沛齊 (PAYX) 2015 Q4 法說會逐字稿

Good morning.

Welcome and thank you for standing by and welcome to today's conference call.

(Operator Instructions)

Our conference is being recorded.

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

I will now turn our conference over to our host, Mr. Martin Mucci, President and Chief Executive Officer.

Sir, you may proceed.

Great.

Thank you.

Thank you for joining us for our discussion of the Paychex FY15 year-end performance.

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

This morning before the market opened, we released our financial results for the fourth quarter and fiscal year ended May 31, 2015.

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

The earnings press release is available by accessing our Investor Relations page at paychex.com.

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

On today's call, I will review the highlights of the fourth quarter and FY15 in our operations, sales, and product development areas.

Efrain will review our fourth-quarter and FY15 financial results and discuss our FY16 guidance and then we will open it up for your questions.

We are pleased, very pleased with our solid financial performance during FY15.

Our results met the guidance that we have been providing throughout the year.

We also achieved two key milestones this year: both our Human Resource Services revenue and our operating income exceeded $1 billion for the first time in our Paychex history.

Efrain will talk about our financial results in more detail; however, I'd like to provide you with some highlights.

Payroll service revenue continued to experience steady growth of 4%, driven by increases in revenue per check and client base.

HRS revenue for FY15 benefited from strong demand for our comprehensive human resource outsourcing solutions, both PEO and ASO, which drove double-digit growth.

Our payroll client base finished the year at approximately 590,000 clients, an increase of about 2% from the prior year.

We achieved good sales and retention results for our 401(k) product, and once again, we were recognized by PLANSPONSOR Magazine as the largest 401(k) record keeper by number of plans for the fifth consecutive year.

Sales execution during 2015 was strong, with significant growth in our new annualized revenue sold.

We did a great job with our team selling approach, which sells the full value of all products to the client upfront.

In addition, our referral pipeline is strong.

We have had success in adding new bank and franchise referral arrangements, and increasing our web leads, in addition to our strong CPA referral channel.

Client service is imperative for our success, and we again excelled in FY15.

This service is delivered through a combination of innovative technology, driven by SaaS solutions, accessed online, through our mobile app, and through the support of our dedicated service specialists, that sets us apart from our competitors.

The value of our solutions and service team, including our 7 by 24 support, resulted in consistently high satisfaction scores, and our best year ever in client retention, in excess of 82% of our beginning client base.

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

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

This includes Paychex Flex, which offers powerful workforce management capabilities in a simple and streamlined user experience.

Paychex Flex couples this with the flexibility of choice for our client service needs, and this approach gives our clients access to a variety of customer service options based on their size and complexity.

Our mobility app also continues to see a fast-growing number of users, both clients and client employees.

On Monday, we announced our Paychex Flex hiring offering, which gives clients a simplified recruiting process with automated job opening, posting, and administration, as well as an ability to onboard new clients in a paperless, electronic environment.

Collecting all new information electronically and populating the data into the employee record fully integrated with our Flex offering.

This continues to enhance the powerful human capital management solution that Flex brings to our clients.

We are also pleased with the market acceptance we are seeing for our new full-service product that helps clients in navigating the complexities of healthcare reform.

We have the ability to leverage our payroll data and our relationships with nationally recognized insurance agencies to offer our clients assistance and value in understanding the complexities of the Affordable Care Act and how it impacts them and their employees.

We have continued our shareholder-friendly actions, maintaining a very competitive dividend yield, with our current quarterly dividend at $0.38 per share.

We have also continued to repurchase Paychex stock and acquired approximately 4 million shares of common stock in FY15.

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

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

We have a solid leadership team that is clearly focused on growth through sales and service execution, technology innovation, and product expansion in FY16 and beyond.

They have delivered solid, consistent top-line growth and strong operating margins.

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

Efrain?

Thanks, Marty.

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

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

As Marty indicated, Paychex delivered solid results in FY15, coupled with improving metrics.

Here are some of the key highlights for the quarter and for the fiscal year.

I'll then provide greater detail in certain areas, and wrap with a review of the 2016 outlook.

Total service revenue, up 8% for the quarter, and 9% for the fiscal year.

Interest on funds held for clients increased 5% for the fourth quarter, and 3% for the fiscal year, to $11 million, and $42 million, respectively.

The fourth-quarter increase was primarily the result of higher average interest rates and the increase for the fiscal year was driven more by higher average investment balances.

Expenses increased by 7% for the fourth quarter and 10% for the fiscal year.

The increase was mainly in compensation-related costs, with higher sales, headcount, and higher comp due to strong sales execution.

Costs relating to the PEO minimum premium plan health insurance offering contributed 3 percentage points of the increase in total expenses for the fiscal year.

Operating margin was 35% for the fourth quarter.

Operating income net of certain items increased 11% to $241 million for the fourth quarter, and 7%, as Marty mentioned earlier, to $1 billion for FY15.

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

Net income growth increased 10% to $161 million for the fourth quarter, an 8% to $675 million for the fiscal year.

Diluted earnings per share increased 10% to $0.44 per share for the fourth quarter and they increased 8% to $1.85 per share for FY15.

Let's look a little closer at payroll revenue.

It increased 4% for both the fourth quarter and for the fiscal year.

We benefited from increases in revenue per check and higher clients.

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

Checks per payroll, which had been trending up in prior years, was relatively flat for FY15.

Checks per payroll growth rates have returned to more historic norms, which are typically below 1%.

HRS revenue increased 16% to $272 million for the fourth quarter and 18% to $1 billion for the fiscal year.

The MPP plan health insurance offering, which was added in the second half of FY14, contributed 6 percentage points of growth in HRS for the fiscal year.

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

In particular, our PEO experienced strong demand during FY15.

Retirement services revenue benefited from pricing, together with growth in the number of plans, and an increase in the average asset value of retirement services client employee funds.

Insurance services had a strong year.

Revenue growth benefited from the ramp up of our new full service offering to comply with healthcare reform requirements, and increase in the number of health and benefits applicants, and higher average premiums in workers comp insurance services.

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

Let's look at investment and income.

Our primary goal, as you know, is to protect principal but optimize liquidity.

Long-term portfolio, which is primarily made up of high credit quality municipal bonds, has an average yield of 1.6% and an average duration of 3.2 years.

Combined portfolios have earned an average rate of return of 0.9% for the fourth quarter and 1% for FY15, which is consistent with 2014 fourth quarter and up slightly from last year.

Average balances for interest on funds held for clients were flat for the fourth quarter as increases attributable to our client base were offset by lower state unemployment insurance collections.

For the fiscal year, average balances on funds held for clients increased due to growth in client base and wage inflation.

Let's look at our financial position.

It remains strong, with cash and corporate investments of $936 million as of the end of the year and no debt.

Funds held for clients were $4.3 billion compared to $4.2 billion as of May 2014.

Funds held for clients vary widely as you know on a day-to-day basis and they averaged $4.1 billion for the fiscal year, a year-over-year increase of 3%.

Total available for sale investments, including corporate investments and funds held for clients, reflected net unrealized gains of $14 million as of May 31, 2015 compared to $35 million as of the same period last year.

Total stockholders' equity, $1.8 billion, reflecting $552 million in dividends paid during the fiscal year.

Dividends paid represented 82% of net income.

Our return on equity for the past 12 months was 36%.

Cash flows from operations were $895 million for the fiscal year, 2% higher than last year.

Higher net income and non-cash adjustments were partially offset by the impact of timing and working capital, which was greater last year than it was this year.

Let's turn to FY16 guidance and I will mention a few things that color both yearly, the annual guidance and also the quarters, so we're clear on what we're expecting for the year.

Our outlook is based on the fiscal year ending May 31, 2016, and it includes our current view of economic and interest rate conditions continuing without significant changes.

I'll explain what we mean by that in a second.

Guidance for 2016 is as follows.

Payroll service revenue projected to increase in the range of 4% to 5% compared to FY15.

We don't expect much, if any, contribution from checks per payroll in 2015, although that number has bounced around a bit at this point.

We think it will be largely flat, could be up a few tenths.

It won't matter.

The projected growth rate is based on anticipated client base growth and increases in revenue per check.

In addition, I want to call out something specifically.

In FY06 (sic) we have two additional payroll processing days.

These will occur in the first and in the fourth quarter, so let me just say that again: we're going to have two additional payroll processing days.

We are punctilious about this stuff because we know you will ask us.

They occur in the first and in fourth quarters.

HRS revenue growth is expected to be in the range of 10% to 13%.

Both HRS revenue and total service revenue reflect the minimum premium plan offering within the PEO will now have anniversaried and it's going to be a compare year-over-year.

So 10% to 13% on HRS.

Total service revenue expected to increase in the range of 7% to 8%.

Net income is expected to increase in the range of 8% to 9%.

We anticipate EPS to be comparable during each of the four quarters of the year, but timing of expenses during the year can change the pattern as it sometimes does.

Let me just repeat that.

We're anticipating net EPS will be comparable during each of the four quarters but timing of expenses during the year can change the pattern.

Operating income, net of certain items as a percent of service revenue is expected to be approximately 38%, so before I get the question, let me answer it.

If you'll look at where we are for operating income net of float, we ended the year at about 37.5%.

We expect improvement and we think it will be approximately 38%.

What does 38% mean?

It could be 37.9%.

It could be 38.1%.

All of those are 38%.

We don't anticipate that it will be 37.5%.

The effective tax rate for FY16 is expected to be consistent with the rate we experienced for this year, FY15.

Interest on funds is anticipated to be relatively flat compared to FY15.

What this means, as I mentioned earlier, is that we are not anticipating at this point any change in Fed behavior.

If it occurs, we think it will be a second half event, second half of FY16 and we'll call it out when it happens.

We haven't included anything in our guidance at this point.

So let me finish with this.

While we don't provide guidance on specific quarters, it's important to indicate at this point in the year that we anticipate that all of the quarters will fall within the range of total service revenue provided with one exception, which is the third quarter, where we believe that HRS revenue is projected currently to be below the low end of the full-year range.

There's a number of factors influencing that.

We can talk about them more in the Q&A, but third quarter, we expect on HRS revenue, not on payroll, on HRS revenue, to fall below the low end of the full year range, has no impact as I said on full-year guidance.

So as you're adjusting your models, take that into account.

Now before I turn things over to Marty, I want to remind you that Paychex will be hosting an Investor Day on Wednesday, July 15.

We will webcast it.

The event will be a great opportunity to learn more about Paychex technology and services and you'll see demos if you are here live.

Unfortunately can't webcast those very easily.

You're going to see the power of our technology and why we're excited about what the future holds for the Company.

We'll also provide a longer-term outlook at the event and we hope to see many of you in a few weeks.

Please sign up so we get a sense of who's coming.

With that, I will conclude and turn it back over to Marty.

Thanks, Efrain.

Operator, we will now open the meeting to questions.

(Operator Instructions)

Our first question is from Smitti Srethapramote with Morgan Stanley.

Sir, your line is open.

Hi, Efrain.

This is Danyal calling in for Smitti.

You invited the question, but I'll go ahead and ask it anyway.

Could you provide a little more color on what's driving the third-quarter movement in HRS?

Yes, the answer to that is that in the back half of this year, we had three vectors align.

The first was real strong growth in the PEO, the start of our ACA compliance, or ESR product, and also strong performance in 401(k).

All of those are more back-half events, and in particular, impacted the third quarter, and so when we get to that quarter, the compares will become a bit more complicated, and by the end of the year, it will normalize, so that's basically what's going on.

Got it.

Thanks.

And then just thinking about Paychex Flex, it's been a few quarters now, so perhaps, Marty, you could talk a little bit about the rollout so far?

And is the goal to transition as many clients as possible, and perhaps raise pricing a bit, and maybe you can just talk about the client reception you've seen so far?

Yes, we've seen good reception on it.

Its been -- the effort is to go -- there's so much feature functionality in it and so it's been a big effort on the training of our sales reps and of the clients but its gone very well.

We've had an increasing level of penetration of the sales folks selling Flex.

We ended the year very strong and we really have put all of the incentives in place to continue to sell it in FY16 so we're going to be off to a really strong start.

Not to mention, as I mentioned earlier, we've continued to add and enhance it, so you're going to see -- we added the recruiting and onboarding functionality, totally integrated on Monday, and released that so these additional -- these adds to the Flex platform are going to help a lot.

So the goal is that is what we are selling and so far the sales and the clients are very receptive to it.

Got it.

And then, is the goal basically to have SurePayroll and Flex and Flex Enterprise as the three foundations to your core offering or will it continue to be more nuanced than that going forward?

Yes, basically that's right.

SurePayroll will remain on its platform.

That's really for that micro-sized Flex and then Flex Enterprise will really be -- have already replaced what was core in MMS.

We have our preview product and we do sell that on the high end, as well, and it's still a good product with a lot of feature and functionality for the high end.

But we're finding that Flex is a great fit -- Flex and Flex Enterprise -- are a great fit for the majority of our market and that really will be the product set that we're selling.

In fact, most clients have already moved to it.

It's not like there's a big migration certainly for the under [20], the core client base, there's no migration.

That is Flex.

That really is our base.

Perfect, thank you.

Thank you.

Our next question is from Tim McHugh with William Blair & Company.

Sir, your line is open.

Hi, yes thanks.

Just want to ask about the client growth, and 2% growth, it's consistent with what you've seen in the last year or two, but given the new bookings growth you've talked about seeing last couple quarters, I was a little surprised it wasn't a little higher.

How does that compare to what you expected and how maybe you're thinking about next year and just contrast that with the overall new bookings, or new revenue sold, you characterized it as last quarter?

Yes, Tim, what we discovered over the last 18 months is that there's a balance between revenue generated in new bookings and units generated in new bookings, and we're trying to strike a balance.

When we have gone pure units, we don't get revenue in the way we want.

When we go pure revenue, we don't get the units we want.

What that represents is -- what you see there -- what that represents is the fact that we're striking a balance between the two, and from a planned perspective, a revenue-generated new bookings revenue, it was pretty much spot on what we expected.

Mix is playing a bigger impact in terms of what we sell.

So we have a number of different products, and frankly, we would prefer a $2,200 client to a $1,100 client and that's going to be reflected going forward in our thinking about how we look at units.

Some units are better than other units.

We want a mixture of both, but at the end of the day, we want revenue that's sustainable over the long term.

Okay.

And you had talked about new revenue sold last quarter growing at a double-digit pace.

Can you give us a sense of where Q4 and the year ended up with regard to that type of metric?

Yes, we stay very consistent overall on that.

We ended up, certainly for the year, double-digit growth.

In fact, we're at the highest -- for the year, we're at the highest growth in [par] we've had in probably eight years.

So as Efrain said, there's that balance, but we've given the sales folks a lot more product to sell.

The team selling approach that Mark Bottini and the team have done, we're selling much more multi-product upfront to the client instead of our older model of selling payroll and then come back in with do they need 401(k) and HR outsourcing.

We're finding clients are really benefiting and we're benefiting from the fact that we're team selling upfront and giving the full value of the product.

So we're very bullish on how the par -- how our annualized revenue sold has done and exactly what Efrain said, it's that balance now, but in the end, it's revenue growth that we want and that's what we're getting.

And just a numbers clarification.

The growth in the outsourcing or HR outsourcing client, is that included in the payroll client growth rate that you quote or is that a separate number?

I'll give you a simple answer and then the complicated one.

Clients are clients, so if we tell you we have 590,000, those are clients who are running payroll.

Our clients that are served by Paychex actually who don't take payroll include actually additional clients to the 590,000, so that's a number that we don't typically disclose, but if we did disclose it, we would be well over 600,000 clients.

So some clients do take HR services, but don't take payroll, and as that number becomes bigger, we'll start splitting it out.

Okay, thanks.

Our next question is from Joseph Foresi with Janney Montgomery.

Your line is open.

Hi.

I was wondering, in next year's guidance, the revenue per check, what's the expectation there, and maybe you can quantify that and how are you getting that increased revenue per check?

We're not giving specific guidance on revenue per check, Joe.

If you look over the last three years and simply do the math, you'll see over that period of time our revenue per client, not revenue per check, has grown about $1,000 over that period of time.

In terms of revenue per check, how we're getting it, we didn't give specific guidance on that, won't do that, but it's a function of price, it's a function of additional products and features sold to clients.

Those are the two big components.

Okay, I figured I'd try.

That's okay.

On the free cash flow side, it was basically flat year-over-year.

Could you just give us some idea of what the trajectory is, if you're planning on growing it, and if not, what has changed on the CapEx side as we head forward?

Joe, I would just say that to really understand that, you'd need to look at the delta between the two years and working capital adjustments.

The working capital adjustments last year were about $54 million, and this year, working capital adjustments were $9 million.

That really accounts for the big difference.

Our free cash flow number is a little perhaps different than others do, but because we also include uses of cash for acquisitions, so we had a bigger acquisition last year than we did this year or more, so it's a little bit funky.

I'd just point you to the operating cash flows and you could see that our operating cash flows were almost $900 million this year, and then normalize the working capital adjustments.

We were low this year, high last year.

You're going to get to a number that is certainly in excess of $900 million on operating cash flow.

And then, of course, there's all of the uses that we have for cash, but I don't anticipate purchases for CapEx and property is really going to change all that much in the year.

Got it, so theoretically it goes up, obviously, based on--?

Yes, that's our expectation.

Got it, okay.

And then last one for me.

HRO has been a fairly strong driver here over the last, I don't know, two years.

Anything that you're seeing internally that would spark a maybe a derivative or a second derivative catalyst as you head into FY16 or should we expect much more of the same, just with maybe tougher comps?

That's our planning assumption, Joe.

What we don't know is what the market reaction will be to the -- what appears to be the beginning of the imposition of penalties for the 100-plus employer set at the beginning of 2016 and then the increased requirements on the 50 to 99 clients under ACA.

Why am I pointing all that out?

Simply because that regulatory overhang is going to probably create some changes in behavior for clients that may drive them to be more interested looking at a PEO solution or looking at our Affordable Care Act solutions.

That's one.

The pace of regulation also, the recent regulations on overtime also are going to drive more regulatory overhang, so I would say that our planning assumption is as you said but there's a number of factors in the environment that could impact that direction.

Yes, as Efrain said, I would say, in the recent overtime [stuff] that has come out just the night before last, really we think that could push HR outsourcing because you are now going to need -- smaller businesses are going to need help with non-exempt and exempt rulings in the next year, trying to figure out who is exempt and non-exempt, and time and attendance could be pushed as well, because you're going to have to be more careful about tracking the hours and keeping a record of those from a compliance standpoint, where all of the overtime rules changing, as well as Efrain said, enforcement is going to continue to pick up on things like ACA and overtime.

Thank you.

Thanks, Joe.

Our next question is from David Togut with Evercore ISI.

Your line is open.

Thank you.

Good morning, Marty and Efrain.

Hey, David.

Could you quantify your gross and net price increases expected for 2016?

I'd love to give you the exact number, David, but I'll just say it's in the range of 2% to 4%.

2% to 4% is gross or net?

That's going to be net.

Got it.

Then you've highlighted about 50 basis points of operating margin expansion targeted for 2016.

Could you talk about the drivers of that margin expansion and then, more broadly, how do you think about operating leverage beyond 2016?

I'd say it's a continuation, David, of what we've done since Marty's been here, which is to say, we want to deliver world-class service, but we want to do it in a world-class efficient way.

So we're balancing the investment in IT that drives better service with greater efficiency from service providers, being very, very careful not to upset the balance on the service side so that they continue to drive the right kind of service.

So it's really -- that's a very circuitous way of saying we balance operating and IT expense to drive that result.

I would say, we target -- we go into a plan typically targeting at least 50 basis points of leverage.

We come out a little bit higher, a little bit lower sometimes there, so that's certainly, in the intermediate term, what we're expecting.

Yes, you'll see us continue to drive it.

It's just part of our DNA, as Efrain said.

The technology spend has more leveled off now.

We've gotten to a good place there about the level of spend and so it's continued to be a significant investment, but it won't have the double-digit increases that we saw for years.

Then on the operations side, we've continued to find other ways of reducing space and cost and really do it more from a service perspective but also from a leveraging perspective, so that will continue.

It gets harder all the time but that certainly is part of the DNA that we take going forward every year.

Quick closing question on capital allocation.

How do you think about dividend growth in the next year or two?

And then for the cash that isn't allocated to dividends, how will you allocate that?

We would expect the dividend to grow roughly in line with earnings.

That ultimately will be a discussion we have in July.

That certainly would be the direction we would go in.

That doesn't mean it's going to be point for point, but it will grow as earnings grow, and then we have some allocation for share buybacks.

You can see we bought back about 4 million shares, and actually share count went down slightly this year.

So we'll continue to do -- to prevent too much dilution from occurring, and with a modest bias downward.

And then finally, M&A is important.

Our pipeline is as robust as it has ever been and we're very, very interested in a number of properties that are available, but we're only interested at the right price and we'll pass if we don't like what we see.

Got it.

Thank you very much.

Thanks.

Our next question is from Rick Eskelsen with Wells Fargo.

Your line is open.

Hi, good morning.

Thanks for taking my question.

On the first one, I just wanted to drill in on the payroll revenue growth that you guys are expecting.

It sounds like a lot of it's driven by mix and also the price increases.

Just maybe a little more detail on what you're expecting for the acceleration at the top end in the guidance for payroll?

There's always three things, Rick.

One is price, obviously, is important.

That price also has an element, as you mentioned, of mix that can impact the price also.

We lump that together with price.

And then we expect unit growth.

We had 2% unit growth this year.

We would expect something comparable, perhaps even a little better next year, but those are the components of the payroll revenue growth.

Then just switching to the technology.

You guys have signaled that it's flattening out in terms of the increase in spending.

Just now that you've had those several years of increased tech spending behind you, can you talk about what parts of the portfolio and offerings you think are now more competitive, what you still need to maybe do more on?

Yes, I feel very good about being very competitive in all sides of it, to be honest with you, and that was our goal really when we started increasing the spending about six years ago.

One, on the core platform, you'll see changes in the user interface that are happening right now that will be expanding over the next few months.

So you're going to get a much cleaner HTML5 interface.

All of that work has been done to really drive clients to all come by the way with a mobile-first view of things, so making things very simple for clients, so they can get at everything whether they're on a mobile, the mobility app, whether they're on their mobile phone, whether they are on the tablet, or whether they're online, and I feel very good about where we are on those fronts.

The mobility app is the best in the business and that -- and we continue to enhance everything that we have.

When you look at the mid-market space, even the 20 and above -- 20 to 500 or so -- in particular, we're very well-positioned now with Flex and everything that we're adding, just like we added Monday, I mentioned.

To have -- to be able to add a new employee all electronically, send everything out to them, that can be updated and then seamlessly one-time put in, from the time you're recruited right through to the time you may retire from that business has made us extremely competitive and just at the right time.

It's a competitive market out there.

We're still see very good sales so I feel very good about the investments we've made in mobile, in the core base, SurePayroll, as well as the mid-market, all of those I feel very good in.

When you get to the ancillary products, we've done the same thing.

401(k), we continue to be the leader, and in the PEO space, they've been upgraded at the same time as we've made these investments, so it's made us very competitive in the PEO space, as well, from a product functionality standpoint.

Thanks.

And then just the last one here.

You talked about this a little bit earlier, but on the healthcare reform, now that the Supreme Court ruling happened, what are your expectations for how that's going to drive clients moving forward?

Do you think that there's -- any of your clients were waiting and seeing?

Just what does that do to your business?

Thanks.

Yes, we had a nice bump in that, the last six months, as clients started to really pay attention to it.

I do think now we'll probably see another resurgence of interest in it.

And then as Efrain mentioned earlier, when you get to the end of the year and those first filings have to be done and the penalties start to come into the 100-plus employee clients, they're really going to get a lot of attention at that point.

The 50 -- or below 100 -- will have to file -- or the 50 to 100 will have to file so that will be an awakening for them that while this is a lot more difficult -- and this is going to be another good year for the ESR product that we have that helps them with Affordable Care Act.

We can help them both monitor and judge what they're doing on a day-to-day basis, as well as the filing, and that puts us in a very strong position, particularly when you're a payroll and insurance client of ours.

Thank you very much.

You're welcome.

Our next question is from Gary Bisbee with RBC Capital Markets.

Your line is open.

Hi, guys.

Good morning.

Good morning.

The first question -- can you give us an update on penetration?

And I realize probably in the 10-K, you'll give us a couple customer counts to think about the big product categories, but it seems like most of the areas you're still very low penetration payroll customer base, and maybe just also, how big is that opportunity?

Could one-half of the payroll customers eventually buy some of these products and does that mean several years more growth in upsell of those?

Thanks.

Yes, Gary, it obviously depends on the product, but each one of these, we've progressed in our penetration, so we feel very good about that.

All of them -- you're right -- we still continue to have low penetration and big opportunity in front of us.

When you look at even health insurance, we had a good year in health insurance increase in sales, and they are still at only probably 2% or 3% of the population, and so as Affordable Care Act, as more pressure on health insurance and having health insurance for your employees comes up, that's a great opportunity for us.

When you look at 401(k), we've been at it a long time.

It's probably one of our best -- between that and workers comp -- our best penetrated products, still a lot of opportunity there.

We're driving a 5%, 6% growth in that all the time and have more plans than anybody else.

And then PEO, really we're perfectly positioned over the last year or so with our PEO functionality, and the product and strength of the sales team, and that has just taken off.

PEO had very strong growth.

So there is absolutely a lot of opportunity there.

We've continued to move ahead in our penetration, but still lots of great opportunity in front of us.

And it sounds like the Affordable Care Act compliance has done really well in the last six months or so since you've launched it.

If we looked at your customer base, 50-plus employees, is there a material amount who have signed up or is that also just very, very early days?

We would say -- I don't think we've given out the numbers exactly of who is -- but we've done probably about almost one-third, 25% to one-third of those who we think could take it, have taken it at this point.

So we've still got some opportunity there.

And again, it's -- we're going to wait to see what the surge is after the end of the calendar year and people start to see how much work is involved in filing and monitoring what they're doing with that.

Great.

And then the retention, very positive obviously.

Do you have a sense how much of that is just better economy and small business health due to the economy and whatnot versus just customers being much more satisfied and happy with the products, probably more the second than the first, but any commentary on that?

Gary, here is the comparison.

If you go back to 2011, we published this information.

We were at 21% loss rate in 2011.

We've improved 300 basis points since 2011.

Marty can talk to some of the specific things that we've done on the op side.

We've just gotten much, much better, but it's partially economy, but partially the results of a lot of things that we've done.

In 2011 to 2012 and a little bit to 2013, it was much more the economy.

What we're seeing now is much more about the service and the satisfaction levels.

We've also got much better at getting into the -- very deeply into our service numbers and with what we call voice of the customer, and you're getting immediate online feedback.

We also have set up national retention teams that when we think a client is thinking about leaving, they go to a team that is focused nationally on retention and on preventing the loss and seeing what we can do to improve the situation.

That's been very helpful as well.

So we've done a number -- we've added 7 by 24 service, we've added multi-product centers for the larger, the more mid-market clients.

Overall, a lot of this -- the last year, particularly 1.5 years has been much more about service and product strength.

The other thing there's customer Service and then there's service from a functionality and feature set.

Both of those have been the bigger impact the last year, 1.5 years.

Great.

And then just one clean-up one.

It looks like, from the press release, you have restated the average investment balances for funds from clients and corporate investments the year ago relative to what was in your press release a year ago.

Why is that and is that a one-time thing or have you changed it going forward?

It's probably average, Gary.

I'm not entirely sure.

My guess is since it's an average, the number could have bounced around a little bit, but I don't think it should have changed dramatically.

It probably had something to do with the averages in that quarter.

Yes, okay.

It looked like last quarter, the same thing happened.

The reason I ask is just that fund balance, if you used what was reported a year ago, looked like it grew [2.5] and your release today is really saying no growth.

Maybe let me ask a different way.

On the [SUTA] work rates declining--

By the way, we did call that out in the press release, that it didn't grow in Q4.

But let me just say one thing, Gary, before we go down a lengthy conversation on this, timing of when a quarter ends and begins can really throw that number, so I'd just caution to look at what we say for a year and six months as opposed to a given quarter.

Yes.

And just the last thing then, the [SUTA] rate drag, which presumably continues for a while and maybe a couple years given what unemployment has done, you hold on to the [SUTA] money longer than a lot of the other buckets of withholding, so is that something we should think about being potentially a drag for the next two years or something on the growth of the (multiple speakers) or was there something--?

It's going to have an impact at the margin.

We do call that out in the press release that [SUTA] rates did impact average client balances, probably not enough to make much of a difference.

If you see, despite that, Gary, our interest on funds held for clients were up 5% in the quarter so it really shouldn't -- if it does become an issue, we'll call it out.

Not anticipating that it will be one though.

Great.

Thank you.

Okay.

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

Your line is open.

Hi, thanks, good morning.

You were talking about focusing on which units are growing, and I'm wondering, do you think we'll see a shift towards larger clients over time on average?

You'll see a shift over time on higher value clients on average, so not necessarily larger, but just understanding -- we've gotten much, much better at understanding what a particular client's needs are and putting, as Marty, said the right team selling approach in front of that client and trying to balance out the revenue opportunity of that client with the resources we've put against that client.

We need both.

You need to fill the funnel because some of the smaller clients become bigger clients, but we also have recognized that focusing solely on smaller clients who don't have necessarily the same lifetime value as the larger client, you need to have some balance between the two.

So we're trying to strike it sometimes very well, sometimes not so well.

So that's what we're doing.

And from a margin perspective, would that client that is buying a larger bundle be higher margin?

Yes, typically would be, Sara.

Okay.

Could you also give us an update on your planned sales headcount growth next year?

We are going to be growing sales headcount about 3% in next year's plan.

Okay.

And then last question.

Is it fair to say that the impact of the two additional payroll days next year is a little less than 1% incremental to your payroll service revenue?

It is fair to say it is precisely a 0.5 point.

Okay, thank you.

Our next question is from Glenn Greene with Oppenheimer.

Your line is open.

Thanks, good morning.

Just actually following up on the last question.

Maybe you could give us the sales bookings growth expectation you're thinking about for FY16?

Can you continue with the double-digit pace and you did allude to the headcount growth of 3%, so implied with that would be the headcount productivity?

Yes, directionally, we certainly are looking for double-digit growth.

We had a big year this year and some of that was -- included, obviously, the Affordable Care Act products and PEO growth, but we're looking for the same directional way to go, which is about low double-digit growth.

Okay.

And then, Efrain, you alluded to the M&A pipeline being robust, but want to be sensitive on valuation, but maybe strategically, where are you looking, where are you seeing opportunities, or what would you like to fill out?

I'll let Marty handle that.

Yes, really across-the-board.

We look for client acquisitions, so client base, where we can grow our existing client bases.

We look for some product tuck-ins, but we're in pretty good shape now where, we had focused a lot on that over the last few years.

But we look at expanding any of the areas, so anywhere from payroll to 401(k) to PEO, across-the-board.

And maybe a few new markets, we look international as well.

We did an international acquisition in Germany about two years ago now, and so we continue to look in other countries and for ways to get in and get started, but growth in a lot of different ways.

It's never been as robust.

The problem, as Efrain said, is getting it at the right valuation.

Are there decent assets of meaningful core payroll clients?

Is that of interest and are there meaningful assets out there for sale?

It's of interest, but I wouldn't say that there is anything out there right now that's meaningful, on the payroll side, specifically.

Everyone seems to be more interested in staying the course and growing, and so at this point, we don't see as much there.

There's certainly always a lot of small ones and we're very active with the sales team on that, but as far as a significant one, I wouldn't say there's a payroll one right there in front of us at this point.

Okay, great.

Thanks a lot.

Okay.

Our next question is from David Grossman with Stifel.

Your line is open.

Thank you.

Good morning.

Hey, David.

Was wondering if we could just go back to the HRS business and the bundle.

If you remove the PEO from those numbers, can you give us -- first fundamentally, if you think about when you're selling that bundle without the PEO as part of that so there's no insurance element that's an important part of the sale, who are you really displacing there?

Is there anybody or anything that you're displacing, or is this just an aggregation, if you will, of what's really being done internally?

And can you give us a sense of just how big that bundled solution is when you, again, back out the PEO, and what rate of growth you're seeing in that business?

If you don't consider the PEO, David, and I'll come back to the PEO because you have to consider it, but if you don't consider it for a second, most of those clients are internal Paychex clients who have grown to a size where they would like to have, in particular, HR outsourcing as part of the bundle.

So I would say, if you're looking solely at that portion of the client base, it's mostly internal clients.

When you go to the PEO, that becomes a different animal because almost one-half of the clients that we sell on the PEO are not clients of Paychex, so I can't tell you who we're taking share from.

I can tell you we're had a very big year in PEO.

Worksite employees grew between 20% and 30% in the year.

That was our biggest year in many, many years, in terms of PEO, driven by ACA, better execution, great job by the HR sales force, and also great job by the ops people.

So it's a little bit of a tale of two cities.

Everything else is really more of an inside game.

When you get to PEO-specific, it's a combination of both inside and outside.

And if you back out the PEO, what does the bundled solution represent as a percentage of revenue?

Percentage of revenue?

Don't disclose that.

We -- a PEO still is not even -- doesn't come close to one-half of HR services growth, so most of it is everything else, meaning retirement services, plus insurance, plus what we call our ASO offering.

Those things are growing nicely, so in the absence of PEO, we would still have a pretty nice growth rate on those businesses.

Right.

And then if we could go back to the concept of a higher revenue per client, because it came through a couple different comments.

One, in the context of how you're driving the sales force, and how to think about unit growth, so now we're thinking of pricing, not just pricing and payroll, but pricing per client.

You said, and maybe I just misunderstood this comment, that the revenue per client is up $1,000 in the past years.

That sounds pretty high, so maybe you could explain a little bit about what that shift has been in terms of revenue per client today versus maybe what it was a couple years ago and how we should think about where that's going to trend, particularly in the context of, again, this comment about a bundled solution and trying to sell more into the existing base?

David, I'm looking at the data from 2011.

In 2011, our revenue per client was about $3,700 -- I'm, sorry service revenue was about $3,600, and by 2015, it had grown to about $4,600.

That's really a function of what Marty has been saying, what was said at the beginning of the call, which is if you went back to where we were four or five years ago, and this is not well understood about the Company, we were a hooks-and-ladder approach, so let's hook them with payroll and then let's ladder on everything else.

We recognized post-recession that -- and this to be fair -- the credit goes to the sales force and to our sales leader.

He said look, certain clients need certain solutions very predictably.

Let's do the data analytics and understand by size who needs what, so we did it and we said, you know what?

Lo and behold, if you're -- I won't say the number -- but a client of a certain size, you typically in our base are going to take X, Y, and Z.

If we know that, then let's put the right salespeople in front of that client, and we have one doing that.

So that's what you're seeing there.

Obviously, there's pricing too, so I don't want to completely oversell the point, but I do think we have simply gotten better at understanding when we have a client, and by the way, we had well over 100,000 of them that we sold.

We have a lot of opportunities to go in and say, hey, here is what you really need if you're a client of a certain size.

And because of the breadth of what we offer, we have a lot more opportunities than most people to do that, so that's what's occurring there.

So then what's the right way to think that about the pricing units equation, because right now you're trending, as you mentioned, about 2% client growth, and that's everybody right?

That's payroll, but I know you've got others, but how do you want us to think then about the pricing element because it's really not that 3%, is it?

It's really more driven by what the change in revenue per client is going to be rather than the change in payroll pricing on that?

I'm not ready to give guidance on that.

That's a good point.

You can do the math, if you look at revenue -- basically we give you enough by giving all of the clients and the break-outs of service revenue, and you can see what the growth in revenue per client has been.

You can see that this isn't a mystery.

Do the math and it's certainly mid-single-digits or above.

So we're playing two games here and it's important to understand that we've evolved the way we think about approaching the market.

Not just get more units and then put pricing on the units, but get more units, get pricing and get the right mix of clients so that we can sell more feature-rich bundles.

Just one final point I would make, David.

Right now, if you compare what our sales force sells today, to 10 years ago, very different animal in the payroll space.

We've got three bundles that basically take you from a basic payroll bundle to what is a pretty integrated HCM suite that you can sell under 50.

So we allow the payroll sales force to sell any one of those three bundles.

We want them to capture the right set of revenue and we want to get the right mix of units, but we want to get as much share of wallet too as we can when we have a sale.

So you can model it out.

We've given enough info there to come to some conclusions on that.

Okay, great.

Thanks for that.

And then just last, a little bit of just a clean-up question here.

You mentioned that we anniversary the minimum employment or the change in the PEO in the second half of last year, so was there any impact on the fourth-quarter growth rate of 16%?

Yes, this is the last time we'll call out the -- in the fourth quarter.

There was probably a pick-up of about 1% in the quarter for minimum premiums so that brought it down to 2015 or so.

It was probably a little bit under that, maybe between 14% and 15%.

There were just a lot of, as I said before, vectors that wind up to drive to -- deliver that quarter.

By the way we had called it a year ago, so we were expecting that by the end of the year, we were going to have a pretty strong fourth quarter.

And when we had this discussion a year ago, there were some concerns about the fact that we were back-ended or had more of a back-end bias to our guidance, but we thought we'd end up in the fourth quarter with a strong quarter and we ended up in the fourth quarter with a strong quarter.

So we expect obviously, based on the guidance, for growth rates to moderate somewhat, but we'll see how the year progresses.

Right, but is there -- that's what I was getting at -- is there anything in the business that you're seeing that would support that deceleration or are you just saying, you know what?

No, no, no, there are really three specific things that support our thesis that it will decelerate.

The first thing, as I said, the PEO works on employee growth was tremendous in the year, so we started from a lower base, and by the end of the year we had hit an all-time high in terms of worksite employees, so now I start at a higher base.

I'd love to think I'll have the exact same year.

30 years of experience tells me that is probably not going to occur.

That's the first thing.

The second thing is the back half of the year, we had strong sales of Affordable Care Act compliance products.

We again think that, that's going to moderate as we go through the year.

And then the third thing is we had a very strong year in 401(k) and we expect that to moderate.

That's a planning assumption.

I would just say this.

We said similar things last year and we were trying to project even a more complex set of revenue and we came within several million dollars of what we expected to hit, so that's where we call it.

We could end up being conservative.

All right.

Great, thank you.

Good luck.

Thanks.

Our next question is from Jeff Silber with BMO Capital Markets.

Your line is open.

Thanks so much.

Just a couple quick numbers questions.

Efrain, in the quarter, operating expenses were only up a little less than 3% relative to the rest of the year that -- or at least decelerated.

Anything going on there specifically?

Basically it was just, Jeff, the anniversarying of the minimum premium plan, which was adopted in Q4, and so in our operating expenses, you saw low single-digit.

That's just because we're getting to more normalized compare on operating expenses in the quarter.

That really drove most of that difference.

So that really shouldn't impact next year at all?

Should not.

Okay, great.

And then your guidance for interest on funds held for clients, relatively flat.

I understand you aren't expecting any increase in interest expense, but shouldn't we see an increase in funds held for clients that should drive that a little bit higher?

It should be higher, Jeff.

There's an element of conservatism in that number, but what I'd say is this: when the Fed raises rates, we'll have a better sense of what the shape of the yield curve is, and right now, I'm duration neutral.

If we like the yield curve then we may extend a bit, and so right now, my thinking is duration relatively neutral.

I know where the intermediate portion of the bond yield curve is.

All of that equates to flattish.

It's probably a bit up from where we're at but not enough to really materially change things until I have a sense of what the Fed is doing and what it signals, more importantly, when it does its first increase, whether it's going to signal rapid future increases or not.

I would just say we've been faked out so much that I'm a little bit gun shy in terms of making any calls on what's going to happen.

So that's our thought process.

Okay, great.

I understand.

Thanks so much.

Our next question is from Jim Macdonald with First Analysis.

Your line is open.

Yes, good morning, guys.

Could you give us some of your thoughts on the middle market area, how it's doing and what your expectations are for next year?

Yes, this year -- right now as we're heading into 2016, we feel good about the product and feature set that's out there for our sales folks to sell.

We're feeling we've had some kick-offs to the fiscal year already for the sales team and there's a lot of excitement there.

Obviously, some competition has cropped up over the last couple years, but we don't see that having a big impact so far, so the market has somewhat expanded.

I do think the need for HR and time and attendance and so forth has come down market, so that mid-market is anything from frankly from 20, 25 plus and we're seeing a lot more need there.

So I feel pretty good that the mid-market in 2016 will be a strong year for us and that's what we're planning on and that we're well-positioned for it both from a sales experience and sales team, very fully trained, and full staffed, and then from a product and feature set and service perspective, we're in good shape.

Great, and then you talked a lot about the ACA, but at the risk of adding one more, any impact in January of the 1095 form?

Do you think that will be or have any material impact and do you think the charge will be similar more than, say, a W-2?

For the whole service, we're charging a monthly charge that gives you both monitoring and recording and so I don't think you'll see any big blip or big change there.

The big change would be if we sell a lot more of it because in that time frame they start to realize there's penalties, that the filing is more difficult than they think, and so forth.

So I don't think you'll see any big blip in Q3 because of that.

What you'll hopefully see is more sales all through the year and we'll continue to update you on that as we go through the quarters.

Okay.

Thanks a lot.

Our next question is from Tien-tsin Huang with JPMorgan.

Your line is open.

Hey, good morning.

Hi, Tien-tsin.

Good morning.

Thanks for taking the question.

Just on the client side, I know, I heard a lot about shifting towards higher value clients.

It all makes sense, but I'm curious, from a unit perspective, how is SurePayroll performing because we could infer that there's a mix shift away from that?

No, I don't think that's a fair assumption.

SurePayroll is doing fine, relatively small part of our revenue base, as I've said in the past.

Sure really doesn't influence the revenue picture very much.

A little bit -- certainly revenues influences the unit picture, but no significant change from that perspective.

I want to be careful.

It could be misunderstood that we don't think that the micro enterprise space is important.

We think it is important.

It's important for a number of different reasons, not just because it represents a source of revenue, but a lot of those clients we now see have an opportunity to become full-service outsource clients, and if they build the right relationship with Paychex, their lifetime value will be significant, so we aren't pivoting away from that.

It's just thinking through how best to maximize the revenue opportunity we have with each sale.

Okay.

I know the three of us have talked about the pendulum between do-it-yourself and outsourcing for a while.

It does feel like it's shifting towards the outsourcing on my side, but I'm curious, are you seeing any new trends there?

And just lastly as a clarification on retention, did you give revenue retention, as well as unit retention?

I didn't give revenue retention.

Revenue retention this last year was about 86%.

And I don't think, Tien-tsin, we're seeing a big shift or anything, but as Efrain said, SurePayroll is still doing well in that micro market and we're certainly still feeling good about the under 20 here, and what we're seeing and selling on that side.

I don't think there's been a big shift, although I do think that it -- everything is coming down as I said so there's more needs for even the under 20.

More getting -- we've had good success in selling time clocks and now the online attendance even to smaller clients that we didn't think would need it.

That may drive more to outsource because it's not just simple payroll calculations where they are doing it themselves.

I think they will look more for a well-rounded offering that integrates everything, and that like time and attendance, you can punch in and punch out on the mobile phone now, so as those things keep getting easier and better integrated and coming down market, more small will outsource.

Okay, good.

Makes sense, appreciate the update.

See you in a couple weeks.

All right.

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

Your line is open.

Good morning, Marty and Efrain.

Good morning.

With regards to your MMS clients, what percentage are on the latest version, the most up-to-date version of your solution?

I don't know if we've given that out yet.

We are going through -- the clients -- we're getting good satisfaction on the existing product.

I would say the new sales are definitely leaning 70%, 80% toward the new product, and from a featured functional set that's fitting those.

And you'll see that shift close to 90% to 100% in this upcoming fiscal year and then other clients will move over.

There's not a big forced migration or any need for that necessarily at all because they are still happy with the former product.

But I would say, from a sales perspective, it's 80%, and will be growing, and existing base, and I don't think we've given that out, so but it's a -- given that Flex Enterprise has been growing here, it's a pretty small, it's a fairly small percentage, but will continue to grow obviously over the next two years.

I'm assuming the satisfaction level with Flex is higher than the base, is that correct?

Yes, although the base is pretty comfortable with the product.

We haven't -- it's not like there's a major issue there.

It's more -- Flex is a little bit higher, but it's not -- the base is not totally unsatisfied or leaving or anything or anything like that, or we would step up a migration but we aren't seeing that.

Flex is driving a lot more to the clients.

Our goal is to pull them over by saying, hey look at the additional feature functionality integration and online opportunities you have there from this offering than what you have.

But there's not any general dissatisfaction with the existing product at this point.

Okay, and then with regards to the retention rate, it's improved nicely over the years.

Where do you think that can ultimately go to?

Do you think you've hit a peak level or do you think there's still room for improvement with regards to that retention rate assuming the economic environment doesn't change?

Yes, it's a good question.

We always struggle with it.

We're feeling very strong when it's over 82%.

It's obviously the best we've ever had.

We'll continue to try to -- we're always trying to drive it a little bit higher.

Can you get it past 83% or 84% given that small client and their rate of turnover.

You might be able to get it up another 50 to 100 basis points, maybe a little bit more over time, but it's a struggle.

But it is really what we're driving now and John Gibson leading the service team is really driving a lot of service options and trying to, with his voice to the customer, we're getting great feedback.

We're responding to the customers even faster, and we're learning how much effort -- we now have systems learning how much effort they have to put into either mobile, online, or talking to the payroll specialists, and then we can build their service around it so it's much more sophisticated.

Who knows?

Maybe we could drive it to 83% or 83.5% or something.

I don't think too much farther than that.

Okay, and then with regards to the delta between the bookings growth relative to the total service revenue growth, can you just go through why those wouldn't be closer?

Well I'm not sure why you'd assume that, Mark.

Remember that each year, in order to grow, we have got to replace the 18% clients, plus get an increment of growth, so even if you had a real strong year in terms of sales, you wouldn't see that reflected unless you had a series of those years in a row reflected in the base.

So we think we are comfortable that we're seeing revenue growth in the base but you just don't see it from one year to the other.

Got it.

And what percentage of the client base is currently getting the 1095s or is signed up for the 1095 program?

We aren't disclosing that number.

Marty indicated that, of the people that we thought, earlier in the call, the people that we thought might be clients, it was 25%-plus.

Great.

Thank you.

Okay, thanks, Mark.

Our next question is from Lisa Ellis with Bernstein.

Your line is open.

Hey, guys.

To what extent are you or the PEO and HR outsourcing markets more broadly, do you think impacted if we see this big wave of consolidation across HMOs, as well as other HR service providers?

I think there's going to still be plenty of choice out there and an opportunity to offer -- you've got to know, if they're combining, they are still going to have very competitive products to compete.

I don't think it's ever going to combine so much that you don't have enough choice and competition there, so I don't think it will impact us too much at this point.

Actually, to some degree, it might make it easier from a operational perspective.

When we got into the health insurance business selling health insurance years ago, we had to go out and connect with the top three carriers in every city, and the number was -- it gets to be very large and complicated.

To the degree that, that begins to consolidate, it might make operationally things even easier, and you might actually have a little bit more clout with getting connection issues resolved and actually make the business more efficient.

So we have to wait and see how it is but the choice -- enough choice will still be there and actually it might even improve some of the customer service by the connections we have with them.

Got it.

And then it looks like SG&A for the full year was up 9% this past year, with a little bit of a lumpy uptick in this last quarter.

You mentioned that sales headcount growth, you're targeting about 3% next year.

Does that mean that we would expect SG&A growth to moderate relative to this year?

It should moderate a bit.

We just had a really -- a very, very strong sales growth this year.

We expect it to be good next year but probably moderate a bit from the growth rate that we saw this year.

Terrific, thanks.

Our next question is from Phil Stiller with Citi.

Your line is open.

Hi.

Thanks for taking my questions.

I had just a couple quick follow-ups.

Efrain, you said the two extra payroll days this year will add about 50 basis points to the growth rate.

Just wondering what the impact on FY17 would be if you have that analysis?

Are we going to lose all of that 50 basis points or can--?

Good question, Phil.

I will tell you this, I've been buried in trying to figure out this call, plus the Board meeting, so I haven't looked at 2017.

It will have an impact.

It's hard to say without understanding where we end up from a client perspective and some of the other revenue issues we've discussed, so it will have some modest impact on 2017.

Too early to call.

Okay.

And then lastly on M&A, you talked about it earlier but on the valuation commentary about being sensitive, what metrics are you looking at?

Are you willing to buy things that have higher multiples than your own stock?

When asked this question, Marty and I, we look at technology and we understand that if someone has got a nice mouse trap, we're going to have to pay for it, but that's why we think being in a position of financial strength is important, so we look at it differently if it's a pure technology buy or it's primarily technology or if it's more of a client base play or a mixture of both.

Our metrics adjust based on what it is we're buying.

You pay for innovation, we understand that, so we're willing to look at businesses that we think have good technology, but we're not willing to excessively overpay for that technology.

Okay, thanks.

Our last question is from Matt O'Neill with Autonomous Research.

Your line is open.

Hi guys, thanks for squeezing me in at the end here.

I just had a quick clarification.

The 590,000 in clients, is that -- that's inclusive of SurePayroll?

Correct, yes, it would be.

Got it.

And then just noticing some recent announcements from some new entrants/potential competitors, most recently, yesterday, Square formalized their payroll offering, at least in California, anyway.

Is there any anecdotal evidence you guys are hearing reported back from your sales force, as far as dynamics or shifts or anything going on, on the competitive front or is it still the usual players that we're all used to, that you guys see day in, day out?

It still pretty much usual players.

I know that obviously there's been a lot of announcements, but it really hasn't -- we have not seen a big impact there.

It's some for price but when they look at the feature functionality, the size of the Company, whether it's public or not, meaning that you're trusting your payroll taxes, a very significant cost as a small business with someone, and that limited functionality and the limited compliance resources.

When you think about Paychex, we have 200 people that focus on compliance and being able to deal with all of the agencies -- federal, state, and local -- it has not been a big impact at this point.

We certainly take all competitors very seriously but we haven't seen a big impact at this point at all.

Got it.

And so based on the sales strategy of going all-in, would you actually quantify it as potentially being harder for a new entrant to compete against somebody like you?

Here's the--

With that backdrop, as product offering?

Yes, Matt, we'll talk about this at our investor day.

What the people who pitched the disaggregation thesis are selling is the notion that integrated solutions are less important than getting the best deal on every disaggregated portion of the bundle.

We can tell you that when you tie that together with technology and you have very good offerings in each of the service areas that a small- and medium-size enterprise wants, that's a winning proposition.

That's what they are looking for.

And then put world-class service on top of that, with a great mobile platform, you've got a pretty powerful combination.

So if you'll compete against that with one cheap payroll offering, you're going to be challenged.

Got it.

Thanks very much.

I won't take any more time.

Thanks.

That is all the questions we have gentlemen.

Thank you.

At this point, we'll close the meeting.

Then if you're interested replaying the webcast of this conference call, it will be archived until August 3. Thank you for your interest in Paychex.

We very much appreciate your participation in our call and we look forward hopefully to see many of you at our investor day in just a few weeks in Rochester, New York.

Thank you and take care.

That does conclude today's conference call.

We thank you all for participating.

You may now disconnect and have a great rest of your day.