沛齊 (PAYX) 2016 Q3 法說會逐字稿

Welcome, and thank you for standing by.

(Operator Instructions)

This call is being recorded.

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

I now would like to introduce Mr. Martin Mucci, President and Chief Executive Officer.

Sir, you may begin.

Thank you very much, and thank you for joining us for our third quarter FY16 earnings release call and webcast.

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

This morning before the market opened we released our financial results for the third quarter ended February 29, 2016.

Our Form 10-Q, which provides additional discussions and analysis of the results, will be available later today.

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

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'll review the highlights of the third quarter related to sales and operations and product development.

Efrain will review our third-quarter financial results in more detail, and discuss our full-year guidance.

Then we'll open it up for any questions.

Once again we've experienced growth across our major human capital management solutions during the third quarter.

Our third-quarter financial results reflected total service revenue growth of 7%, including 4% in payroll service revenue, and continued double-digit growth in our HRS revenue.

We experienced positive sales growth through the first nine months, including a strong selling season.

We were particularly pleased with our results in the mid-market space.

Our HR outsourcing services also continued to reflect strong growth.

Mark Botini, our Head of Sales, and his organization have done a terrific job working as a team to demonstrate to new clients the value of our full suite of products that are the full -- the value of our full suite of products that they offer.

Our sales force turnover is at its lowest level in years, and we are already ramping up for additional reps to be fully staffed for the start of FY17.

Our service execution continues to excel, demonstrated by continuing high levels of client satisfaction and retention.

We completed a successful calendar year end, and our employees continued providing great service, as we have moved to an even more flexible service options.

Year to date, we are experiencing the best net client gain since the recession, as a result of both positive and effective selling, and solid retention results.

In terms of product development, we continue to focus on enhancing the user experience and flexibility with Paychex Flex, our cloud-based human capital management platform.

Paychex Flex delivers access to payroll, human resources, and benefits information, creating a streamlined and integrated approach to workforce management.

Earlier this fiscal year we launched new and integrated modules within the Flex platform.

This included the addition of Paychex Flex Time, Paychex Flex Benefits Administration, and Paychex Flex Hiring, which includes paper-less recruiting, screening, and on-boarding.

This integrated suite allows for a simpler user interface that is supported by an industry-leading service model.

We are very proud of our Paychex Flex platform, and we're pleased to be recognized for the value our technology brings to our clients.

In addition to the recognition from the Brandon Hall group, and Gartner increasing our position on the magic quadrant earlier this year, PC Magazine recently recognized Paychex Flex as one of the best cloud-based payroll services for 2016.

We are very proud of the increased recognition that Paychex software-as-a-service-based products and service are experiencing, and we see this played out with solid sales and retention performance.

Last fiscal year we launched our Paychex Employer Shared Responsibility service, which is our full-service Affordable Care Act, more commonly known as ACA, solution.

Our ESR product includes a monthly monitoring service with automatic alerts, as well as year-end reporting.

Our revenue from this ACA solution has increased as we assist clients with their monitoring and year-end reporting requirements.

As a result of the demand for this service, we have increased our implementation and support spending.

On December 22, we completed the acquisition of Advance Partners.

Advance Partners offers customizable solutions to the temporary staffing industry, including payroll funding and outsourcing services.

We are excited about the opportunity this acquisition provides, and believe it's a great fit.

The temporary staffing industry has experienced expanded growth in clients within our targeted market of small and mid-sized businesses.

Our consolidated financial results include Advance Partners from the date of the acquisition in late December.

We remain committed to adding value to our shareholders.

Last July, we increased our dividend by 11% $0.42 a share, and have maintained a strong dividend yield of over 3%, one of the highest in our industry.

Our stock repurchase program remains in place, and we have acquired 2.2 million shares of common stock during the first nine months of FY16.

I would like to take a moment to mention something else we are very proud of.

On March 10, we were recognized by Ethisphere Institute as a 2016 World's Most Ethical Company.

As an eight-year honoree, we believe this award underscores our committment to leading ethical business practices, and standards and practices ensuring long-term value to key stakeholders, including our customers, our investors, and employees.

We are one of only two companies in the outsourcing services category honored this year.

In summary, we saw continued strong execution from our sales and service teams, our product and financial performance remains strong, and I appreciate the great work of our Paychex employee team.

We are focused on a strong finish to FY16 in a few months here, and I will now turn the call over to Efrain to review our financial results in more detail.

Efrain?

Thanks, Marty.

Good morning.

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

Refer to the usual disclosures.

As Marty indicated, our third-quarter financial results for this fiscal year reflect continued progress across major product lines.

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

Total revenues, as you saw, grew 7% for the third quarter and nine months to $753 million and $2.2 billion, respectively.

Total service revenue also grew 7% for the third quarter and nine months to $741 million and $2.2 billion, respectively.

Interest on funds held for clients increased 11% for the third quarter, and 8% for the nine months, to $12 million and $34 million, respectively.

We are beginning to see some positive impact from recent increases in interest rates.

Average invested balances for clients' funds were basically flat year over year, as positive impact from client growth was roughly offset by lower state unemployment insurance rates.

Total expenses increased 7% for both the third quarter and nine months.

Compensation-related costs were the largest contributor to this growth, driven by higher wages and performance-based comp.

In addition, strong growth in the PEO, and the additional cost for Advance Partners in this quarter were factors in expense growth.

Operating income net of certain items increased 6% for the third quarter and 9% for the nine months to $268 million and $837 million, respectively.

We've maintained strong operating margins of 36% for the third quarter and 39% for the nine months, but anticipate that our full year will remain within our guidance of approximately 38%.

As a reminder, we typically experience lower operating margins in the back half of the fiscal year.

Net income was up 7% to $180 million for the third quarter, and 13% to $579 million for the nine months.

Diluted earnings per share increased 9% to $0.50 per share for the third quarter, and 13% to $1.60 per share for the nine months.

The nine-month period was positively impacted by the net tax benefit related to prior-year revenues that were recognized in the first quarter.

Excluding this impact, net income and diluted earnings per share would have risen 9% and 10% respectively.

What you see in EPS is a function also of the effect of buybacks that we've done over the past year.

Payroll service revenue increased 4% for both the third quarter and nine months to $440 million and $1.3 billion, respectively.

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

Revenue per check grew as a result of price increases net of discounting.

Advance Partners contributed slightly less than 1% to payroll service revenue growth for the third quarter.

Let me repeat that, slightly less than 1% to payroll service revenue growth for the quarter.

I would say one other thing.

Checks per client in the quarter moderated.

This was partly a result of two things.

One is in the third quarter, benefits -- I should say bonus checks are -- typically, we assume they are going to be a little bit higher than the year before.

That didn't end up being the case this year, although it's difficult to quantify.

We had a little bit of impact that was the result of client mix in the quarter.

Q3 is a little bit tough to predict in that respect.

We ended up a little bit lighter than we had projected.

HRS revenue increased 12% to $301 million for the third quarter and 13% to $865 million for the nine months.

We are pleased with the growth for the quarter.

If you recall, last quarter we indicated that we anticipated Q3 HRS revenue growth to be below the low end of the range for our annual guidance.

This was due to a comparison to a stronger quarter in the prior year.

We exceeded expectations, landing in the middle of the range.

The increase reflected strong growth in both clients and work-side employees at Paychex HRS Services, our largest HRS revenue stream, which includes ASO and PEO products.

We had -- continued to have strong growth in PEO revenue in the quarter.

Insurance services benefited from continued growth of our ACA product that assists clients with health care reform, and an increase in health and benefits applicants, together with higher average premiums and clients in our workers' comp insurance programs.

One other note, and we called this out in our Investor Day.

I want to just highlight this.

HCM module revenues that assist clients in HR administration and time and attendance also were strong in the quarter.

You don't see that in the payroll service revenue because of the way we account for it, but as we discuss during -- we will discuss during the call when we get questions on sales, we had a strong performance in mid-market, and you see that reflected in HRS, not in payroll.

Advance Partners contributed slightly more than 1% to HRS revenue growth for the quarter.

Now turning to our investment portfolio, our goal continues to be the protection of principal and optimization of liquidity.

On the short-term side, our primary short-term interest vehicles were bank demand deposit accounts, US Treasury securities, and high-quality commercial paper.

In our longer-term portfolio, we invest primarily in high-credit-quality municipal bonds, corporate bonds, and US government securities.

Long-term portfolio has an average yield to maturity currently of 1.7%, and an average duration of 3.2 years.

Combined portfolios have earned an average rate of return of 1% for the third quarter, and 1.1% for the nine months.

In December, the Fed raised federal funds rates by 25 basis points.

This was the first interest rate hike in nearly a decade, as you know.

With this, we have raised our guidance on our interest on funds held for clients to high single digits, where we had previously indicated it would be relatively flat.

That simply reflects what you're already seeing in the numbers, so it's not a significant change in guidance.

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

It remains strong.

We had cash and total investments of $756 million as of the end of the quarter, no debt.

Funds held for clients as of February 29 were $4.7 billion, compared to $4.3 billion as of May 31, 2015.

As you know, funds held for clients vary widely on a day-to-day basis, and averaged $4.5 billion for the quarter and $4 billion for the nine months.

Total available for-sale investments included corporate investments in funds held for clients reflected net capitalized gains -- unrealized, I should say -- gains of $61 million as of February 29, compared with net unrealized gains of $14 million as of May 31, 2015.

Total stockholders' equity was 1.9 million as of February 29, reflecting $455 million in dividends paid during the nine months, and $108 million of common shares repurchased.

Our return on equity for the past 12 months was a sterling 39%.

Our cash flows from operations were also strong this quarter, and I want to call that out.

They totaled 791 million for the first nine months -- again, a very strong 14% increase from the prior year.

The change was a result of higher net income, higher non-cash adjustments to net income, and positive fluctuations in working capital.

From a financial metrics perspective, very pleased with where we ended.

Now on to the 2016 guidance.

I'd like to remind you that it's based on current view of economic and interest rate conditions.

Guidance for the full year is unchanged from previous quarters, except as I mentioned for interest on funds held for clients.

I'll reiterate some of our full-year ranges, and then give some concluding color.

Payroll service revenue anticipated in the range of 4% to 5%.

That obviously also includes the addition of Advance Payroll in that number.

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

Again, Advance is in that number.

We obviously expect it will be at the high end of that number.

Total service revenue is anticipated to be in the range of 7% to 8% -- again, towards the high end of that number.

Net income growth is anticipated to be in the range of 8% to 9%.

Please note that the range excludes the benefit of the net tax benefit we recorded in the first quarter.

Effective tax rate for the year, also excluding the impact of the net tax benefit recorded in the first quarter, will be approximately 36%.

Our interest on funds held for clients is now expected to grow in the high single digits -- as I said, as a result of recent increases in interest rates.

Current guidance does not anticipate any additional increases in the Fed funds rate for the remainder of the fiscal year.

If someone can decipher what the Fed is saying, I would be interested in getting schooled on the subject.

Finally, we anticipate the contribution of Advance Partners is going to add somewhere between 1% and 1.5% to total service revenue in the fourth quarter.

That's a bit of color on what's happening there.

Finally, we anticipate higher selling expense in the last quarter of the year.

We had strong sales, and comp will be up as a result of that.

Higher ops expense due to stronger sales also, and also client on-boarding for our ACA compliant solution.

We anticipate with all of this that our operating margins in the fourth quarter will be between 35% and 36%, bringing the full-year margin in line with our previous guidance of approximately 38%.

With that, I will turn it back to Marty.

Great.

Thanks, Efrain.

Operator, we'll now open it up for any questions or comments.

(Operator Instructions)

Our first question come from Danyal Hussain of Morgan Stanley.

Hi.

Good morning, Marty and Efrain.

Thanks for taking the question.

I wanted to start off asking about small business hiring.

Your index suggests there's been stability in the past few quarters, but we've seen mixed data points elsewhere about optimism in hiring, and heard a more cautious tone from one of your competitors.

Maybe could you talk a little bit more about what trends you are seeing there?

Yes, what we've seen with the Paychex HIS small business index, which we released for the month yesterday, we saw the best three-month increase in the job growth rate for small businesses under 50 in two years.

This wiped out all of the decrease that we saw, a decrease in the growth rate at the end of 2015, calendar year 2015.

Then in this first quarter we saw that bounce back and wipe out all the decrease.

We think that small business hiring, job growth, is on the up-swing right now.

It's not huge, but it certainly has recovered the decrease we saw last year, so we're pretty optimistic about it.

We're seeing it.

A lot of -- there is some part time in there that we're seeing increase, as well.

You're seeing it in services like -- or in sectors of jobs like other services and leisure and hospitality, where there tends to be some part-time jobs; but we're definitely seeing some optimism in the job growth rate.

Got it thanks.

You're expecting, I think, a potential second wind with ACA selling, as you approached or passed in the most recent employer mandate deadline.

It may be too early to say now, but are you getting any read from your sales force in whether you're seeing interest pick up again over these past few weeks, or accelerate?

I haven't heard it yet, but I think as the deadline for the 1095c's tomorrow hits -- and there's been a lot of activity obviously in the last 30 days with clients, and those who were not providing some of the data and now are scrambling to give data and make sure they're covered.

I think we still expect that we'll see a second wave pick-up here somewhat in the next quarter, but I haven't really heard that yet -- but I do think it will pick up.

Got it.

Thank you, and maybe one last quick one.

Could you call out any non-recurring costs related to the Advance Partners acquisition, either the deal or integration costs?

There weren't any integration costs, but obviously our expenses were higher.

I think I called it out in the comments that essentially in the quarter the additional revenue from Advance Partners was matched by the additional expense, so it's recurring.

It's not non-recurring, but it's in those numbers.

Okay, thank you.

Thank you.

Our next question comes from Jason Kupferberg of Jefferies.

Good morning, guys.

This is Ryan Cary calling in for Jason.

I just wanted to ask a question on the growth of the core payroll business in the quarter, which came in a little bit below where we had modeled.

I know you had called out growth for the quarter to be at the low of the full-year range at the 4% to 5%.

Once I exclude the benefit from Advance, it looks like the growth was more in the 3% range.

First, is this the right way to be thinking about this?

Second, anything particular that was a drag in the quarter?

Lastly, how should we think about the full-year guidance range.

Should we now expect growth maybe at the lower end of the range?

Wow.

You pack, Ryan, a lot of questions in one sentence, so let me un-pack that.

I think you're right that about 3% is correct.

In my comments, I called out specifically that the driver of that being of the 3% -- which by the way is up sequentially from last -- from the comparable quarter a year ago, where we were a little bit over 2%, really was driven by checks.

There's two things that happened, because I'll get a number of questions on this on the call.

Third quarter's unusual compared to every other quarter in the year, because third quarter is a quarter where you have more checks than normal due to bonus checks.

There's simply no way to figure it out.

I've spent a lot of time looking at dollars to figure out whether they equate to checks.

We don't know whether there just may have been lower check volume in part because of bonus checks.

Then the second thing that I called out is our client mix was a little bit lower in the quarter than we modeled.

The combination of both of those drove the rate down a little bit.

We'll have to see whether that's a trend that continues.

In part, there's a good point to that.

Our unit sales growth is at this point trending about two times, double what it was last year.

When you have that, you tend to have a mix that skews a little bit lower.

Then one other point that I would make on that is that the way that we report numbers, what you see as payroll is simply the portion of a bundle that is payroll.

It really says nothing, literally, until you can aggregate to that the payroll, the non-payroll portion of the sales that are made in the mid market.

There we saw some nice pick-up in the quarter.

I think that the short of it, after I've said all of that, checks were a little bit lighter in the quarter than we anticipated.

We'll see whether that's a trend that continues.

Client mix skewed a little bit smaller than we had projected, but we'll see where we go from here.

No, when I say those of you who know when we talk about guidance, when I say it's between 4% and 5%, you can peg where we expect it to be.

Great.

I believe in the last couple calls you've called out new bookings growth, in that low double-digits range.

How should we think of this trend through the key selling season?

Would you say it's roughly in line with where it' been the past couple quarters?

Any color would be appreciated.

I think we were pleased with the selling season.

I think year to date we've continued to see that double-digit, low double-digit growth.

We're happy, and that's across the board for the different divisions.

We're feeling good about it.

Great.

Thanks for taking my questions.

Thank you.

Our next question comes from Tim McHugh of William Blair.

Yes, thanks.

Hi, Efrain.

I just want to ask, the comment you just made about unit sales being 2X what they were trending last year?

When you say unit sales, can you be -- is that net client growth?

What are you referring to?

Yes, so unit sales are going -- obviously you need to know what losses are, but that's one -- the first part of the equation.

Unit sales growth is trending higher than it was last year.

Because sales -- I'm sorry, losses are trending in line with where they were last year, we're expecting obviously decent net client growth.

Okay.

You're not willing to say year to date where you're at with that?

Year to date, I'd say this Tim, that our net client growth year to date is higher than it was last year.

Okay.

Then just going back to another comment you made.

The margin, 35% to 36% for Q4.

Was that excluding interest revenue, or was that the gap number?

Yes, that's our op income margin -- yes, excluding.

Excluding interest?

Yes.

Okay, just wanted to be clear.

No, I get your question.

Thanks for clarifying.

Okay.

Then you highlighted last week the -- you referred to a middle market a few times as really a particular area of strength.

I think you talked about time and attendance in that bucket.

Can you just -- I guess, where are you seeing strength in middle market?

Can you remind us at this point how big that is, and how much more quickly is that growing than even the core overall business, to add some perspective?

Yes, Tim, I'll take that.

I think what we're excited about is I think we're seeing the pay-off for all the technology investment that we've made.

With flex having added that full product suite, we're selling a lot more -- we're selling more clients, and we're selling a lot more full bundled clients with full time and attendance, and HR support benefit enrollment, benefit administration, et cetera.

We don't break out the client base specifically, but it is growing.

The sales are growing very well year to date, and at the highest rate that it's been, probably since pre-recession.

The mid-market has come on very strong year to date, and certainly seeing that growth stronger than on the small end.

All sales are doing well year to date, but that's the strongest we've seen.

Okay, great.

Thank you.

Thank you.

Our next question comes from Gary Bisbee of RBC Capital Markets.

Hi, guys.

Good morning.

Hi, Gary.

In light of the commentary on strong sales, retention remaining stable but at a very good level, I struggle to think through how we should think about what that means for service revenue growth?

If we adjust last year for the change in PEO presentation, it really doesn't look like you've seen any acceleration in service revenue growth.

If you back out the acquisition this quarter, one might even argue you've seen modest deceleration in the last quarter, too, versus last year's trends.

How should the better bookings and stable retention flow through?

I know you don't want to talk about 2017 at this point, but is there any reason that we shouldn't expect that all the positive stuff you've talked about is going to lead to the top-line growth accelerating on an organic basis?

Yes, Gary, I'd say Q3 is a weird quarter in the sense that there's always some elements of timing in it.

If I just pick on the quarter and project Q3 forward and say what are you assume about that, I think you've got to add in Q4 to get a better picture, because the back half tells a better picture.

Sequentially, Q4 is going to be stronger than Q3.

I think you need to take both of those quarters together, and that gives you a more accurate picture of where the Company is going.

I think obviously, you've got projections, and there's street projections out there.

They seem reasonably in line with what we expect is going to happen.

Then we'll issue guidance off of that.

I don't -- this is not a business that where you can project one quarter to tell you what the rest of the year is going to look like, because there's always elements of timing, when days fall.

For example, this quarter ended on a Monday.

Whether the quarter ends on a Monday or a Thursday can have some impacts on revenue, so I'd say you really need to look at three and four to form a better opinion.

Okay, fair enough.

But we're pleased.

Just one other thing, Gary.

When we look at the key indicators -- before this call, I looked at 12 key indicators.

I'm looking at client base, I'm looking at discounting, I'm looking at net client growth, I'm looking at sales units; I'm looking at sales -- annualized sales revenue.

Every vector was pointing in the right direction.

The only item in the quarter that was a little bit lighter than we anticipated was checks, and there's some variability in that, so it doesn't concern me significantly.

Okay.

Great, thanks.

Then I've asked you this before, but I feel like I keep needing to ask it.

You've had this strength in bookings.

We've seen it from a lot of other HR outsourcing companies.

I think at some level Affordable Care Act has led companies to -- a lot of businesses to take a fresh look and decide if they should outsource more.

It's not just the ACA compliance, but I think broadly PEO and other have benefited.

Do you have any better sense at this point if any of that has been pulling forward future sales, or there's risk of now having to at some point in the next year of comp this very strong growth in bookings you've seen, and it gets a lot more difficult?

Or are you -- is what you're hearing from your sales force and what not lead you to believe more that this is going to be a sustainable trend of more desired outsource?

Thank you.

That's a good question.

I think it certainly has pulled some sales forward for clients who may not have made the choice to outsource before the Affordable Care Act pushed them into it.

But I also think in a general sense that we've talked about the last few years, you see the need for HR and the acceptance of outsourcing and going to an HR administration and a SaaS-based product for time and attendance, HR administration, benefit enrollment, payroll.

We've seen that certainly come down in size from 50 employees to 100 employees down below 50.

I think there's still plenty of opportunity to have strong sales, even -- it's not just the Affordable Care Act.

We still feel good about the opportunity for future sales, because the demand has come down, meaning more clients are interested it in and gaining value from it, and the fact that I think we've invested very timely in our products and service model to be able to respond to that increased demand.

Great, and one last one for me.

If I'm doing the math right on Advance Partners, it looks like you paid a pretty healthy multiple, eight or nine times sales and 20 times EBITDA, or something like that, for this business.

Can you give us a better sense how you justify that price as a reasonable price?

Particularly given the highly cyclical end market it operates in, how confident are you that you can continue to grow the business at the rates they've been doing?

Thanks a lot.

Hi, Gary.

I think your numbers are off.

Let me just correct your assumption.

We actually paid somewhere between four and five times revenue for it, and we paid less than 10 times EBITDA for it.

We don't typically over-pay, so that's Part A.

Okay, great.

I think the numbers are slightly off.

The second part is we are not in the staffing business, and we have no interest in being in the staffing business.

But we have a lot of interest in providing back-office services to the staffing business, because we think from a secular growth perspective -- and Marty alluded to it earlier in his comments -- we think temp staffing is going to do nothing but go up, Part A.

Part B is there's lots of small- and medium-size staffing firms, and those of you who cover that industry know that.

For every large staffing Company there's always spinoffs that need financing and funding and back-office services.

We had looked at this transaction literally for three years before we pulled the trigger to convince ourselves that the growth rates were real, and that there's an opportunity for someone with the right kind of both service and capital availability to come in and make an impact.

We are very comfortable about both those issues, and that's really what drove the transaction.

So far, so good.

Great, thank you.

I appreciate the color.

Thank you.

Our next question comes from Bryan Keane of Deutsche Bank.

Hi, guys.

Good morning.

I heard the comments about the mid market being strong.

Just curious the low end and then the high end.

Any changes in the dynamics in the market, especially competitively, that you guys saw in the key selling season?

Not really, Bryan.

We're not seeing much change from a competitive standpoint, frankly, in any of the markets.

We focus primarily on that small to mid size, and up to 1,000 -- primarily, I'd say up to 500 or so.

Again, very strong on the mid market.

The low end was as expected in a typical selling season.

As Efrain and we both mentioned, year to date our net client gain is the best its been since pre-recession levels.

We're feeling good about not only the sales side of it, but also the retention.

Then just thinking about this key selling season, how did net pricing look, how did that come out for the quarter and for year to date?

Look, I think Bryan, pricing is always competitive during the selling season.

This was no difference.

As I've mentioned in a number of meetings, you discount during the quarter at a level that's appropriate to get the business.

Then over time if you deliver service you have a chance to recoup that discount.

I would say it was comparable to what we've seen in prior years.

Okay.

Finally for me, on checks per client, I know they moderated.

I think I understand that for the third quarter.

What does that mean for the fourth quarter?

Does it bounce back or does it stay at this depressed level?

Thanks so much.

I wouldn't use depression, but I use the word moderated.

Look, I don't completely -- I can't completely answer that question, because bonus checks as I mentioned earlier in Q3 have an impact.

It could be that we see a little bit lighter checks per client going into the fourth quarter because of client mix.

But I would assume that will be a little bit lighter than we had initially projected in Q4.

Okay, thanks for the color.

Thank you.

Our next question comes from Kartik Mehta of Northcoast Research.

Good morning, Marty and Efrain.

I wanted to ask a little bit about the Advance Partners acquisition.

Is this an acquisition where -- you talked about the temp business growing.

Is this a business that you anticipate growing organically by using your balance sheet and your distribution, or is this something where you have to go acquire some other companies in other geographies to build a little bit of scale for this business?

Well, I think primarily it's organically.

There may be some opportunity, just like they would have if they were on their own, to acquire other companies.

They will always look at that just like we are that are in that kind of business.

Organically, what we saw was a great leadership team that had been producing solid growth, and it fits our market.

It's small and mid-size staffing companies that they provide everything from payroll funding to payroll outsourcing to HR support.

We think it's a good fit, and we saw their clients -- that's a growing industry with their clients.

We were -- when we started getting into this, we were surprised at the thousands of small independent staffing firms that needed that support.

We thought they were providing a great product and had lots of growth opportunities.

When you couple that with the fact that we have a number of staffing companies as clients, independent staffing companies as payroll clients, we now I think can take to our clients additional product and services that they offer, and that will help their growth even more.

We saw it as a really good fit, not only from a product to service, a market, and a leadership team vantage point.

Then Efrain, you're in a very enviable position.

You have a balance sheet with almost $700 million in cash, no debt.

I saw you bought back some shares this quarter.

Going forward, what's the strategy?

Do you think you would continue buying back shares, or is this price where the stock is prevent that?

Are there acquisition opportunities, or is there anything changing in that environment that would allow you to take advantage of maybe acquiring a company?

Yes, so three questions.

First, I would say this, that when you look at the results for the quarter, EPS is up 9%, and shares were down.

We've been slowly whittling away at the share count, and would anticipate that will be flat to modestly down in the future.

We do have -- we added share buybacks into our capital distribution approach.

Kartik, the second point is that -- and Advance is one example of it.

For a number of years, you've heard us say that we wanted to keep some powder dry to be able to move quickly to do acquisitions.

(audio difficulty) pipeline as robust as it's really been in the last three or four years.

There are a number of acquisitions that we're looking at that could consume much or all, or even more of that cash.

We prefer at this point until that pipeline dries up, to focus on the right kinds of selective M&A as a use of that cash.

If in the next 12 months those opportunities don't materialize, then we'll have that discussion.

Marty and I have had that discussion with the Board.

At this point, part A is do M&A and part B will be -- we'll reach that when M&A is no longer an opportunity.

Thanks, Efrain.

Appreciate it.

Thank you.

Our next question comes from S.K. Prasad Borra of Goldman Sachs.

Thanks for taking my questions -- a couple, if I may.

First, probably on just the revenue visibility.

Has anything changed this year compared to say the last few years you have seen -- specifically from the point of view that the unit growth you're talking about that seems to have close to doubled compared to the trends what you're seeing last year?

Your revenue retention seems to be pretty stable, so what should stop from payroll growth to accelerate in the next few quarters?

S.K., just a few points on that.

I think we have been very effective at the low end of the market in capturing units as compared to last year.

In order to have significant growth in unit acceleration that would be visible in two or three quarters, we need to have sustained -- continued sustained unit growth.

We look at strategies that drive that.

We're fairly unique in that we play both in the micro space with everything from SurePayroll to the mid-market space with our Paychex Flex integrated solution.

We'll have to have a number of continued strong quarters in terms of unit growth to drive that higher.

One thing I want to emphasize, which I said earlier, for us as we think about payroll service revenue growth, increasingly what we think about is HCM platform service growth, and we're seeing that already.

You see that in the HRS numbers.

What our sales people do -- a sales person in our one to 50 or small market sales force, they are not simply selling a payroll-only solution.

They are increasingly selling a bundled HCM solution, and we're seeing benefits from that.

The benefits don't flow into the payroll service revenue line, because the portion of the HCM platform --particularly HR administration and time and attendance, where we're seeing really good growth -- really is reflected in HRS.

I think we're seeing a bit of both, and we're going to focus on both driving revenue by selling more integrated HCM, and also driving units by approaching that smaller market aggressively.

Okay, that's great.

Probably just one on the cost side.

Martin, you also here mentioned that the implementation costs have slightly been higher compared to recent quarters.

Are you planning on capturing that in terms of your head count increase, and would you expect the implementation cost to stabilize now, especially the ones related to ACA, or do you expect that to inflect higher over the next few quarters?

I think it stabilized at this point, unless we have a big influx of new sales.

I think this was the most difficult quarter to get through, in getting all of the -- the first time going through getting all of the 1095c forms out and so forth, so we ramped up for that.

I think that will be -- I'm not sure that will decrease necessarily at this stage, but I don't think -- I think we've ramped up, and I think we're holding pretty well at this stage.

Then any other additional head count will really depend on sales and the number of net clients that we're adding.

Obviously we said the net client gain is better than last year and better than we've seen in a few years.

That may drive some head count, but I don't see any big jump over what we've already done.

That's very helpful.

Thanks, Marty.

Thanks, Efrain.

Thank you.

Our next question comes from David Togut of Evercore ISI.

Thanks, good morning.

Just a quick follow-up on the strength in the mid market; trying to piece together what you're seeing with what ADP is seeing.

For example, they called out an unusual drop in client retention in the December quarter, particularly tied to slower-than-expected transition from a legacy platform to their cloud-based work force now.

I'm just trying to understand, is the strength in the mid market somehow tied to this probably short-term drop in client retention at ADP, or do you think it's all related to upgrades related to Flex?

Yes, I think it's more the upgrades related to Flex.

I think we're holding and we're maintaining a good retention in our mid-market clients but the sales have increased.

It hasn't been -- I don't think from any one competitor.

I think we're doing well against our main competitor there, but I think we're winning -- we're just winning more because the product and the service levels are better.

I don't think -- it doesn't feel like a one-time thing to me.

The sales have accelerated and shown consistency.

When specifically did sales start accelerating in mid market?

Pretty much in the last two quarters, but I think mostly this quarter as you get to year end it's a little bit skewed.

Really, we got to the point last fall, September-October, when we really had the full suite brought into the software-as-a-service product; the Flex.

We added the complete time and attendance and benefit administration enrollment, and the electronic paperless on-boarding -- really came together in a single employee record in the September-October time frame.

That is when we started to started to start pick-up speed.

Okay, thanks very much.

All right.

Thanks, David.

Thank you.

Our next question comes from Rick Eskelsen of Wells Fargo.

Hi, good morning.

Thank you for taking my question.

I just wanted to ask on the HR outsourcing side, and the PEO and the ASO.

What are you seeing on demand in clients' acceptance of one versus the other?

Are you seeing more clients move to the full-service PEO model rather than the ASO?

Just get that dynamics between the two of those, and more on the demand, which I believe was strong in the PEO?

Yes, I think we haven't really seen a big shift there -- maybe a little bit leaning toward the PEO, given the fact that the Affordable Care Act requirements.

But I think we're still seeing sales both sides grow pretty well.

It's just a preference.

That's why we feel very good that we have sales and service folks that handle both.

They really respond to the client needs and what the best fit is.

You still see PEO predominantly in certain states where there's a comfort level with it, and there's just better knowledge of it; but we're seeing that expand to a few other states.

It's still primarily in those PEO states, I guess I'd say.

Thanks.

Then just one follow-up.

We've read in the press some stories about funding getting tougher for start-ups in certain situations.

Two parts to the question.

First, what impact if any does that have on your client base and the growth in new client opportunities for you?

Then second, what impact might that have on the competitive environment out there for you guys?

Thank you.

I would start by saying I haven't -- we haven't heard or seen it get that much more difficult.

I think some small business lenders have come down.

But there's been actually -- it's always difficult to fund new start-ups.

The hardest -- the biggest hit to that was the drop in home equity, because that's really how a lot of these got started, and that happened back in the recession.

If anything, I think some of that has come back and not so much tightened.

Now you've got also an explosion of online offerings that will provide lending to small businesses, if they have some credit.

I don't -- we haven't seen it have much of an impact on us at all.

There was really a big impact in the recession, and I think that has slowly come back.

Efrain?

Yes, just a couple of -- a little bit more color on that, just to build on what Marty said.

I mentioned earlier that payroll sales or sales units this year are trending above last year.

Actually, sales units are growing about twice the rate that they did last year -- sales units, that's not client base.

But what's interesting is when you disaggregate that number, our sales units from new business start-ups actually were up about 7% in the quarter.

It looks like the environment -- and that's a good development for us, because obviously, 50% or more of our sales in a given quarter come from newly started businesses.

That's a good development, and says the environment is good for sales.

Thank you very much.

Thank you.

Our next question comes from Jim Macdonald of Analysis.

Good morning, guys.

I had a couple of follow-up questions on Advance Partners.

I think I heard that the impact on the payroll side was less than 1%, and I couldn't quite hear the impact.

There was also an impact on the HR side, was that slightly more than 1%?

Yes, slightly more than 1%.

Okay.

On Advance Partners, what kind of integration plan do you have, and what kind of timing to maybe bring it to the rest of your client base?

Yes, Jim, we're already in process of -- we've identified the clients that we have that are independent staffing agencies.

We're working with the sales team at Advance to get them out and talking to them, where they already have a relationship with Paychex, and now we'll see this as an additional offering.

It's early stage.

We closed it at the end of December, but I think we've already been working on having identified the clients, get them in the hands of the sales team, make sure the sales team understands.

And be very careful with how they approach those clients, because they're Paychex clients, and we're trying to approach them, but offer them additional services and support.

As Efrain said earlier, we don't see any big one-time integration cost for this.

It's another great thing about the acquisition, and bringing them into the Paychex family.

We saw ongoing expense and ongoing revenue in the expense, but no big one-time integration costs.

It's really just bringing the groups together.

By the way, Jim, points I was asked earlier about specific integration costs in the quarter.

There were modest amount -- maybe between $1 million and $2 million in the quarter.

We just absorbed it, didn't call it out especially in the numbers -- thought it was just not important.

Great.

Maybe just one follow-up.

Do you expect to be able to accelerate Advance Partners' growth now that you're bringing them into your base?

Yes, we hope so.

We certainly would model it that way.

As we did the acquisition, we felt that they had good growth, but they were somewhat limited from a capital perspective, obviously, and from a cash perspective for their funding -- for the funding of their clients and the work they do.

Then just the client base that we have, I think between those two we do expect to be able to help them accelerate their growth.

Great, thanks very much.

Okay.

Thank you.

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

Thanks so much, just a couple quick follow-up questions.

Marty, at the beginning of the call I think you said that year to date you've seen your best client gains since the recession.

Are you talking about total clients, you talking payroll clients, HR clients?

Can you just qualify that a little bit?

Sure, it's payroll clients.

We always talk about it as payroll clients.

It's the net client gain of the total payroll base -- the one that we give once a year at the end of the year, we'll give the base.

Year to date, we've seen the best client -- net client gain, because of a combination of both better sales and solid retention since the recession.

Jeff, we typically have been saying that we'll be between one and three.

If you looked at our numbers, we've been slightly under two in prior years, and we're trending pretty solidly between two and three.

It takes a while for a client base of 600,000 clients to grow, but we feel pretty good about where we're at.

Okay, great.

I just wanted to double check on that.

Then Efrain, you were asked about the purchase price for Advance Partners.

I think you said something in the range of four to five times revenues, and less than 10 times EBITDA.

What time frame are we talking about for the revenues and EBITDA.

Is it forward-looking, backward-looking?

It's backward-looking.

It would have been their calendar 2015, which of course you don't have any access to.

But yes, we acquired them right at the end of December, and we paid between four and five times revenue.

I would just say this about Advance, and they have done a phenomenal job.

There are very few businesses that we have looked at, and we have looked at many, whose EBITDA margins are at or exceed Paychex, so obviously that got our attention.

Okay.

Then I'm sorry, just one more clarification on that.

That includes the debt that you absorbed in the transaction, net of cash?

Yes, so no, Jeff.

Part of the -- you'll see when we do the Q disclosures, we settle it out.

We paid off an existing loan that they had, chose to not re-fund it.

We'll fund it again, that's the way the business works.

But then we acquired a number of receivables that basically offset the amount of the loan.

On a net basis, when you filter through that, that's what I'm talking about.

It will have -- the disclosure in the Q, which we'll file at the end of the day, is pretty explicit.

Okay, great.

We'll take a look at it then.

Thanks so much.

Okay, thanks.

Call me if there's any questions on it.

All right.

Thank you.

Our next question comes from David Grossman of Stifel Financial.

Thanks, good morning.

Sorry to ask another question on growth so late in the call here, but I'm just looking at the numbers.

It would appear that if my math is right that Advance adds about 60 basis points to the service growth for the year, but we maintained the guidance for the year for service revenue growth.

That said, momentum in the businesses remain pretty strong and your tone is very positive.

I understand the timing issue with bookings among some of the other things that you mentioned, but I guess I'm still having a little trouble reconciling your tone with the guide for the year vis-a-vis the acquisition.

If you feel you've already addressed this we can take this off line, or if you have anything incremental to add that may clarify it, that would be great.

No, I get it David.

I understand the point you're making.

I think I said at the -- in my comments that we expected the guide for revenue to be at the high end of the range.

I'm not going to call out a 10- or 20-basis-point difference.

Obviously when we guide to seven to eight, we think we're going to be somewhere in the middle of the range at the beginning of the year.

I don't know whether 60 basis points is exactly correct.

It's not probably directionally all that far off, but now I'm into discussing whether it's going to be 8.1 or 7.9.

It's just too close to call, especially because as I mentioned, checks were a little bit softer.

I'm a little bit cautious about where we end up in Q4.

But that's the color on that number.

The trends are strong.

Then on the dynamic between the strength of the market and how that gets recorded as payroll versus HRS, does that dynamic then continue into FY17, so you see that you would probably see better HRS growth on a relative basis in payroll because of that mix dynamic?

Yes, that's right, David.

Look, frankly, just to expand on that.

You've covered the Company for a long time.

Ten years ago, what we did was we saw a payroll sales person, either in the small market, sold payroll -- that's what they sold.

Then if there were ancillaries, they were sold by an ancillary sales force.

That was the product we had.

I would say in the last five -- or certainly since Marty was CEO -- that dynamic has changed pretty significantly.

Our financials reflect the old dynamic, not the new one.

The new dynamic is this -- two things.

A much better sales efficiency, so that when Mark has a client of a certain type that we've identified it's a team sale.

But we've already discussed that in prior calls.

What's changed really over the last 18 months is that a small market payroll sales person is able to sell a HCM-bundled product, and they are increasingly doing that -- meaning our payroll sales people who used to sell payroll only now sell products that are actually included in the HRS revenue, which is time and attendance and also HR administration.

It is very possible that total revenue can grow nicely, and payroll service revenue doesn't seem to be moving significantly.

That's a function of where the technology has been and where the market is heading.

We're going to have to figure out how we represent that a little bit more clearly.

I think it is the case as we put more emphasis on selling more integrated bundles that you could very well see payroll service revenue not growing quite as fast, but you're seeing sustained growth in HRS, because that's where the other components of that HCM revenue are being recorded.

It wasn't a big deal several years ago.

It's a bigger deal now.

Great.

Well, thanks for clarifying that.

If I could just one last question on Advance.

Can you give us any sense of how much balance sheet exposure you have at any given point in time now that you've got that acquisition?

Yes, again I'll just point you to the Q. Our -- we established a dedicated line of credit for Advance, and that number is going to be somewhere between $125 million to $150 million.

Okay, and is the vast majority of that outstanding at a given time?

Yes, it's going to be outstanding at any given time.

By the way, just an aside, David, because I think it's a great question.

One of the things that we looked at, they've been around for 20 years.

Obviously, I -- not I, we -- had to look at the acquisition very carefully.

They've had very few problems, because they have very extensive credit vetting process.

We have a really first-rate group that also does that.

We've got -- there's a lot of safeguards that go into what we do.

Very good, thank you.

You're welcome.

Thank you.

Our next question comes from Mark Marcon of R. W. Baird.

Good morning, Marty and Efrain.

Hi, Mark.

Good, thank you.

Couple of quick follow-ups.

First of all, you said that the retention rate has improved.

Can you give us a little bit of feel for how much it's improved?

Yes, and actually what -- when we look at net client gain, retention has held pretty steady, which has been around our best ever, so we're right near our best-ever retention.

It hasn't really improved all that much, but it's holding very well even as the client -- even as the sales have gone up, so we feel very good about that.

Sometimes as the sales increase obviously retention becomes more difficult, as we are bringing in more clients.

The sales have gone up.

The retention, I'd say, has stayed pretty level at its best ever that we saw last year.

It's still in that 81% range?

Yes, or a little better, closer to 82%, I think.

Great.

Then with regards to the comments on the mid-market, can you quantify what portion of the mid-market you're seeing the strongest growth in?

In other words, small market is up to 50 employees, then is it the 50 to 100, 50 to 200?

How would you characterize that area that you're seeing the best growth in?

I think I'd go -- yes, Mark, I'll probably go fairly broad there, but it's -- I'd say 50 to 300.

That's where the most new activity is, I think, when you see it, because that's where this need, particularly with the ACA compliance and so forth has come down, and more are outsourcing and interested in outsourcing.

I think that's where we're seeing probably the biggest jump.

It's not in the 500-plus.

Let's say 300-plus, 250-plus.

We're still doing fine there, but the acceleration has been more that 50 to 250 or 300.

Great.

Then given all your comments with regards to selling additional modules, it sounds like you should have some confidence that the HRS growth is going to hold steady at these current levels that you're seeing for this year going forward, just given the dynamics -- or is there something that would drive that down lower?

I think no, I feel pretty good about it.

You never know, but at this stage, the only questionable thing would be -- we call it ESR -- would be ACA compliance, does that catch that second wave or not?

Overall, I think you may see a second wave in ACA as well as health and benefit insurance, for more people needing insurance, we may catch some wave there.

But the 401(k), the PEO/ASO, all seem very steady.

As Efrain said, a lot of our bundled products on low and mid being HR administration, on-boarding time and attendance, all seem to be very -- continuing to be very strong.

Yes, I would expect that.

What do you think the ACA on a direct basis is contributing to the second half of this year's growth?

Yes, Mark, it's -- I'll answer it, that's my pause.

I'm trying to figure out how to best -- it's probably less than 1%.

Great.

Then one follow-up with regards to the comment around -- or the question around acquisitions.

In terms of the acquisitions that you're looking at, are you looking at things that are still more in the Advance-size range, or was there some suggestion that perhaps we could look at things that are even bigger and could potentially be a bigger impact with regards to the balance sheet?

What's the minimum level of cash that you're comfortable holding on the balance sheet?

Boy, that's three questions so let me answer.

Part A, Mark, would be that much of what we're looking at is in that Advance -- SurePayroll Advance range, so that's part A. Part B, if you've heard me in conferences say this, we do look at larger acquisitions.

It would have to be right.

The numbers would have to add up.

It would have to give us some sort of durable, sustainable, competitive advantage in the market.

We would look -- not likely, but it's not out of the question.

Minimum cash -- it's lower than what we have on the balance sheet now, but this is a business where you have to project a sense of financial strength to the customers to whom we're entrusting $4.5 billion of cash to use.

I don't know precisely where that is, but certainly you need I would say not just cash but liquidity.

If you've looked at what we've done, we've been adding greater and greater liquidity over the last two or three years quietly, to make sure that we're never in a position where there's any issues on that.

Great.

Just to go back to the mid-market, it sounds like most of the mid-market growth has really been through adding more modules, as opposed to necessarily an increase in terms of competitive wins.

Is that a correct interpretation, or do you think your competitive wins have actually increased, as well?

No.

Yes, I don't think so.

I think our number of competitive wins have increased.

I think particularly as I mentioned in the fall as those products -- as the whole product suite got into that single employee record, and we had that full single sign-on flexibility, no, they definitely have picked up.

While we certainly are bullish on how well we've done on ancillary sales and add-ons and full packages, it's been also the payroll in the mid-market has been very strong -- strongest it's been in years.

We feel very good about the mid-market payroll sales, as well -- payroll and full bundle.

Great, thanks for the clarification.

Okay, Mark.

You're welcome.

Thank you.

Our next question comes from Lisa Ellis of Bernstein.

Hi, good morning, guys.

I have a question about Flex.

I know one of the unique aspects of Flex is that you've got this tiered service structure to it.

How are you seeing client response to that?

What types of service levels are the most popular, and how are you seeing that evolve now that you've rolled it out?

I think for the mid-market where we've been talking a lot about this morning, I think the biggest, the best impact for our clients has been the multi-product centers that we've been putting together.

In the past, you would have your payroll support, and then you would have your additional products in unique support to where they're uniquely trained on that product -- time and attendance and HRO.

While that worked well, sometimes clients would say geez, it would be even better if you were more connected as a team, so that things between various products -- if I had questions on how to use something or best, get the most value out of it.

Those multi-product centers have been established by John Gibson and the team, and we're staffing those up now.

We're seeing more clients come into the multi-product centers.

That's probably been the biggest benefit.

The other one is last year at some point we went to 7 by 24 service, and that's been a benefit.

I would say that's more of a benefit on the small end of clients, and we've seen an increased use of that where hey, they're doing payroll themselves online, and it's off hours.

It's Saturday, it's Sunday, it's a weeknight late at night, and they get hung up on something they want to do, and they can call for that 7 by 24 support now.

That's gained a lot of interest and a lot of positive feedback, as well.

I think it's that flexibility, or -- and as well, of course, they can do a lot more self service.

They can do a lot more things themselves.

We're finding that clients don't actually stick to one service model.

They are this week might want to be doing more things themselves, then get hung up on creating a couple of special bonuses or something the next week and need support, and the next week they might need after-hours support.

It's that flexibility that we're finding is getting positive feedback.

Got it.

In that example, just a clarification.

How does the pricing structure work then?

Not a significant change in pricing there.

We don't really charge a lot extra for this.

Well, we charge it in the price.

If you're taking a full bundle of products and you're supported by the multi-product center, we feel you're paying for that level of support in the price of the product.

We're not having you sign up for various support levels.

We feel that when you're buying a full product suite from us, we're going to give you a full multi-product service response to your needs.

Got it.

Okay, so you're seeing as you've got new clients coming on to Flex they're generally buying in the full service -- because you've got different -- a tiered pricing structure to it, right, with different --?

Sure, there's payroll only.

There's obviously various product bundles.

We're seeing more take multiple products.

Never enough for us; we would always like to see even more of that.

But we certainly have a lot of payroll only, but we also are picking up a lot of steam, as Efrain mentioned, with taking the full product suite right up front.

Our model used to be let me sell you payroll.

Once you're used to it, it's working well, you're feeling good about our relationship, two months later we come in with a sales force on 401(k) or a sales force on time and attendance, or whatever.

Now we're selling much more of the full suite of products right up front in the sale through integrated or team selling.

Perfect, thank you.

Thanks a lot.

Thank you.

Our last question comes from Tien-tsin Huang of JPMorgan.

Hi.

Great, thank you, good morning.

I just wanted to ask, given the selling commentary here.

Can we infer that full-service out-sourcing demand is getting better versus self-service or point solutions?

I know I've asked that in the past, but I wanted to see if we can tie those things together?

I think it's, Tien-tsin, a mix.

I do think it's going both ways.

You're seeing those with needs coming down.

I'd say even 20-plus employees, sometimes 15 depending on the business, they want more of a full-service solution.

They're not just looking for payroll.

They're looking for help with recruiting and on-boarding their clients and screening, and all of that that's tied right in with their payroll.

They're not just looking for payroll.

There's that growth in demand.

Then there's also on the low end much more -- there's more clients who say hey, I just want on online solution with 7 by 24 support when I need it, and I'm willing to do, and I want to do more things myself.

We're trying -- the changes we've been making the last few years in technology and service models have been to respond to all of that.

If you're an online client, we've made the online -- and continuing to do that, actually, this next 12 months -- make it much easier, and make it an employee journey for the clients so that they can walk through all the way from hiring right through to payroll, HR, et cetera, in a very self-service format, if that's the way they want to do it.

Okay, thanks for clarifying that.

I'm curious, any impact from benefits and what's going on there?

Have you seen any client change or coming back, et cetera, to Paychex?

A little bit.

I don't think we lost a lot to them, but we have seen a little bit of a pick up on the health insurance side, I think, where they probably lost some clients due to the concern about them and so forth in the licensing and compliance.

We've picked up some there.

I wouldn't say it's a big measurable or anything, but particularly in those markets on the midwest and west coast where it's been most visible, I think we probably picked up a little bit of demand there.

All right, great.

Thanks for the time, guys.

Okay, you're welcome.

Any more questions, Olive?

We have our last question from Sara Gubins of Bank of America.

Hi, thank you.

Just a couple quick ones.

First, do you have what the final year-one adoption of the ACA product was?

I know you talk about it being a little over 50%?

Yes, that's where we ended up, Sara.

Now just to clarify that -- and Marty talked a little bit about the second wave.

As new clients are coming on, particularly mid-market clients, you get a chance to sell the service.

That number as a percentage of the base could end up higher, but the initial wave was a little bit north of 50%.

Okay.

Then Efrain, there was discussion about mix trending down and that was an impact on the quarter.

You also talked about new business sales being about 7%, which was pretty impressive.

Is that a pick-up versus recent quarters?

I'm trying to understand how much of the mix down might be because of new business formation, as opposed to growth in SurePayroll?

I know I'm mixing terms between total client growth (multiple speakers).

No -- yes, I get it.

Yes, that's a fair question.

We've seen sales to new businesses trending up.

Q3 was a strong quarter in terms of sales to new businesses, so that's number one.

When you do that, Sara, you're correct that the units that you sell then have this impact of driving checks down a bit.

In Q3 in particular, it's tricky because you lose the most amount of clients, obviously, and you gain a lot of clients.

If that mix is a little bit off from what we project, you can get checks being a little bit more moderate than we expected.

By the way, when I say that, I'm talking about 0.1%.

I'm not talking about 4% or 3%.

I'm talking about being off by 0.1% in what you project.

It was a little bit lighter there.

Sure had a good quarter, but Sure really wasn't driving that result.

Okay, great.

Then last question.

Do you by any chance have the number of payroll days in FY17 versus FY16?

The number of what, I'm sorry?

Payroll days.

Number of payroll days.

In FY17?

Yes.

No, not yet.

I think we're going to have one less than -- one less day.

I shouldn't say no, and then I give you the answer.

The answer is one less than next year.

Okay, great.

Thanks a lot.

One less than this year, just to clarify.

Thank you.

We show no further questions at this time, sir.

All right.

At this point we'll close the call.

If you're interested in replaying the webcast to this conference call, it will be archived until about May 2. Thank you for taking the time to participate in our third-quarter press release conference call, and for your interest in Paychex.

Have a great day.

Thank you, that concludes today's conference.

Thank you all for your participation.

You may disconnect at this time.