest.

And you again had another strong margin quarter, not as strong as a year-ago quarter, and you obviously had a very tough comparison versus a year ago.

But how should we think about the seasonal pattern of the margins?

Is the first quarter typically going to be, as it is historically, going to be the strongest margin quarter of the year?

It's typically been the pattern.

It could change in a year, given investments.

But typically we are going to have our strongest quarter in the first quarter.

And then it sort of --

At least the trajectory, the direction, Glenn, is going to be similar to prior years.

Okay.

And then quickly, I can infer from your pricing commentary, and your attrition commentary, it sounds like competitively, you're seeing no change.

At a minimum, you feel at least stable to perhaps somewhat better competitively.

Yes, I would say somewhat better, Glenn.

I think definitely between the momentum of the innovation and the products that we're offering, and the execution from sales, we are feeling better from a competitive standpoint.

So we feel the market, the competitive environment, hasn't really changed all that much.

We feel we're even in the best position we've probably been in, in a long time.

Just to add to Marty's comment, Marty called out the recent review we got for our online product.

We don't highlight SurePayroll's numerous awards.

We win a lot of technology awards.

I think seven years ago, five years ago, we recognized that there were investments to be made.

If you look at the breadth of products that we've got, you look at nettime, you look at myStaffingPro, you look at ExpenseWire, these are all leading products in their respective categories.

So we understand this is a technology game.

We are very, very clear on that.

We also understand, which some people in the market seem to be forgetting, it's also a service game.

And especially in the under 50 space, where we have 94% of our clients, ability to provide service is a differentiator.

While some people don't seem to be thinking it is, we've done the research and we know it is.

So we feel pretty good about where we're at.

Great.

Thanks a lot, guys.

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

Hi, thanks, good morning.

With the checks per payroll growth around 1%, how much of that 1% do you think is mix maybe bringing that down, versus actual hiring trends?

If I give you 1%, Sara, that's an apples-to-apples.

So we have modified the methodology a little bit.

Using our normal methodology and also doing same store, same store for us is about 1%.

If you do it the other way we're doing it, there's probably a 0.2% difference.

It's not significant.

So the 1% probably is -- well, not probably, but is a hiring within the base.

You're seeing really slower hiring than you had been before?

I would just say if you look at our small business index, Sara, we're definitely -- this year has been stronger at the rate of growth and hiring in small business over last year.

Even though it's tempered down a little bit the last three out of four months, it's still stronger than last year.

And it's definitely stronger than our base year for the index, which is 2004.

It's like a whole percent stronger hiring growth rate in small businesses under 50 employees.

So we still think that hiring is up over last year, even though it tempered a little in the summer.

It's still stronger than last year, and we're certainly benefiting from that.

Okay.

And then separately, last quarter you talked about new sales growth being the highest that you'd seen, I think it was in seven years.

Did you see continued momentum along those lines in the first quarter?

Yes, definitely.

Definitely felt that the execution continued.

We're seeing not only good unit growth in the number of sales, but also holding price and gaining in the revenue per client.

So we're seeing very good sales execution, and feel very good that that momentum has continued.

We certainly are looking for it to continue through a big selling season here coming up.

Great.

And then last question I wanted to clarify something from earlier.

The sales force hiring for the fiscal year, you said you have done about 3% so far.

I had thought that were you thinking about planning on doing 5%.

Is the target now 3%?

No, I think that probably what happened there was we're comparing against where we were at a point prior to the year.

Right now, we're about 4%, close to 4.5%, higher than we were last year.

So at the end of May, we're about 4.5% higher than where we are.

We were down a little bit in -- last year, head count, there was a little bit more turnover.

Turnover has come down a lot.

It wasn't super high last year, but it was higher than it is now.

So turnover has come down and we were a little bit low, below where we wanted to be last year at some points of the year.

Where we are now, is besides the new hiring, everything is fully staffed, and in fact over-staffed in a few areas.

Great.

Thank you very much.

The next question is from Jeff Silver with BMO Capital Markets.

Thanks so much.

Sorry, just a quick follow-up on the sales force question.

Assuming normal turnover with sales force, it'll probably stay relatively stable for the rest of the year, is that correct?

I think what we're saying is it would be up.

It will stay fairly stable from now, from where we are now, yes.

That's my question.

Yes.

Okay, great.

And then on the seasonality side, Efrain, I know you called out a few things last quarter regarding growth rates in the HRS revenue and your operating margins for each quarter.

Any changes to that?

Or anything else we need to be aware of on a seasonal basis?

Thanks.

Not particularly.

We'll call out in next quarter's call, if we see any things that are different from guidance.

But, no.

I think the other thing, Jeff, I'd say, is that if you look at the presentation that we posted, should have posted it just recently, we have the supplemental guidance schedule at the end there.

We're still within those ranges.

So if you look at that closely, that's a pretty good guide for where we expect to be.

All right, great.

I'll take a look at that.

Thanks so much.

The next question is from Brian Keane with Deutsche Bank.

Hi, guys.

Just a couple of clarifications.

What percentage of the new sales is going towards the SaaS-based solution versus more of a full-service model in core payroll?

We don't break that out, Brian, specifically.

And it's becoming increasingly difficult to do so.

The reason for that is that not only do we have SurePayroll, but we also have our own online product, which Marty talked about earlier.

If you combine both of those, you're probably up over 25%, maybe even 30% or so, of sales in those models.

That's about as definitive as we can get.

Okay.

And the record sales you guys have seen, does that get us to potentially outside the guided range?

Or are we trending above the range of where we guided to for core and HR?

I'm just trying to get a sense, how does it translate into revenue, if sales numbers seem to be tracking ahead of plan?

No, I don't think we're ready to start changing the guidance ranges.

I would say we feel pretty comfortable that we're well within those guidance ranges.

Build revenue builds over the course of the year, and while we feel real good about Q1, we still have three quarters to go.

We'll get a better picture as we get through the selling season and get some early signs.

Okay.

And last question for me, it looked like finally we turned the corner on interest on client funds.

But expectations, we always get the question on rates and rate increases, just give us an update on that.

Thanks so much.

Our assumption is not much is going to change in this fiscal.

So this fiscal goes to May.

We think the real action starts to occur in 2016.

The Fed has really given a lot of very inconsistent signals.

It looks like they want to raise sooner rather than later.

But our planning assumption is really it's going to be a 2016 event, not a 2015 event.

If they do it, obviously we'll be happy with it, but it's probably a next-year event.

And then just remind us, a raise of 25 basis points, or the impact of the model, so we can get ready for it.

It's between $4 million and $5 million.

That is the Cliff Notes version.

It's a little bit more complicated than that, but that's our disclosure in the Q. It starts to add up in a hurry, if we get what we hope, which is a rise in short-term interest rates, and the long part of the yield curve also goes up.

Okay, super.

Thanks so much.

The next question is from Jim McDonald with First Analysis.

Good morning, guys.

I wanted to clarify, Marty, I think you said something about moving down market with your sales force.

Maybe you could explain that.

One of the things is that we found that in selling, our approach in the past has been, in what we call core payroll sales side, has been very much the selling payroll.

And then the other sales teams would reach in over time, at different stages, to say -- hey, are you ready now for a 401(k), or worker's comp, or health insurance and so forth.

We've made some changes this year in saying that if you're a certain size, that we're coming in now with a combined sales force.

So I guess what I'm saying is, we've moved down in offering the full breadth of our services right up front, in the way we approach a client.

And I think we've gotten some nice traction and good stories on it already.

By approaching a client with multiple sales teams, together at once, if they're let's say, 20 employees, you might go in with HR outsourcing, 401(k) and payroll all at the same time.

In the past our model was much more -- hey I'll sell you payroll.

And then the other teams will come in after you've had a month or two on the service and see if you need something else.

We're finding that the need for those services, I'm sure you've seen this, has pushed down over time with the technology and the number of products available.

We think that this is a better way to capitalize on some of that, is making sure the full need of the client is addressed right upfront.

As opposed to our traditional model, which was selling them payroll right up front.

And I would say one other thing, Jim, is that our sales force execution capability is really, really superb.

And that's helped us to understand the potential of this integrated selling approach.

And it's paying dividends.

And another update on how you're doing in the middle markets, since I don't think we've talked about that much yet.

I think there, we've offered an awful lot of product, so we're combining all of that product.

I think you'll see shortly we're going to brand that whole thing together, because we've been adding a lot of product, as Efrain said.

Mentioned myStaffingPro, ExpenseWire, our own Paychex next generation offerings, our time and attendance now with both our legacy product and nettime.

And we're in the process of being sure -- now we've already been selling it that way, but we're bundling it all together and we will be announcing that shortly, to put a tag all the way around that.

Along with, we've been changing some of the service model there to be sure that when have you multi products from us, that it's handled as smoothly as possible, from a multi-product standpoint.

So mid market is, we'd always like it to be stronger, but it's doing well against the competition that's out there.

Because I think we have a full breadth of product, as well as a great sales team there.

Thanks very much.

The next question is from Tim McHugh with William Blair.

Hi, yes, thanks.

Following up on that last one, are you seeing faster growth in the middle market or amongst your smaller customer base at this point?

Relative to each other.

Relative, I'd say on the small under 50, is stronger.

I think that's the marketplace.

I think that's the economy.

What we're seeing is small business starting to pick up finally.

Still not where it was, but that is starting to pick up.

And that we're offering that approach of -- we've already been offering the larger clients, the 50-plus, the multitude of products up front.

This approach of selling the breadth of our services below 50 on the front end is a newer approach.

I think we're picking up there a little bit faster because of that approach.

Also the referral channels that I talked about, the banking, the franchise, and of course are continuing in the CPA referral model, it's always been strong for us, that's where you see the smaller business growth come from.

Because these are startups or companies that have reached the size that under 50, but that they need a payroll solution.

So I'd definitely say that the under50 is seeing a little bit stronger growth right now.

I think that's more because of those things than anything.

And the change in the PEO business, in terms of the self-insured plans, I get that accounting impact that you described to us.

But is it driving a significant improvement or acceleration in the growth rate of that business as well?

I mean is it also helping unit adds in a big way because it's more attractive to people?

Yes, it's still fairly new to us.

We did it because from the competitive standpoint, we felt that it was worth taking on a little bit more of the risk and so forth, because we had even a more competitive product.

We still have a number of carriers, but this plan, particularly in Florida where it is a very competitive PEO market, I think put us in a great spot.

We'll find out a lot more in the next quarter or so as you get into the true selling season of benefits and so forth.

But we feel very good that that's positioned us even more competitively now in the PEO.

And we also, just add to what Marty said, we really have a terrific PEO team and group that manages that business.

So I think our execution capability, our product capability, have never been better.

Would you, in terms of the comprehensive, I know you report comprehensive HR outsourcing work set employees.

Can you give us a rough sense how much of that is PEO at this point?

How big is that business now for you guys?

It's still relatively, I should say, on the gross-up, I was going to say it is relatively small.

It's still not the bulk of HRS, but it's growing in importance.

You know, Tim, the reason why I give you a somewhat imprecise answer there is that unlike other competitors, we manage our ASO and PEO and this other smaller product we call HR essentials, which is a lighter version of our outsourcing product, together, in one sales force.

We're somewhat still agnostic in terms of whether a sales person sells a PEO or ASO.

It's going to depend on what client needs are.

HRO, HR outsourcing, is the biggest part of HR services, and that's where we're seeing the growth in that segment of the business.

PEO, ASO, for us, they are largely interchangeable, both from a financial metrics standpoint, excluding the gross-up, because that has a little bit of an impact on margins.

But in terms of the offering we go to market, we're willing to sell either depending on what the client wants.

I think the point there, as Efrain is saying, when you look at all of the products combined, that outsourcing of the HR function is a significant part of the HRS business.

I think as we said in the fourth quarter, we don't give the numbers all that probably once a year.

But we service more client employees than any competitor combined, and I think for the most part, probably any two competitors combined.

When you combine PEO, ASO and what is Efrain's -- HRE an essential offering, we're the largest HR outsourcer in that product set.

So we're very proud of that, and that growth is going very well.

Okay, good.

Thank you.

The next question is from David Grossman with Stifel.

Thank you.

I wondered if we could just go back to an earlier question, because maybe I just misunderstood.

But when we look at the growth year over year, of 17% in that HRS line, to get an apples-to-apples number, should we be backing out $16 million of this -year revenue?

Yes, that's correct.

So it looks like then the growth rate was about 10% year over year.

Does that sound right to you?

Not too far off.

Right.

And is that -- I don't know if I've got good comps for the FY13 year.

Is that a deceleration from what we saw last year or are last year's numbers skewed?

It's comparable to Q4 of last year.

Okay.

And then, but the guidance for the year is -- how do we normalize that guidance?

I think we went through that, David.

We have a 16% to 19% guidance range.

And we said about 5% of it is the PEO.

16% to 19% HRS, to be precise.

Okay, got it.

And minus 5%.

So you pick the number you feel makes most sense.

I think the gist of your question, not reading in too much, is that we expect HRS to accelerate as the year goes on.

Right.

And what is the basis for that based on?

Because you guys generally have pretty good visibility in your business, so --

Yes, I think there's probably three things on that.

One is we expect insurance services to accelerate as we go through the year.

That's a function of a number of things, not the least of which is being fully staffed.

And anniversarying some compares in that business that were tough last year.

That's one.

And as Marty said, we've talked a lot on this call, just the growth and the momentum in HR outsourcing services, we think continues to build through the quarters and through the year.

Right.

And on that last point, is there anything we should be thinking about in the context of what's going on, either with the Affordable Care Act or the regulatory environment at large, that would make us more optimistic or less optimistic over the next 12 to 18 months?

I'll let Marty talk to compliance-related products, which is its own set of discussion.

But I do want to clarify that our guidance doesn't assume that there's some material change in what we're seeing in terms of uptake of some of the compliance-related products, which Marty can talk to in a second.

We just are looking at, based on the rate, and on our plan, where we expect to be as the year progresses.

I think in general, David, it's not getting any less regulated.

Everything is getting more complex.

And so, one, regulations aren't going to get any easier.

Health care reform just continues to drive a lot of confusion at all levels as to when it is kicking in, what does it mean for them.

And I think it's probably still pretty fluid from the way things have been.

Second, the technology has gotten a lot better.

The innovation has gotten a lot better.

For example, our products and in other competitors' products, that drive the ability to use HR services online at a lower level of client size, employee size.

And so a lot of that has come down, because the technology and the products have gotten better.

I think that that bodes well for us.

We talk about time and attendance and we talk about HR administration online, products that we have.

These used to be 50-plus solidly, 50 to 100-plus.

They've come down, and many clients are using them now.

And the mobility offerings make it a lot easier as well.

We find that the mobility offerings are being used by clients for everything from their employee contact list, to reviewing an employee's 401(k) with them face to face, just looking at their mobile app.

All that bodes well, I think, for demand for HR online, payroll online, and a lot of the other.

And we didn't even really touch on 401(k), but 401(k) continues to be very strong as well.

And I think the market leaves it always a little shaky on 401(k) on whether to jump in or not.

But we're certainly seeing assets increase.

And our initiative on large market, larger plans, has started to pick up in pace on dividends as well.

And just to build on Marty, I focused almost exclusively on HR outsourcing.

But we also expect that our retirement services revenue is going to build through the year, too.

Right.

And one last thing.

Again, based on a comment you made earlier, is if the quarter came in perhaps a little bit stronger than you had anticipated, and again, that you typically have pretty good visibility on your business going into a year, let alone a quarter, can you help us better understand what the components were that drove a slightly better result than you had anticipated?

David, I think I'd just leave it to say we thought we had a strong quarter, we were pleased with it.

We were happy with what we saw on the payroll service side, and HRS continued to perform strongly.

I'm cautious about getting too granular about projecting Q1 trends for the remainder of the year.

Because, as I said earlier, we try to give annual guidance, and stick with that, so we don't get into a quarter-over-quarter conversation.

The only thing I'd caveat is the selling season is important to us.

It's good to start well; it's much, much better to finish well.

And so we will continue to work on doing that, so we can continue to deliver good results.

All right, fair enough.

Thank you.

The next question is from Tim Willi from Wells Fargo.

Thanks and good morning.

You just touched on it, but my question was about the 401(k) and retirement services business on two fronts.

First was, I remember -- it's probably within the last couple of years there was some shift towards different kind of plans that I think was hurting the revenue growth relative to asset or account growth in that business.

I'm curious if we have cycled through that and there is not any revenue issue relative to account growth or asset values that would have been a headwind like you transitioned through?

And the second was --

Yes, I think, Tim, you might have been -- I'm sorry, go ahead.

And then the second part of the question, if I could, was again, you talked about the confidence you have in that business.

Anything specific to sales or product, or if there are different referral channels that may be more productive around 401(k) and retirement services that you are focused on, or have sort of figured out?

Some opportunities around the sales management referral channels to help that business?

I'll let Marty take the second part.

So the first part, Tim, I think you may be referring to the fact that about two years ago or so, we decided to take a portion of the retirement services sales force and dedicate them to the up market.

When we had did that, we took people who were servicing the smaller market out, and didn't necessarily replace those.

So we had a little bit of a transition in that business as we did that, as the larger market reps were starting to ramp up.

We've anniversaried that.

We think that the larger-market reps are doing a really good job in execution.

It's helped our growth rates in retirement services, and feel that we've got a nice runway in front of us.

We can see that in part by the amount of the growth in assets that hasn't been just market growth.

But it's also been plan growth, meaning more plans and larger plans.

So I think we're past that anniversary.

I will let Marty --

And I think Efrain pretty much covered it.

I think the other thing we were doing was having a team that builds a lot more -- focuses on the relationships with the financial advisors.

I think that that's really starting to pay some dividends there.

That takes time to build that relationship so that they trust us going in to not only a brand new client, but to go with a larger client and a conversion of a larger asset base.

We're really starting to pick up, I think, some momentum there and some trust from financial advisors to not just give us the startups, but the larger clients as well.

And I think to us, that gives us confidence that we're going to see the year either as we predict it, or a little bit stronger.

Great.

Thanks very much.

The next question is from Mark Marcon with Robert W. Baird.

Good morning and congratulations, Martin and Efrain.

Thanks, Mark.

Staying on the 401(k) for a second, so what level of growth should we anticipate, roughly speaking, on retirement services?

Mark, obviously we don't break that out.

It doesn't grow quite as quickly as HRS overall.

But it's a little bit less than that.

Just a little bit less than what the organic underlying growth rate?

Correct, yes.

Organic underlying growth.

Thanks for the clarification.

Yes.

And then with regards to the health care offering on the PEO side, how should we think about the profitability of that?

The profitability of the --

Of the Minimum Premium Plan health care option.

That's an interesting discussion that's probably worth a long, long time.

But for purposes of the financial statement, it's a pass-through.

It's actually a little bit more complex than that simply because you can make some money on the plan.

But what ends up happening is that that just helps you to be that much more competitive in the future and buy down future rates.

But from the standpoint of financial, or financial results, it's largely a pass-through.

Whatever your expenses are, you are not permitted to take a margin on those expenses.

So it sounds like the reality of what we should think about, from an economic perspective, would basically be that 11% to 14% growth, on an underlying basis, is really where we should focus?

That's right, that's right.

Yes.

Okay, great.

And then with regards to the core, really glad to hear about how things are shaping up.

Can you talk a little bit about some of the sales force metrics with regards to both the turnover rate as well as the percentage of sales people that are currently running at your historical quota rates?

They are, one, for turnover, it's a little bit below where we have been historically.

Historical average is in that 30% to 35% turnover rate.

We're at the low end of that range right now.

Now, that can always change.

But for first quarter, it's been very good.

The recruiting, I think, of the new reps has been very good.

So I think we're picking up a very good quality of new reps.

And the training consistently has been revamped and so forth.

I think it's very good execution in the leadership team across the board, from the senior team, right to the district sales managers.

You just feel like a good experience level now in that team, and that they have done very well.

When you look at the metrics, and I think I have said this, the units, what they're selling, the number of units, is good, as well as holding price.

So that, to us, bodes well from an experience level and execution of the rep.

So they are not just going in and selling price and we're getting more units at a low price.

We're getting unit growth and revenue per unit growth.

Again, first quarter.

But we are feeling positive about the execution of that sales team from those kind of metrics.

Great.

And is there a sizable percentage that are now approaching our old historical pre-recession quota rates?

I don't know if I'd go that far.

I would say that from an annualized revenue perspective, they're certainly showing some promise.

But I don't think -- again the economy isn't where it was pre-recession.

Sure.

But I'd say relative to the last few years, and last year where we started to see really the best in seven years, we're still at that level.

So it's definitely the best we've seen since the recession.

And it continues to go up.

I wouldn't say it's right at that pre-recession levels yet though.

Great.

And then one last one.

Marty, with regards to the commentary in terms of the competitive take-aways, I missed that in terms of who that's coming from.

Can you --

No, because I don't think I said.

So you didn't miss the exact things there, but it certainly is the national player, and as well as the regionals, more regional players.

I think what you are seeing is national player, I think what we're doing very well is selling the value of our service, combined with the technology.

That means that they can be online or they can be a SaaS offering that's online, with mobile or full service.

I think from the regional players, what you're seeing is particularly smaller players in the market, they're struggling more with the technology.

They don't have the mobility offerings.

They don't have the online offerings.

These are changing constantly.

We're updating our mobile offerings, probably every quarter, with something new.

And the smaller players just can't -- you just can't keep up with that technology now.

And we are finding that clients are really using it.

At the beginning it was sporadic use.

It's a lot of use now.

Not so much doing your payroll, but for reports, for information or working with their employees on issues.

They're using the mobility a lot.

That's great color.

Thank you very much.

You're welcome, Mark.

The next question is from Lisa Ellis with Sanford Bernstein.

Hi, guys, good morning.

Happy to be joining these calls.

I had a question on the PEO business.

Clearly, healthy growth there.

Can you characterize what, if any, risks you take on as you grow this business?

And what the mitigation approaches are around that?

So Lisa, there's two risks that everyone takes on who's in the PEO business.

It's the quality of the worker's comp underwriting.

And then secondarily, although we have talked a lot about Minimum Premium Plans, we still have a lot of health insurance plans that are not under this cost-sharing arrangement.

In the cost-sharing arrangements, and I should say the risk-sharing arrangements, if your health care book is not what you expected it to be, you can end up with having more health care costs than you gauged.

And same thing with worker's comp.

We use a number of sets of actuaries.

I'm pretty familiar with the underwriting process in both areas.

And we set the probabilities that we will exceed our targets at a very, very low rate.

Meaning, when we ask our actuaries to do projections of what we think the costs are, we are not asking them to do a 95% probability.

Typically we're asking them to set it at 99% plus.

On the worker's comp side we have done that over the years and have had very, very good results managing books, our books of business on the worker's comp side.

And we feel very comfortable.

We have very deep expertise on the health care side, understanding and assessing risks.

In the last year, really built up our underwriting capability and our management capability in the PEO.

So feel pretty comfortable.

Wouldn't go down this route if we didn't.

Is that then the rate-limiting factor on growth in the business?

Given we're seeing healthy growth in the PEO businesses across the industry, and the economics -- coming new into this space -- the economics to you and the economics to the client appear to be pretty compelling.

So I'm just trying to understand really nice healthy growth, but why isn't that faster?

Does it end up being the underwriting component of it that rate limits that?

No, I think it's one element of it.

But Marty faces the decision around how to make trade-offs with investments across a number of different sales forces that are growing.

I would say two or three years ago, people who followed us closely knew we struggled a little bit in the PEO, took a breather, retooled and have really gotten ourselves back in the game.

I think our level of investment in that sales force is commensurate with what we think the opportunity is right now.

One other thing I would add to that is that it's not just PEO for us that's an important element of what we sell in HRO.

But we have a very, very strong ASO business, which is very similar to PEO, but doesn't have some of the risk characteristics that the PEO does.

So we are looking at it a bit more holistically than other competitors do.

Terrific.

And real quick on the core payroll business, you mentioned that you're seeing continued growth in number of clients in core payroll.

I know you don't disclose that on a quarterly basis, but can you bound that?

I know in the past fiscal year, it went up above 1% for the first time in several years.

Are we still running in that trajectory?

Stronger?

Weaker?

So last year, we finished at about 2%.

We're certainly in that range.

Good, thank you.

The next question is from Tien-Tsin Huang of JPMorgan.

Thanks, good morning.

Good results.

Quickly on the competitive take away question, I caught the national and the regional, but what about against point solution providers?

You made it pretty clear that service is still in high demand.

How about the competitive take away versus point solution providers?

Okay, so define your definition, Tien-tsin, of a point --

So I'm thinking about oint, I'm thinking about, call it a payroll-only player or a benefits-only provider, only a 401(k) administrator.

Trying to think about unbundling all of the different HRS solutions out there and seeing if maybe that those are drifting in your direction.

Does that make sense, Efrain?

That makes sense.

And I think that that is -- we tend to do very well there.

Again, I think the demand for the HR, the overlapping services, is pushed down in the market, with the technology and the offerings and so forth.

I think the point service, the point providers as you'd say, I think it's tougher for them, to sell by themselves.

And the better you can integrate that experience, and make it easier for the client, more and more clients need multiple services.

An they're not as interested in -- hey, I'm going to take things from three different providers.

So the key is, okay now, and you can see what we've acquired over the years, we've brought in these great point solutions.

The key is to integrate them as seamlessly as possible from a service perspective for the clients, so that you're adding a lot more value.

They don't have the time or the desire anymore to integrate themselves, the clients, to integrate three different products, I don't think.

So it's all a matter of integrating it in together.

And that's what we've continued to do and will continue to work on.

And Tien-Tsin, in the under-50 space particularly, it may be different in the enterprise space, what one of the many things that clients value in that space is the ability to have one single point of access and access to your data.

So a single sign-on is really, really big.

And then when that single sign-on is coupled with your ability to access all of the different aspects of the data that are you trying to manage, be it health and benefits, 401(k), HR outsourcing, that that's really the compelling proposition.

It may be different in the enterprise space.

Certainly in the under-50 space, they're looking for that integration, as Marty said.

That makes sense.

My only follow-on is just -- I know there's a lot of questions on the 3%, the sales force increase.

But given the single point of access, the sales person is now required to be smart on a lot of different subjects.

Does that change your comp structure?

Or your go-to-market and how you touch the client?

No, not really.

We're very competitive, first off, in the comp structure, and we always made changes to be sure we stay very competitive on that.

But also we are doing a lot of team selling.

The point I was trying to make earlier is that we've come down now.

Where that was always the approach, very much the approach anyway, on the 50-plus, below 50 now and probably even in that 20 and above range, there's a lot more team selling going on.

So we have expertise.

It's not necessarily expecting the rep to know everything, it's saying -- hey, when you used to go in and sell payroll and then your 401(k) sales team would come in a month later, two months later, six months later, now we go in together as a team on a lot of these leads and say, what's the full breadth of what the client needs, and look to sell them up front.

So it is not necessarily requiring a lot more from each individual sales person, but more of a team approach to the way we're selling.

Which seems to be getting some traction now.

I think the market is ready for it.

And I think we will execute it well.

Got it.

Thanks, Marty.

Thanks, Efrain.

You're welcome.

Our final question today is from Ashwin Shirvaikar with Citi.

Hi, Ashwin.

Please check your mute.

I think Ashwin may have left the building.

I'm not receiving any response and I'm showing no further questions.

Okay, at this point, we will close the call.

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