沛齊 (PAYX) 2015 Q2 法說會逐字稿

Welcome, and thank you for standing by.

(Operator Instructions)

Today's session is being recorded.

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

Now I will turn the meeting to President, Chief Executive Officer, Mr. Martin Mucci.

Sir, you may begin.

Great.

Thank you, and thank you for joining us for our discussion of the Paychex second-quarter 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 second quarter ended November 30, 2014.

We will file our Form 10-Q, which provides additional discussion and analysis of our results for the quarter within the next few days.

Our earnings release and Form 10-Q will be available on our Investor Relations page at paychex.com.

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

On today's call, I will review highlights from the second quarter in our operations, sales, product development areas.

Efrain will review our second-quarter financial results, and discuss our full-year guidance.

And then, we will open it up for your questions.

We were pleased with the second-quarter results.

We continue to see growth, and have good progress on our key initiatives.

Payroll revenue continues to advance, as the result of increases in revenue per check and client base growth.

HRS revenue grew at double-digit rates in the second quarter, led by our success in selling HR outsourcing solutions to our clients -- solutions to our clients.

Total service revenue increased 10%.

From a sales perspective, we saw continued progress during the second quarter, particularly in our Paychex HR services and retirement services.

We are fully staffed.

Rep retention and development is on track, and we have continued to be successful in adding new bank and franchise referral arrangements, as well as increasing our web leads in addition to our CPA referral channel.

Our partnership between our selling organizations has never been more efficient, as they help our clients realize the full value of the breadth of services that Paychex has to offer, including our newest offering, StratusTime, the leading cloud-based time and attendance solution in the market, from the addition of our Nettime solutions company acquired last June.

We are also seeing an increase in the sales of our health care reform related product.

We are in a unique position, with both payroll data and insurance agency, to offer our clients assistance and value in understanding the impact and requirements of the Affordable Care Act, and its impact on their business and their employees.

We can bring clients great value by helping them navigate the complexities of the Act, and stay in compliance with their requirements.

From a technology perspective, we continue to focus on bringing industry-leading products and enhancements to the market to meet the growing needs of our clients.

Our innovative -- leading edge technology coupled with our with our exceptional client service, we believe sets us apart in the market.

During the second quarter, we introduced Paychex Flex, a product offering which integrates our leading-edge software-as-a-service platform with our newly expanded service offerings.

Paychex Flex offers powerful capabilities in a simple user experience that responds to the needs of our clients across the human capital management spectrum Our new service initiative offers clients the flexibility of choice for their service needs.

This approach gives clients access to a variety of customer service options based on their size and complexity, including our new 24 by 7 customer service center.

Paychex Flex offers a unique blend of both software and service, and we believe again it differentiates us, Paychex, in the marketplace.

In Q2, we also enhanced our mobile app with the introduction of Paychex Time, a mobile time punch app that offers a quickest mobile punch possible.

This app enables client employees to securely record their hours and avoid time-consuming log-ins.

In summary, we are pleased with continued execution of our sales and service teams, our product strength, and the financial performance.

And I appreciate the great work of our Paychex employee team across the country, and in Germany and Brazil.

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 would like to remind everyone that today's conference call -- during today's conference, we will make some forward-looking statements that refer to future events, and as such involve some risk.

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

You also may recall that during the latter part of last year, we introduced a new health insurance offering within our PEO, for PEO clients and worksite 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 FY15 second quarter and six months results, as it was not initiated until the second half of FY14.

As Marty indicated, our second-quarter financial results for FY15 represented continued progress from the solid start we had for the year.

Here are some of the key highlights.

I will provide greater detail in certain areas, and wrap with a review of our 2015 outlook.

Total service revenue grew 10% for the second quarter to $666 million, and 9% to $1.3 billion for the six months.

Interest on funds held for clients increased 4% for the second quarter, and 3% for the six months to $10 million and $21 million, respectively.

These fluctuations were driven by an increase in average investment balances.

Expenses increased 10% for the second quarter and 11% for the six months, primarily in compensation-related costs and PEO direct costs.

The increase in the portion of PEO direct costs is the result of the new health insurance offering, which accounted for approximately 4% of total expenses for both the quarter and the year-to-date periods.

The increase in compensation-related costs was driven by higher employee benefit related costs, mostly medical costs, along with higher sales headcount, and performance-based comp costs.

We also continue our investment in our product development and supporting technology.

Operating income net of certain items increased 9% for the second quarter and 7% for the six months, to $260 million and $517 million, respectively.

We maintained strong operating margins, and anticipate that our full year will remain within our guidance range, which I will discuss shortly.

Diluted earnings per share increased 9% to $0.47 per share for the second quarter, and 7% to $0.94 per share for the six months.

Net income increased 9% to $173 million for the second quarter, and 7% to $344 million for the six months.

Payroll revenue.

Payroll service revenue increased 4% for both the second quarter and six months.

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

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

We saw a moderation in the growth in checks per payroll in Q2, expect that that will continue through the year.

HRS revenue grew 21% for the second quarter and 19% for the six months.

The increase reflects an increase in PEO revenue as the result of the new minimum premium plan that I referred to earlier.

This represented approximately 7% of total HRS service revenue for the quarter and six month periods.

In addition, we experienced strong growth in both clients and worksite employees of Paychex HR.

All of the metrics, operational metrics on the HRS side are trending very positively.

Retirement services revenue benefited from pricing, together with increase in the number of plans, and average asset of value of participant funds.

Our online HR administration products contributes to the growth through sales success of SaaS solutions.

Turning to our investment portfolio, our goal is to protect principal and optimize liquidity.

We invest in high-quality, low risk instruments, primarily variable rate demand notes and bank demand deposits for short-term funds, and mutual bonds for the longer-term.

Our long-term portfolio has an average yield of 1.6%, and an average duration of 3.2 years.

A combined portfolios have earned an average rate of return of 1.1% for the second quarter and six months, consistent with the same periods last year.

Average balances for interest on funds held for clients increased during the second quarter and six months, primarily driven by wage inflation, together with growth in the client base.

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

It remains strong, with cash and total corporate investments of $928 million as of the end of November, and no debt.

Funds held for clients as of November 30, were $4.0 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 throughout the quarter and six months.

This reflects growth of 4% for both periods.

Total stockholder's equity was $1.8 billion, reflecting $276 million in dividends paid during the six months, and 1.3 million shares repurchased.

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

Cash flows from operations were $405 million for the first six months, a slight increase from the prior year.

This change was the result of higher net income on cash flow from operations, offset by fluctuations in working capital.

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

All of these are affected by cut-offs in a given month.

It is common for working capital to fluctuate between quarters.

Now let me turn to guidance for the remainder of the year.

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

And our guidance is unchanged for the year.

Total service revenue is anticipated to be in the range of 8% to 10%, [but] the ranges for payroll and HRS consistent with previous guidance.

Let me provide additional color on the second half of the year.

We expect that payroll services will be at the very low end of the full-year guidance range in the third quarter.

But in the fourth quarter, we expect revenue to be above the midpoint of the range.

And this really just has to do with the some timing of revenue shift from third into fourth quarter, doesn't affect the year as a whole.

So let me just repeat that again.

We expect payroll services revenue to be at the very low end of the range in the third quarter, but above mid point of the range in the fourth quarter for the reasons that I just mentioned.

We have also updated the supplemental guidance schedule to reflect HRS revenue expectations in the third and fourth quarters, and you will see that those ranges have been tightened somewhat.

These changes, which are modest changes to update the ranges a little bit more precisely, so you can update your models, have no impact whatsoever on full-year guidance.

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

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

Now I will turn it back to Marty.

Great.

Now Derek, we will open it up for any questions.

(Operator Instructions)

David Togut, Evercore ISI.

Do you have any early read on the calendar year-end selling season and client retention?

Yes.

Client retention continues to be very strong, so we feel very good, very consistent with that.

And the early look, obviously you don't know until we're through January, but it looks good to us.

And selling continue to progress well.

It is early, particularly in the small market side, to know for sure.

But I think we're off to a good start through November and December, from what we're seeing.

We've got full rep headcount, we've got turnover pretty consistent to where we want it to be, and we're feeling, at this point, pretty good about it.

What is client retention running currently?

I'd say we're very consistent still, around 82%, which is basically our all-time best.

And can you quantify for us bookings growth in the November quarter?

No.

We don't give that out.

And we certainly what wait until we get through the selling season before we talk about how it was.

We feel pretty good about it, though.

We mentioned in the first quarter that we felt good about Q1.

Q2 was very consistent, from a revenue par growth, annualized revenues sold.

Can you quantify growth in checks per client?

Yes.

Checks per client were under 1% in the quarter.

I had mentioned in previous calls that once we started dipping under 1%, we wouldn't call out the exact tenths of a point.

We saw some moderation in checks per client.

We're looking at it.

It seems to be consistent with what we're seeing and what seems to be happening in the under 50 space, which is around 1%, a little bit under, in terms of employment growth.

But we'll have to see.

It can vary, sometimes, from quarter to quarter.

This wasn't a particularly strong quarter from a checks per payroll standpoint.

Understood.

And then on pricing, can you quantify what the net price increase is running after discounting?

David, I wouldn't go any farther than to say we're still in that 2% to 4% range.

Feel pretty comfortable it's holding.

Don't see any significant issues, there.

Understood.

Just a quick final question.

ADP completes their transition of their small business client base to RUN, they say, by the end of FY15, ending June.

What impact will that have, in your view, in terms of direct head-to-head competition versus ADP?

And if you could maybe frame that in terms of any new products you have in the small business space.

So David, as far as we can understand their strategy, they appear to be, obviously, moving a lot of people onto their RUN platform and also moving a lot of people to an online service model.

That has some strengths and some weaknesses associated with it.

We think there are challenges in the lower end to operate with that model, and we think we have differentiated service that will compete very well.

From a platform perspective, from technology, what they offer versus what we offer in the small market, we feel pretty comfortable we can compete pretty effectively.

And we think we've got the better service model.

Just to add to that, they've been going through this platform change for a while.

And I think we've competed very well.

In fact, if you look at the gain, the net gain from our numbers, we're gaining lightly from them.

We always lose some and take some.

And I think we're still doing very well.

So I don't really anticipate much change there, as well as, as Efrain said, I think we compete very effectively from the product standpoint.

Our SaaS-based products, our online interface and mobility apps, I think, are the best out there right now.

And we just continue to keep adding to them.

Understood.

Happy holidays.

Jason Kupferberg, Jefferies.

Wanted to start with a follow-up question on the checks per client.

I know you said that you expect the slowdown to continue in the second half.

But what's your sense of where it will actually bottom out?

I know it sounds like you're still trying to get to the root cause here.

But do you think it could even go negative?

And anything you can give us in terms of revenue sensitivity, when this metric moves by, I don't know, 50 basis points or 100 basis points?

So checks per payroll, when you start getting down below 1%, there's a lot of variability in that number, and it's affected by the mix of what's happening with new clients compared to other clients that are attriting out of the base.

I think we're reaching some sort of steady- state here, with that number will oscillate between flat and 1%.

That seems to be consistent with what we're seeing in terms of our small business index numbers and seems to be implying -- and you have to be careful, because this is one quarter of data -- it seems to be implying that you're reaching some sort of more moderate state of employment in the small market space.

We had 2 or 3 years of really strong checks per payroll and employment growth in the small business space.

It seems like that's starting to moderate.

The impact on revenue -- so, what I like to say is if you have about a point growth in checks, that's typically going to give you anywhere from 25 basis points to 50 basis points, depending on the mix in revenue.

So it should be relatively modest.

And we should settle in somewhere in that range.

And that would be specifically for the core payroll?

Yes.

It mostly affects payroll service revenue, yes.

But the 25 to 50 bips is specific to that line, not your total revenue?

Yes, that's correct.

I had another question.

But do you want to finish your answer?

So just on the CPA referral channel, I know you had mentioned last quarter that you were penetrating some newer CPAs, but wanted to see if there's any update in terms of latest data on percent of your new sales coming from the CPA network, or what percent of them are exclusive to Paychex for payroll referrals, and is there any uptick in competition for this channel?

I think it's been pretty consistent competition in the channel.

What we've done is kind of change the sales force around a bit to have some CPA-centric reps, so where we have a lot of concentration of CPAs.

In the past, we hadn't done that.

We had been pretty clean on the territory of who owned the territory and everything in it.

So we've added more dedicated reps just to that CPA channel.

I think it's early in that process.

We continue to get a majority of our referrals -- not a majority, a large sense of our referrals from CPAs.

And that's been fairly consistent at times.

I think it's competitive.

I think it's picked up maybe a little bit from a competitive standpoint, meaning from one competitor.

There's really not many that go after that channel.

It's really two of us.

And I think there's probably been a little bit more competition from an incentive to the CPA, I guess I'd say.

But I still feel good about that, and I think we'll have the best sense of that after third quarter.

That's fair.

Just last question, on the margins, ex-float income obviously running around 39% through the first half of the year.

You've got the typical seasonal headwinds in the second half.

I know you're still endorsing the full-year range of 37% to 38%.

But should we be thinking about the upper part of that range being more likely, or does it feel more like a right down the middle sort of year?

It feels right down the middle sort of year right now, Jason.

Okay.

Thank you, guys.

Happy holidays.

George Mihalos, Credit Suisse.

Efrain, I know you don't want to get too specific as it relates to pricing, but I think on the first quarter call, you had mentioned that pricing trends were kind of trending toward the midpoint of your 2% to 4% range.

Would you care to update that at all?

I'd care to reiterate what I said originally.

Okay.

Perfect.

What we see, George, is very consistent, there.

We really feel like we're holding the price and the price increase, and nothing's really changed in Q2 from Q1.

Okay.

And then I know it's early days here in the selling season, but would you categorize what you're seeing so far as ahead of expectations, in line with your expectations?

It's hard to say.

I think I'd say certainly in line, if not a little positive, a little above.

But it's early.

You never know, especially in the small business market.

Because so much of it is done at the last minute and we got a lot of sales in at the last minute.

But right now, I'd say certainly at expectations or a little above.

Okay.

And just last question for me, I just want to make sure I understand it.

The deferment of some payroll revenue from the third quarter to the fourth quarter, can you remind us again what's driving that?

And have we seen that before or is something going on here that's a little different?

So me explain that in two ways.

If you look at last year's results in payroll service revenue, we started the year relatively low, 2.4 accelerated in Qs 2 and 3, and then ended the year at 3. That had to do with days.

This really doesn't have anything to do with days compare.

It's simply that cut-offs in a given quarter may affect where revenue falls the edge of one quarter or another.

We looked at -- there's 14 revenue streams that comprise payroll service revenue.

As we looked at it, our best of estimate is that some revenue that we would otherwise see in Q3, because of timing, is going to fall in Q4 this quarter.

It doesn't always happen, but if you look at the payroll service revenue line over the last couple of years, you see it bouncing up and down, not because it's that variable, but timing can affect it, days can affect it.

And that's why I caution that you really need to look at the year as a whole.

Okay.

Thanks, guys and happy holidays.

Joseph Foresi, Janney Montgomery Scott.

My first question here is, could you give us some sense of what the client growth was like this quarter?

I know you talked about the checks per payroll.

But I was wondering how's that been trending?

Joe, what we said was we had a goal of growing clients 1% to 3%.

We certainly feel pretty comfortable about where we are in that range.

And we got off to a good start through the first 6 months, feel like we're on track in terms of where we expect to be in the year in that range.

Got it.

And then on the year-over-year revenue growth has ticked up over the last couple of quarters.

Can you give us a sense of how much of that is associated with this, I guess, either new business or penetrating your own businesses versus the general macro backdrop?

I think it's probably a little bit of all.

What I'm asked that question, I say we could egotistically say it's 95% execution.

The reality is, you need a better environment.

So the environment is better.

Our execution is better.

Pricing is a little bit better.

And the opportunity in the under 50 space, overall, is better, and we're executing better against it.

So I think it's the mix of all of those issues.

I would say, though, that our execution on the sales side has been really strong.

And it's been strong for a number of quarters, now.

And we feel pretty comfortable about where we are positioned competitively.

Are there any -- I guess, two parts to the last question And then the second part of that question is -- and it's more of a competitive one -- a lot of potential competitors have gone public.

Are you seeing them in the general arena or any change in the competitive environment?

I'll take the last part and then turn it over to Efrain.

We've seen, certainly, some of the more competitors showing up in that mid-market space, in particular.

But I think we're doing well against them.

In fact, they're going to pick off some clients at some point, because they're new in the market and they've got something to show.

What we've done is started to win back some, already, which we think is a very positive thing.

And overall, it's not having any sizable difference to us.

So I think, while they're out there, I think we've invested very well in the past, particularly the past 3 or 4 years, and have rolled out a lot of product now that I think has positioned us very well against competitors.

While they're out there, we still have the widest breadth of services to offer.

And certainly, the best service and service options, along with the mobility.

And when you think about all the interconnection, it depends on the client -- but when you think about all of the service offerings that we have that connect you into a platform of 401(k), payroll, HR administration, time and attendance, et cetera, it makes us a much better, from a competitive standpoint.

Efrain?

I'd say the other thing, Joe, is that we call it out in the press release, while we don't give the specifics, when we get to year-end, you can calculate the number.

We talk about revenue per check.

And revenue per check is a combination of a number of things.

Obviously, it includes pricing.

But I think what you're seeing there is sales to a little bit bigger client on the core payroll side and more sales of precisely the kinds of products that Marty just mentioned to that sales force.

our cross-selling abilities have never been better and our team selling has never been better.

So I think it's all of those working in combination.

And while it's easy to look at just what's happening in payroll service revenue and ignore what's happening in HRS, the reality is that you have to look at both.

And our growth rate is a combination of ability to do both of those things well.

Thanks.

Happy holidays.

Kartik Mehta, Northcoast Research.

Both of you talked about the selling season being good.

And I think you've given some thoughts behind why.

I was wondering, if you look at the fundamentals, or at least the fundamentals you look at to determine if it will be a good selling season or not, how have those trended?

And what are some of those fundamentals that you would look at to predict how the selling season's going to go?

I think, one, at this early stage, obviously you look at submitted.

We don't get into that amount of detail.

But you look at what kind of sales have been submitted already.

And as Efrain mentioned, that's not only payroll, but that's the PEO business, the 401(k) business, et cetera.

Because you get a sense of those a little bit earlier, even in small business payroll.

And things look pretty solid to us.

The other thing you look at is -- it's a little more subjective -- what's the pulse of the sales folks and the sales leadership.

And it's pretty strong right now.

As Efrain mentioned, we've got great team selling going on.

We've got retention in good place.

We've got full reps all out there, all positions are filled.

In fact, we're a little slightly over, so all the positions are up and running.

Leads are coming in very well.

So I think all those early signs, we hate to talk about it until the third quarter's over and you get a sense of it.

But it's a pretty good sense right now of what we're seeing.

And again, you've really got to see January to know.

But it's a good sense.

And competitively, we feel very good.

There's not a lot of things that are popping up competitively that are saying, hey, there's someone out there with a real aggressive pricing, like we've had years ago, that was really taking some share at a very low price or high, high discounting or something.

We're not seeing anything like that.

So we feel we're competing very well and the products are going over really well.

The retention also looks good, at this point.

So you don't know, again.

But again, retention, we're at our best ever.

And that feels good.

Marty, in the press release you talked about the minimum premium health plan, that doing really well.

Is that strictly a reflection of ACA and what your customers are trying to do, or are there other drivers helping that business grow?

Talking about that plan, specifically to the PEO, and we introduced it in the last half of last year, I think what that really implies is the PEO is doing well.

So right now in the marketplace, PEOs have come on very strong.

And we certainly have felt that kind of from the end of last year through this year.

Little slow at the beginning of the year, starting, but we seem to be picking up great momentum.

I think some of, Kartik, is definitely health care reform.

They're looking for the strength of coming into a co-employment position.

But I also think we're having great sales execution on the PEO side.

We also expanded it, so we're selling -- while you still sell the majority in PEO quote-unquote states, we're selling it nationwide and we're getting very good sales execution on the PEO side.

Something we've been in a long time, but we think the product and the sales team are really hitting at their peak right now.

And then just one last question.

Efrain, on the float portfolio, any thoughts about changing investment strategy or any other aspects of it, considering the rate environment?

You know, Kartik, that's a good question.

So our duration now is 3.2 and our yield's about 1.6% on the long end of the portfolio.

You can see, if you look at that line, that we're ticking up gradually.

We obviously invest differently than ADP does.

We don't push everything out longer term.

Look, we have a conversation about that in the spring.

We'll take a look at it.

I don't anticipate any major changes.

We were very, very positive about rate changes 3 to 4 weeks ago.

And now, I'm thinking that while we'll see some rate changes there, they're going to be moderate.

And so you're going to have to think about how you position the portfolio in that environment.

And we may be there for a longer period of time.

So yes, we'll give some thought to that, as we get into the back half of the year.

I don't anticipate any significant shift.

But it looks like we've got low interest rates here for some more time, given the collapse in oil prices.

Thank you very much.

I hope you guys have a great holiday.

Gary Bisbee, RBC Capital Markets.

On the HRS revenue growth, you'd given, and I guess you've updated this morning, this chart of how adding in the new health plan changes the growth rates.

And that chart sort of implied 4% acceleration Q1 to Q2 in HRS revenue.

Is that really why we see the acceleration?

Or is the underlying momentum in the business adjusting out the impact that the revenue recognition change is having?

Is it really picked up momentum?

We saw some improvement in the second quarter.

So we had -- versus first quarter, Gary.

So we had strong performance, literally, against every single product line.

Insurance, which started a little soft in the first quarter for us, had a good quarter.

In the second quarter, we expect that to continue.

So we anticipate that we'll continue to have strong performance through the balance of the year.

So the deceleration implied in the back half is more just how it flows through and then starting to lap some of that revenue being in last year, not anything about underlying --

No, no, no.

Sorry, Gary.

I probably misunderstood your question.

That's correct.

So what happens is in the back half, you anniversary the changes in the minimum premium plan.

By the time you get to the third quarter, you're getting roughly about half of the impact.

And by the time you're in fourth quarter, you've anniversaried it completely.

Great.

And then on the PEO and more broadly, HRS strength, there's several competitors that are public now that we see PEO seems to be doing terrific everywhere.

Do you have any -- and obviously, there seems to be some benefit from health reform.

But do you have any fears that demand is being pulled forward with everyone doing well, or it sets up really difficult comparisons once we get into calendar 2015 and more of the mid-market customer -- they have to be in compliance, and so then you've done that?

Or has this got people really more willing to consider the benefits of this model and you think that the momentum can remain for awhile?

At some point, the growth itself in PEO will slow down a bit.

It's early to talk about where we are in terms of FY16.

But we've had a strong year and a half with respect PEO.

We'll see where we end the year.

Marty was mentioning about sales season.

Sales season in Q3's important for the PEO.

So where we end up there will give us a good indication where we are from FY16.

And I'll let Marty talk specifically about employer shared responsibility, which is also an important component of our thought process.

But it certainly gets the conversation about PEOs going in a way that probably was different than 2 or 3 years ago.

As Efrain said, obviously, when you look year-over-year and when you get into FY16, there will be tougher comparison on the PEO side.

But I think we're still very early stage on health care reform.

As Efrain mentioned, our health care reform product is just starting to pick up steam now.

And we really had it in place before anybody a year ago.

But with all the delays and the changes in the regulations, I think it took awhile while to get going.

But we're seeing a nice pick up now from health care reform, whether it's PEO or not.

And I think this will just add to it.

So I think it's still pretty early.

And I think this will give us some growth, for certainly, for the rest of this year and then into next year.

Great.

And just one last one.

On the strong HRS growth, if we look today versus 2 or 3 years ago, that the mix of what's coming upsell to existing customers who may have already been a payroll client versus new customers that just want these services and you sell them because they're interested in the HRS, maybe more than being legacy payroll.

Has that changed at all?

Or is it really the same mix and sales process that you've been executing for --

It's similar in ways, although I think a couple of things have picked up.

One, Efrain mentioned insurance.

And health insurance has picked up, particularly recently.

And so that's in there and that's started to pick up again.

I think 401(k) was very strong a few years ago, and it's kind of leveled out.

It's got nice growth.

But the fastest growing is HR outsourcing, whether it be the PEO model or the ASO model or our phone support model.

All of those, I think -- the HR support has seen the fastest growth in the last 2 years, anyway.

And that's picked up a little bit faster in the mix of things.

And I think that's just the fact that you've seen HR outsourcing and the complexity of HR come down in the client base.

So where it used to be that was the 50-plus, or at least 30- or 40-plus, that's coming down more and more into where we have a lot of clients.

And so I think we've gotten very good at selling the value of HR support at various levels to smaller clients.

And Efrain mentioned earlier, the team selling approach that we've gone to, which is if a client is of a certain size, we go in with multiple sales teams together on the front end, instead of coming at them after they have payroll, I think has also helped get that growth going higher.

Okay.

Great.

Thank you.

Tim McHugh, William Blair.

Can you update us at this point in terms of how much is the sales force or your sales resources up year-over-year as we go into the selling reason?

And is that a fair bogey for how you think about -- I know you've said 1% to 3% client growth for this fiscal year, but a lot of that was dictated by last selling season.

So I'm trying to get a sense for how we should ballpark what the potential is for this upcoming season, in terms of client growth.

I think, from a sales headcount perspective, I'd say it's up around 4%, maybe 4% plus, a little bit.

So a little stronger than -- we were kind of holding constant for a few years.

Last year we were up a bit.

And this year we went up again across the various sales organizations, around 4% plus, or a little bit over 4%.

I didn't catch the second question, back half of that.

And is it fair to think about the target for client growth would be around that number?

I know you said 1% to 3% for this fiscal year.

But I would assume most of that was driven by last year's selling season.

I would just start by saying, remember that sales team is across all divisions.

So it's not so much on the payroll growth, as we've probably seen more increases in the HRS teams, as well, and also we've moved up some of the virtual sales teams on some of the products, like time and attendance and merchant services and so forth, as well.

So it's a mix across that, Tim.

So I wouldn't say that that necessarily has given you anything on the client growth.

The client growth, we still think we're in that 1% to 3%.

Okay, Efrain?

You fair with that?

Okay.

The new PEO, the new health insurance product, I get a lot of the focus -- there's an accounting impact of just adding that in there.

But how's the client reaction been, as we look back, at this point?

It feels like it's been adopted a little more broadly even than you would have thought.

And I think follow-up is what does that imply?

I think you only started doing this in a few markets, initially.

So do you get more aggressive with rolling this out?

I just don't want to mix up two different things there.

There's the healthcare plan, where we took on more in the PEO.

And that was primarily in Florida.

And that's the market that we're trying it there.

So you're right, there.

We're doing it in Florida.

We're getting good feedback on that.

It gives us more flexibility on the rates the whole process of how we sell and so forth.

We've gotten good feedback on that.

And that's part of our PEO growth, I believe, that you'll see continue.

On the health care reform, specifically, we've introduced the product across the country.

And that's not just PEO, that's to all clients, and it's various products of helping them.

But primarily, helping them understand and give them reporting on the number of clients that they have as full-time equivalents, whether health care applies to them.

If it does apply to them, do they have all of the right things in place, and how are they going to file the requirements of the Affordable Care Act?

So I would say they're a little bit different.

I don't know if you were combining them or not.

But the PEO is going well there, in Florida, in particular, where we introduced that plan.

And then the health care reform products, as we talk about, is really the reporting and the compliance, and that's across the country.

And that's really -- this second quarter just started to really start to pick up some steam, so we're anxious to see how Q3 goes.

I was talking more the Florida product.

What would you want to see to take that more broadly across the rest of the country?

It's just a matter of, can you get the right plans in place and is the risk reasonable for us to take on?

This is where we're taking on more of the risk ourselves.

And we felt it was, certainly, a very big PEO market, when you think of really, 2 or 3 key states for PEO, at least right now.

That was a good one to take on.

It was worth it, because of the size of the market, the number of sales we have there.

And of course, the plan we're able to get and work out through the Florida Blue.

So we continue to look at those all the time, and we're looking that them around the country, as to whether that's the right move are not.

It's the combination of all those things.

Okay.

And if I could slip in one more.

There's, just this week, news of a new legislation around that PEO sector, in terms of having some certification and clarifying some of the tax implications of adopting a PEO, I believe.

Can you give us your thoughts on, is that meaningful, as you think about the growth of that business?

So you're talking about, I think it's called SBEA.

Another great government acronym.

At the margin, it's positive for PEOs.

It recognizes them as an important solution within the marketplace.

There was some ambiguity about how the government was going to look at PEOs.

And we think that it's just going to make the attractiveness of that offering greater in the marketplace.

We're digesting all of the provisions of the legislation.

But we think at this point, our compliance group, legal group think it's going to be a positive for PEO.

Okay.

Great.

Thank you.

Smitti Srethapramote, Morgan Stanley.

There's been a lot of attention on the growth in the FSA and HSA accounts in the US.

Can you talk about what role you expect Paychex to play going forward, whether it's continuing to work with partners, or becoming more directly involved?

And how big an opportunity could this market be?

Yes.

I think FSA has come under some pressure, because of some of the changes on it and so forth in legislation, and the deductibility of it and everything.

I think that's going to slow down a little bit.

I think HSAs will become stronger.

I think that what you'll see there is it gives us more opportunity.

Because I think more health plans -- and this could be through the agency, as well, through our insurance agency -- you'll see more health plans go more toward HSAs.

They're going more toward, obviously, the high deductibles and then giving HSA money to employees.

I think it's an opportunity for us.

I don't know if it's going to be a major impact, at this point.

And I think you'll see us do a combination of -- probably always partnering to some degree with it, because of the back room requirements of it, just make more sense sometimes to partner than to build.

But we've been in FSA for a long time.

I think we'll be able to handle it very well and it will be continue to be part of our package.

Great.

And then maybe just a follow-up on the partnerships that you have developed with companies like Elavon.

Can you talk about how that partnership and payment processing is going, and if there's any other type of similar types of partnerships in the pipeline?

Yes.

I think the Elavon partnership has gone well.

We were a little slow out of the gate on the selling of merchant services.

I think we felt that the field sales would be able to sell that well, and they were first in for some new businesses and so they'd be able to sell it.

It turns out we learned a lot in different trials on that, that it's a complicated pricing structure based on your type of business and so forth and very competitive.

So what we found was we now have the field sales team refer back into an internal team, which we increased the size this year and they're doing very well.

So we've gotten some real traction this year on the inside team that sells basically, virtually.

So the field sales refers it back into and inside team who then talks to the client and sells the credit card, the merchant processing.

And that's started to pick up some real steam.

Now, it takes a lot of clients, given the commission structures there, to have substantial revenue, given our revenue size.

But we do think it's got great momentum, and we're continuing to see that.

So it's been a nice partnership and I think it's starting to take off.

Other partnerships like that, can't think of too many, other than Paychex accounting online.

We've invested with Kashoo in the Paychex accounting online.

Again, a little slow getting going.

I think we're learning lot about the marketing of the product and how to integrate it more into the marketing.

Our clients still view us very much as the human resource outsource, human capital management, payroll and HR, and time and attendance.

And getting them to view us as an accounting offering, as well, with the Kashoo product has been slower than we thought.

So we're learning on that.

But we're always open to that.

And of course, Brazil is a 50/50 partnership with Semco down there to help us get started.

And I think just starting in January, we're off to a pretty good start.

I wouldn't give a client count at this point.

But it's starting to pick up traction, as well, and we feel very good about that decision.

Thank you.

Sara Gubins, Bank of America Merrill Lynch.

I had a question about the new platform.

I had a chance to take a look at it at the recent HR Tech conference and was particularly interested by the flex enterprise platform for larger clients.

I know it's really early, but I'm wondering what the feedback has been from the sales force in early demos, and if you think that that is now fully competitive with some of the more recent entrants, at least, to the public markets?

Thanks.

Obviously, we've been able to show it at some of the shows.

And the sales force is really picking up steam on it now.

We sold another platform for long time, so there was a lot of learning there.

And we've been enhancing it very quickly.

The thing that changes so quickly today is when you release something, almost every month there's a new release that's adding something to it.

And so that's probably been the biggest challenge for the sales force is all the changes to it that we've been adding.

That's a good thing, because it's added enhancements.

Gotten good feedback on it.

I think the clients really like the way it shows.

The user interface is very simple and very direct for them.

We're working on integrating more and more of the other products that we have into that, so there is a full suite of products.

And combined with that great user interface and the mobility platform and multiple products that are going anywhere from recruiting, onboarding, to payroll, to HR administration, time and attendance, all of that's bundled in and we're giving more service options now, between the user interface, the mobility and 7 by 24 client services.

I think the differentiator will be technology to some degree, be it will also be the great service that we can provide that I don't think anyone else is focused on.

So it's getting good traction with the sales force, and we're anxious to see the January results.

Great.

Thanks.

Following up on that theme of being able to do payroll in a lot of different forms, given all of the updates that you've been making to mobile and your platforms, are you starting to see -- or are you continuing to see -- a shift towards more online entry as opposed to phone and fax?

Is there anything appreciable really happening there?

And if there is, do you think that we might see an operating margin benefit over time from that?

I think we are seeing some shift toward that.

And it's interesting, it's particularly -- we just saw a big shift on mobility for the holiday, for Thanksgiving.

You're seeing it around certain times, which is exactly what we'd like, where the client has a choice each and every week or every other week, whenever they do payroll.

They can go mobility this week.

They can go online next week.

They always have their dedicated personalized service to fall back on whenever they need it, and they can just call up and give their payroll over the phone, as well.

So we're seeing some shift.

But the thing that we're seeing that's very positive to us is that clients are using the multitude of options available to them, which is what we wanted to give.

We don't want to force them to online.

We don't want to force them away from a payroll specialist who gives us the great retention numbers that we have.

So I think there certainly has been some opportunities there.

And you'll see us, with our industry-leading margins, you'll see us continue to find ways to keep those.

You may find us reinvesting, as we have the last 4 years, though, right back into technology, because it's going to be this combination of service and technology that makes us successful.

Great.

And then just last quick question.

Last quarter you talked about an uptick in sales to new startups.

You mentioned here continued strength in the under 50, and I'm wondering if that sales to startups continued this quarter?

Yes, it did.

We continue to see a positive uptick compared to last year.

And so we're still seeing -- the new business startups, as you know, I'm sure still are not back to what they were pre recession levels, but they certainly have ticked up over 700,000.

They're just not quite back up from what everything we see, back up over that 800,000 level, country-wide.

So we're encouraged that we're seeing more sales from new businesses.

And that's always been a big part of our business.

So, yes, that has continued in Q2.

Great.

Thanks very much.

Bryan Keane, Deutsche Bank.

Most of my questions have been asked and answered.

But just want to look at the big picture, maybe, Marty.

When you look at payroll services growth and HR services growth, and you look at the guide, is that the right model to growth rates or are you leaving some growth on the table?

How do you think about the big picture as we go out for the next couple of years?

Well, is it the right model?

I think we'll always see the HR service revenue growth growing faster.

And I think that what the good thing is there, Bryan, is that we've got a lot of opportunity, when you think of the penetration rates that we're at.

So even as long as we've been in this business and successful at selling into that base, we still have low penetration rates in a lot of services, right from 401(k) to insurances and so forth.

So I think you'll always see that that growth is higher.

I think the interesting thing, approaching $1 billion in revenue in HRS is really exciting to us and going well beyond that.

Payroll service revenue growth is always going to be somewhat tied to the economy.

But we feel like we're executing well on everything that we can control.

And I think you'll see, frankly, a blending more of that.

It won't be so much about how much is payroll service revenue growth and how much is HRS growth, but how much is the combined service revenue growth.

And we're trying to continue to drive that to upper -- into a consistent upper single digits kind of place to be.

And given that, then keep those margins up and expanding.

And we've got something very unique here.

So we're excited about how we're executing, and certainly about the opportunity in front of us.

What's the acquisition pipeline look like?

And is there any appetite to take on larger deals moving forward?

Yes, there is.

We've come close on a few.

I think the tricky thing is the valuation.

A lot of these things in the pipeline are priced or valued at almost what I would say is a perfect acquisition.

So it doesn't leave you a lot of room for error, in our opinion.

We've been very successful at the product tuck-ins and the acquisitions, like SurePayroll, that we've done.

So we're very careful about what we acquire.

But the pipeline's pretty good.

It's just the valuation's got to be right or we're not going to do it.

But we've got the cash and the flexibility, and I think we got a nice track record of executing.

So we're pretty aggressive about looking at everything that's out there right now.

And would everything be in the HR area?

Or is there certain other verticals that you guys would look at?

I would say, pretty much anything that we're into right now would be in our space.

So anything from payroll to PEO, product tuck-ins.

But certainly, larger deals, as well.

And like I said, we've come pretty close, but the valuations are pretty steep.

And so again, if we don't feel like we can make that difference, we're going to be pretty disciplined in our pricing.

Okay.

That's all I had.

Happy holidays.

Jim Macdonald, First Analysis.

Just a couple of quick follow-ups.

On the HRS growth, if I remember right, the 401(k) restatements may have had some impact in the quarter.

Could you talk about that?

And was it confined to this quarter?

Jim, it's part of your decision on pricing.

HRS was strong in virtually every single line.

You make a decision as to whether you want to take that pricing or not.

But in the 401(k) business in particular, we had higher assets or moved to bigger plans.

And that certainly played some part in it, and will continue to play a part for the remainder of the year.

But that's not the sole thing driving growth in that business.

I was trying to figure out if that was a little more than normal this quarter.

It was a little bit more than normal this quarter.

But again, 401(k), part of the way that we make money in that business is a number of different streams, and all of them were up.

Great.

And another follow-up.

On the new Flex product, could you talk a little bit more about what your primary -- or where you think it will sell the best, which size range of customer?

Yes.

I think we're seeing mostly anywhere from 20 and up, 15 to 20 and up, is probably going to be seeing that the most.

This is where -- the good news is, I think that's probably even lower than we had expected for a full suite of the products.

Now Flex can encompass as little of payroll and as large as the entire suite.

And so I think that -- but overall, when you see multiple products being purchased as a bundle, it's in that 20-plus, which is I think a little stronger than we expected.

And I think that that's because, again, the market's changing and things are coming down, the need for HR administration, time and attendance, particularly as the technology's made it better.

We just introduced Paychex Time, which I mentioned.

And here's a mobile punch that now allows you to go in and punch and actually keep the punch, keep your time open on your mobile phone for up to 72 hours.

So you don't have to log in again, get into your mobile app as an employee and then punch in.

You can actually leave it open for multiple time periods.

As that stuff gets easier and easier, we're finding smaller businesses are finding big benefits and we're able to sell them on the big benefits.

So we're excited about Flex and the fact that it bundles all this together, along with the service options.

It's appealing to 20 and above, but certainly has some -- it certainly fits even below that.

Great.

Happy holidays, guys.

David Grossman, Stifel Financial.

Just a couple of very quick follow-ups.

I was just wondering, I assume you track -- or some kind of tracking of revenue per client.

And I'm wondering if you could help us understand how that has been trending, given all the changes in the underlying services and some of the enhancements to the product that you're making, to accommodate a bundled type of sale?

Yes.

It's been trending positively, David.

I think that what Marty was saying earlier about team selling and cross-selling, I think we've just gotten much better at understanding what a client's needs are, based on size, putting the right set of solutions in front of them.

And because we have breadth of service -- I'm sorry, breadth of product offering that's pretty unrivaled, we can typically get a client the solution they need from the first instance, which is a little different than what we were doing probably 4 or 5 years ago, where we would wait for payroll and then do the sales sequentially.

So,, I'll wait till the end of the year to quantify it, but we're pretty pleased in term of the revenue uplift that we've been getting per client.

So what that implies is that the game no longer is just simply get units and then add ancillaries, which is what we talked about 5, 6 years ago.

It's really get the revenue on initial sale for the right kind of client.

And we're executing pretty well against that strategy.

Is there any way you can disaggregate how much of that phenomenon is contributing to your growth rate?

And I guess, on the same line, can you help us understand the margin profile of those clients versus what they look like historically, where you would go in and sell payroll and other services on top of it?

So margin profile is not significantly different than what we've seen historically.

And if you go back 4 or 5 years, our operating income net of flow was about 400 basis points lower than it is right now.

So we obviously have been able to execute that strategy and grow margins at the same time.

That's one.

To disaggregate it, I need to give you year-end client data and then you need to compute what average revenue per client is.

So you can get a sense of that, if you do that analysis from last year.

I won't -- we'll probably update that at the end of the year, but we're getting a pretty nice revenue uplift.

And the issue is that we think we can continue to execute that strategy into the future.

And maybe just a related question, as it relates to the margin.

As you think about these acquisitions that are out there, and I know valuation is a separate issue.

But as you think about that, as well as some of the enhancements you're making to the platform and some of these newer segments that you're going after, is the Company, perhaps, thinking more holistically about the margin in terms of that balance between growth and margin?

Or has there really been no change internally about that?

Sure.

I think we're always looking at -- we're trying to get that upper, consistent upper single-digit growth in the top line and continue to be very shareholder friendly on the bottom, and so have the high margins.

But it is a balance.

If we see a good opportunity to drive growth that might hurt the margin a little bit, then we're not going to hesitate to do that.

It's always going to be a balance, though.

We want to drive both.

But if in the short-term, it hurts you a little bit, I think we're willing to be able to do that.

So we're investing -- what we've been very successful at over the last, particularly 4 years, is driving margin improvement and also investing very heavily in technology.

And I see it along the same lines.

We drove costs out of operations, who got very productive, tried new things, and still got us a great client retention and satisfaction.

And we funneled those dollars into technology, where we were behind 4 or 5 years ago, and put us in a great spot from a technology position now and the competitive situation.

So we'd see the same thing with an acquisition.

If we're going to take it and it takes on some additional expense, where else are we going to be able to cut, to be able to offset it?

Right.

And just one last thing then.

Going to the international expansion, this has been a long road for you guys, starting in Germany years ago.

You now have this joint venture in Brazil.

Are you getting any more encouraged or less encouraged about the ability for the model to be expanded outside the US?

And could you share any insights into where your heads at in terms of taking this into other geographies?

We'd like to -- as a team, we talked about the strategy a few years ago and decided, hey, look, let's try to pinpoint 3 or 4 countries, tops, let's get it growing.

I think there wasn't a focus on it for quite a while.

It was kind of a nice idea, but was not always a focus.

We started focusing on it.

We've really doubled the size of Germany through acquisition and through additional sales people.

So we're pretty encouraged there, and think that there's still opportunity there.

But it has moved slower than we expected.

But frankly, the culture is slower to still outsource than we had expected.

So we feel pretty good about the fact that I think acquisitions are opening up, as well as the opportunities for sales there.

In Brazil, having only been there less than 1 year, really, I think we've learned a lot.

It also a little bit slow to come out from the CPA or the client doing it.

So we've worked a very good process in with becoming the CPA's back room.

I think that's brought down the revenue per client less than we expected, but it's helped accelerate the growth in blocks.

So you go to a CPA and you take their business, you build credibility with the CPA.

then we'll move into the direct sales to the client, because we'll have market share and credibility.

And that's actually picking up some nice traction.

And Semco has helped.

I think knowing Brazil and partnering, that was a different approach than Germany, where it took us a long time because we did it ourselves.

And then we're still looking at one or two countries where we can get in either through acquisition or startup, primarily probably through acquisition.

And we're trying to build it to where it's meaningful to our revenue, which is difficult, given where we're growing.

But I still think it's a nice opportunity.

Very good.

Thanks for that.

And have a very nice holiday.

Jeff Silber, BMO Capital Markets.

I know it's late.

I just wanted to ask one question.

Efrain, I think you had mentioned earlier the potential impact of oil prices on your thoughts regarding interest rates.

Is there any other impact, potentially, on the rest of the business from the decline in oil prices?

No.

I highlighted that because, obviously, it's had an impact on the Fed's thinking around interest rates.

I was just reading an article before the call around what they expect to see, in terms of consumer uplift.

It's hard to peg any of that to have a direct impact on our business.

So no, it shouldn't have an impact.

We're hoping that it brings up, at least in the short term, some consumer confidence, which gives them some discretionary income to spend and might bring small businesses up.

Plus it's going to help small businesses a bit, as it works through, depending on the business.

And so hopefully, it has some positive impact, but we haven't seen too much, yet.

And do you have any specific geographic exposure to the states in the US that have a lot of energy production?

We're seeing, overall, from our small business index, we are seeing that the central part of the US is where we're seeing the best small business job growth, because you're seeing increased jobs in the drilling and fracking and so forth.

And that's the central.

It's anywhere from Texas to North Dakota.

So it's interesting that they're having the best job growth right now, where the coasts have calmed down some.

But I wouldn't say it's had any dramatic effect, but I think it's been a positive, but mostly in the central US.

I was actually looking at it from the opposite perspective, with the decline in oil prices, if you've seen a slowdown in job growth there?

Not that we've seen, no.

We have not seen that.

Good to hear.

Thanks so much.

Happy holidays.

S.K. Prasad Borra, Goldman Sachs.

Firstly, how should we think about revenue per check?

And probably just following on one of the earlier questions, when you think about it, it is dependent on pricing, but also the kind of product portfolio you have.

What is the price differential between the most basic versions of products which you're selling compared to a full-blown out version?

And what kind of penetration levels do you have, like, let's say, put 100 figure to the most basic product to, say, 20% or 30% penetration of the full portfolio?

So if you could give any numbers around that, that would be helpful.

S.K., I think the best way -- let me start with the end and then come back to revenue per check.

So obviously, we think that revenue per check has been going up and will continue to grow.

If you look at each of the product lines we have -- and I say this frequently, Marty does, too -- that we have about 10%, on average, of the base penetrated right now.

That's what's generating the HRS revenue.

So I'll let you figure out in your model what that equates to.

But certainly, we think 10% is pretty underpenetrated for the base.

And there's probably multiples of that kind of opportunity that exists within the base, ignoring whether you get growth in the base, which we think we'll get, over time.

With respect to each of the products, it really -- it depends on the product.

When you attach an HR outsourcing solution to a payroll client, you're getting multiple Xs of that payroll client's revenue.

And that ranges anywhere from 1X to 2X on a 401(k) plan, as I said, to multiple Xs of that payroll revenue in an HR outsourcing solution.

So it really will vary, depending on where the opportunity is and the rate of penetration by products.

But we think we still have a long way to go in terms of getting to a point where we've saturated the base with the suite of products that we have.

Okay.

And just one other question.

For the last few years, you have been excessively reinvesting in products, and the point which Marty was mentioning about continuous investments in technology.

And this year, you invested quite a lot around sales and marketing.

So when do you expect a more normalized investment year?

Is it going to be FY16, FY17?

Any views on that?

I think you'll always see some growth from a sales and marketing perspective, just to keep up with the competitive environment.

It's fairly normalized.

It wasn't a huge increase in sales and marketing.

But I think when things are at a normal pace, we typically trying to grow the sales force by 3% or so.

From a technology standpoint, the increase, the level of increase has slowed.

And I think it'll be -- while you can always spend millions more on technology, I think we've got a great product portfolio and road map that we invest in and have tried to slow down the increase of spending, but the level of spending will probably stay relatively the same.

So I think we're in kind of a normalized -- we're heading into a normalized period right now.

Thank you.

That's pretty from my end.

Mark Marcon, R. W. Baird.

Couple of quick questions.

On the PEO side, when you're getting new clients, are you typically seeing brand new clients to the overall solution, or how many of the new clients that you're getting are competitive takeaways?

How would you describe that?

I would say it's kind of 50/50.

I think we're selling into the base, as well as brand new clients on the PEO concept.

So I'd say it varies month to month, but probably around 50/50 is fair.

I think we're putting a little bit more emphasis on brand new clients, because I think there's a real opportunity out there.

I think our sales force is executing well and really can sell the benefits of the PEO to a brand new client.

And it's part of, as Efrain's mentioned a number of times, this kind of team selling.

So you don't necessarily have to go in and just sell them payroll, our old model.

It's selling them a complete suite, if they need it and value it.

And so you'll see us focus probably some reps just on PEO selling outside the base.

Great.

And obviously, there's a couple of states that are well penetrated.

In terms of outside of those core 2, 3 states that are really well penetrated, are you seeing an increasing level of acceptance of the PEO concept?

Yes, and I think this legislation that Efrain mentioned earlier may accelerate that a little bit, too.

But I think so.

Where it's typically Florida, Texas, Georgia.

I think even New York now is starting to pick up, and some other states that we really haven't seen that much growth before.

So I think there is more acceptance.

And I think the legislation will make that even better.

Great.

And then on the competitive takeaways, on the PEO side, what's the primary reason why somebody would come to you from a competitive perspective?

I think the insurance plans that we have, as well as the service and then the technology of the product that you have.

And I think when you look at a few of us that are in the PEO business, there's only a few that really have that wide breadth of it.

Also, you've really got to count on somebody large and I think sometimes people go into these -- there's a lot of small PEOs, and I think clients go in there thinking they're going to get something that in the end, they can't provide from a service and technology perspective and just a safety, I guess, I'd say of the insurance plans.

So I think it's a combination of product offering, technology, service, and strength of the company behind it.

Great.

With the supplemental schedule that you provided, when we take a look at the fourth quarter number for HRS, do we have a full comp in in terms of the insurance, so that the fourth quarter is indicative of the longer term growth rate to expect out of HRS?

Okay.

You were good.

You had me until that last statement.

So I can't give you next year's guidance.

But Q4 certainly is indicative of a full compare.

I would hesitate, Mark, to say that, simply because we've been having a very strong year in PEO.

When we do our plan, we'll figure that out.

I don't anticipate it will be quite that strong.

Okay.

But we do have the full compare, in terms of the insurance plans.

But the factor to think about is that even though Q4 has that full compare, we're then going up against a really strong year, and so therefore, there should be some -- But let's say that we end up being 100, 200 basis points lower than that fourth quarter number.

Does that seem like a pretty good, long, sustainable --

Mark, so my answer, [eudophorably], is that we target around double-digit for HRS.

And year-to-year, that can vary a little bit.

But that's what we're trying to get to.

Got it.

And then you said something interesting on the core payroll side, which is that you are already starting to see some clients come back to you from some of the newer solutions.

Can you give a little more color around that?

Yes.

I think what we've seen, it's a small sample set.

But what we've seen is the service model being probably the biggest impact.

I think what's selling some of the new companies that have come out is user interface and technology might look good to them.

The service model has not been as complete or as strong as, I think, as they expect.

Some clients see services possibly a commodity, as they're going in.

And it doesn't turn out to be that way.

When you think of the breadth and experience that Paychex has versus some of the startups and the rate that they're trying to grow, you're going to have service issues.

And I think that's been the primary thing that's driven them back to us.

Great.

And then on the new clients that you're getting, are they typically on the smaller end of your range or the higher end or your -- and I'm talking about on that under 20 core side?

It'd be over the 20.

It'd be more in that mid-market space, anywhere 20 to 200, really.

Oh, I wasn't referring to the ones that are coming back.

I just meant in terms of the overall client growth that you mentioned the 1% to 3%.

The market's skewing smaller.

And what I meant was, is it relative to where it's been historically, is it skewing even smaller?

I can't really answer that specific question.

But it is, in general, smaller.

Okay.

Great.

Happy holidays again.

[Alyssa] Ellis, Sanford Bernstein.

If I unpacked the accounting impact, it looks like you're underlying apples to apples margins are trending up.

Is that accurate?

And can you give some color around that?

They trended up from Q1, Lisa.

But I think I was asked earlier where are we in guidance range?

We still think we're solidly in the middle.

We'll see.

We'll update it as we go through quarter to quarter.

Terrific.

Just a follow-up on the competitive environment in the small business base.

You gave a little bit of color earlier around Kashoo and Paychex online -- sorry, Paychex accounting online, as well as your net win backs that you're seeing from some of the new entrants.

Can you specifically give some color around Intuit?

They've been pretty aggressive in a lot of their earnings calls talking about their traction in payroll.

I'd be curious to see your view on that.

We have not really seen losses to Intuit.

In fact, we've seen, as we've dug deeper into some of the gains, we've been gaining some from Intuit on a net basis.

So we haven't seen a big impact there.

I do think they go after a little bit different market.

While people always think that they may be taking share from us, we don't see that.

We do see they compete more with our SurePayroll brand and company.

And SurePayroll is still doing pretty well.

So they still have double-digit client growth and so forth.

So I think they're still doing well and we haven't seen a big impact from Intuit.

So they may be getting it more from those who are manual and moving to a software, which is what we see happening with SurePayroll.

Terrific.

Thanks, guys.

Happy holidays.

Tien-tsin Huang, JPMorgan.

I'll be quick.

I know it's a long call.

So just clarifying on the PEO front.

I'm curious, have you changed your sales philosophy at all with respect to pushing or promoting PEO?

It sounds like you have.

I believe you sell both PEO ASO together.

Has that changed?

No.

Not really.

We do sell them together.

I think I did mention, though, that we do think that there is a growing opportunity for the PEO.

And so we are going to look at -- we are adding some reps that are just PEO-centric, so just kind of dedicated to the PEO.

But we're still, the vast majority are still selling both products, because we still think we've seen good opportunity in both of them.

Okay.

Thank you for that clarification.

So just the new folks that you're bringing in are dedicated to PEO.

Got it.

And then just another clarification.

Forgive me if I missed this.

On the HRS guidance in the slides, where you show the third quarter, fourth quarter guidance.

It looked like it changed a little bit.

What is that?

Is it just a math kind of thing?

You know what, Tien-tsin, so what ended up happening when we issued the guidance at the beginning of the year, the attach rates on healthcare influenced the ranges.

That's really basically what's going on.

So we looked at where we expect to be in the third and fourth quarter and just wanted to tighten the range, so that the midpoint, obviously, is where we think we're going to end up.

But that could vary, because attach rates on healthcare can change quarter to quarter.

It's really -- we're being punctilious on our guidance.

Nice.

I like that.

Well, that's all I needed.

Have a safe year-end, guys.

Thank you.

For our last question, the line comes from the line of Mr. Matt O'Neill of Autonomous Research.

I was just curious, going back to the 1% to 3% client growth, how you guys are thinking about that?

It sounds like you answered it already in that the SurePayroll is still growing double digit.

Just as far as the mix as a source.

We don't really break it down, I think.

We're seeing growth on -- from both of us.

They're a little bit faster.

Remember, they're a much smaller base from where they're coming from.

So we're seeing growth across the board, really.

Got it.

One last follow-up, if you don't mind.

I was thinking through the profile of the clients that roll out of the Paychex business versus the new class of clients that come in every year.

Is that profile in aggregate different?

Is there anything to think about a client that's leaving the business versus the new client that's coming in?

It sounds like maybe a little bit on the average number of employees trending down a little bit.

But aside from that, are there any bigger differences to think about conceptually?

No, not really.

We track to the last penny the revenue we lose, the size of client, what products they have.

And it really hasn't changed much.

Okay.

Thanks very much.

Have a great holiday.

And as of this time, sir, there are no further questions.

Okay.

Thank you.

We will close the call.

If you're interested in replaying the webcast, it will be archived until around January 19.

I thank you for taking the time to participate in our second quarter press release conference call.

We're excited about year-end, a great time for opportunity to show our clients what we bring them from a service perspective as they close their year, many of them.

And certainly, a big time for us in the selling season, and we're excited about all the work that our Paychex employees are doing.

With that, we wish you all a very happy holiday season and thank you for joining us.

Take care.

Thank you.

And that concludes today's conference.

Thank you all for joining.

You may now disconnect.