沛齊 (PAYX) 2018 Q2 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 point.

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

You may now begin.

Thank you, and thank you for joining us for our discussion of Paychex's Second Quarter Fiscal 2018 Earnings Release.

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

This morning, before the market opened, we released our financial results for the second quarter ended November 30, 2017.

Our Form 10-Q will be filed with the SEC within the next few days.

You can access our earnings release and Form 10-Q on our Investor Relations web page.

This teleconference is being broadcast over the Internet and will be archived and available on the website for approximately 1 month.

On today's call, I'll review the business highlights for the second quarter, and Efrain will review our second quarter financial results and discuss full year guidance, and then we will open it up to your questions.

Well we are halfway through fiscal 2018, and we have continued to deliver solid results across all of our major human capital management product lines with growth of 7% in total service revenue for the second quarter.

In particular, our HR outsourcing services, retirement services, and time and attendance solutions have continued to perform very well.

On August 21, we announced our acquisition of HR Outsourcing Holdings, Inc., or HROI.

HROI is a national PEO that serves small and midsize businesses in more than 35 states.

The integration of HROI has progressed favorably.

Combining the HROI team with our experienced PEO sales and service operations teams has further strengthened our presence in the PEO market.

This is particularly relevant during a time of regulatory change like we're seeing now.

This expansion along with our certification by the IRS under the Small Business Efficiency Act positions us for accelerated growth in our comprehensive HR outsourcing solutions.

Small business job growth continued to moderate slightly during the second quarter after the sharper uptick experienced last year, following the conclusion of the presidential election.

By contrast, hourly earnings have improved to an annual increase of nearly 3%, based on our data.

The combination of this level of wage growth and consistent moderate small business job growth are indicators of a healthy small business sector.

We believe these promising indicators will continue to create opportunities for new sales in the small business market.

At HR Tech in October, we introduced our new product bundles that are now in the market.

These bundles include new simplified pricing, and included in 2 of the mid-level HCM bundles, at no extra cost, our Paychex Flex onboarding essentials providing a paperless employee onboarding experience and do-it-yourself handbooks.

In addition, we introduced a retina scan, InVision Time Clock.

We are excited about these new offerings that respond to the evolving needs of our clients, and we are pleased with the initial response from our clients in prospects.

We are committed to delivering best-in-class technology solutions for our clients and business partners.

We recently announced a release of Same-Day ACH Debit functionality for our clients using direct deposit.

With Same-Day ACH, employers have the ability to reverse the payroll and have money debited from employee bank accounts in the same day avoiding the costly time lag associated with payroll reversals.

This has -- this enhances our position as a leader in the payments industry.

We also announced real-time integration between Paychex General Ledger Services and Sage Intacct.

Paychex and Intacct are certainly 2 key service providers to the accounting industry.

And our CPA partners are important to our business and this integration provides better tools, which allow them to gain insight into their data and their clients' data on a real time basis.

We also introduced AccountantHQ, a website for accounting professionals to help them service their Paychex clients even more effectively with a comprehensive online dashboard that provides a single source of immediate service, access to authorized Paychex client data, robust reporting capabilities and valuable accountant resources.

We consistently evolve our service offerings to meet the needs of our client base.

An example is we just had a recent announcement that Millennium Trust company and Paychex have teamed up to offer a SIMPLE IRA to employers with a 100 or fewer employees with innovative features, including auto enrollment and investment fiduciary services.

This is becoming a popular offering or a popular requirement from some states across the U.S.

We are proud of the recognition we have received regarding our solutions for our clients and our leading edge technology.

Inc recently recognized Paychex as the Best HR Outsourcing for Small Business Overall.

They noted that Paychex's Flex, our product, offers a full range of services for HR outsourcing, including payroll, tax, payment, benefits, recruiting and training, and we do so without requiring a long-term contract.

More uniquely, Paychex also offers on-site assistance program that puts HR professionals or HR generalists, or HRGs, in the office with customers when they need more help.

We are proud that Paychex Flex was recently awarded a Gold Excellence in Technology award for Best Advance in HR or Workforce Management Technology for Small and Mid-sized Businesses from Brandon Hall Group.

In previous years, we won the bronze award.

This year, moving up to the gold standard, and we appreciate that.

This evidences the strength of our technology as well as our service performance.

As I noted last quarter, the seventh -- this is the seventh consecutive year we were ranked the largest 401(k) record keeper by total number of defined contributions plans by PLANSPONSOR magazine, and our Paychex Insurance Agency hit the rank of 21st -- to 21st largest agency from Business Insurance magazine.

And we are very proud of all of this recognition because it comes from and really is deserved by the -- or deserved of the 14,000 employees who make it happen, from sales to service to technology innovation teams here at Paychex.

We're very proud of them and the results that they've achieved.

Providing excellent service to our clients remains a top priority, of course, and we've completed the realignment of our service organization at the end of last fiscal year.

And our investment in the service realignment was an important strategy to help support long-term growth as well as the -- as well as an example of our priority and commitment to providing the best service possible to our clients.

With the realignment completed, we are seeing benefits from this change.

One last comment before I turn the call over to Efrain.

Yesterday, of course, Congress voted in favor of tax form legislation.

We are currently reviewing the terms of the bill and analyzing the impact it could have to Paychex.

Efrain will talk more about this later on.

Tax reform will provide a great benefit to us in a lower effective tax rate.

We do expect that a portion of the potential benefit will be reinvested to drive future growth for the company and our shareholders.

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

Efrain?

Thanks, Marty, and good morning.

I'd like to remind everyone that today's conference call will contain forward-looking statements.

We'll refer to the customary disclosures.

I'll start by providing some of the key highlights for the quarter, provide greater detail in certain areas and then wrap with a review of the 2018 outlook.

Service revenue this year grew 7% for the quarter at $813 million, approximately 3%, little less of that growth was attributable to HROI.

Interest on funds held for clients increased 23% for the second quarter to $14 million as a result of higher-average interest rates earned.

You're starting to see the benefit of all those cumulative increases in interest rates.

Expenses increased 7% for the quarter.

HROI, though, contributed about 5% of this growth.

So we had very good growth expense control in the quarter.

Comp-related costs were up modestly, and continued investment in technology and growth from the PEO also contributed to the slight uptick in expenses.

Our effective income tax rate was 35% for the second quarter compared to 35.2% for the prior year's second quarter.

Both periods reflected net discrete tax benefits related to employee stock-based compensation.

This impact to the second quarter was $0.01 -- a kind of $0.01 of EPS and was immaterial in the prior year quarter.

Let's talk about payroll service revenue, increased 1% in the second quarter to $445 million.

The growth was driven by an increase in revenue per check that was tempered by the impact of client size mix from the same quarter a year ago.

Recall that, as we ended the year, we had a slight drop in client size and that's reflected in the payroll service revenue growth.

On the HRS side, we grew 15% to $368 million for the second quarter.

It reflected strong growth in the client base across major HCM services, including comprehensive HR outsourcing services, retirement, time and attendance, and insurance, all saw good growth in the quarter.

Within Paychex HR Services, we continued to see the strong demand, which, along with the acquisition of HROI, is reflected in continued solid growth in the number of client worksite employees served.

So we're seeing growth there, and we're seeing growth in other areas of the PEO.

Insurance services benefited from continued growth in the number of health and benefit applicants and higher average premiums within workers' comp insurance offering.

Retirement services revenue also benefited from an increase in asset fee revenue and earned on the value of participant funds.

So all of those are contributing to the positive results in HRS.

Year-to-date, let me just say that total service revenue growth was 5%, of which about 1% -- 1.5% approximately was attributable to HROI.

Recall that Q1 was a lower quarter, and we build from there.

Operating income growth was 7% with margins of 41.2%, up approximately 50 basis points year-over-year.

Net income diluted earnings per share grew 6% on a GAAP basis to $445 million and $1.23 respectively.

Adjusted net income and adjusted diluted EPS are both up 8%, and that just takes out the benefit of the discrete tax items that we recognized in both years.

Investments and income.

As you know, we -- our goal is to protect principal and optimize liquidity on the short-term side, primary short-term investment vehicles or bank demand deposits and variable rate demand notes.

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

The long-term portfolio has an average yield of 1.8%, an average duration currently of 3.3 years.

Our combined portfolios have earned an average rate of return of 1.5% for the second quarter, up from 1.2% last year.

We're starting to realize the benefit of gradually increasing interest rates, as I mentioned earlier.

Average balances for interest on funds held for clients was relatively flat for the second quarter, primarily as the impact of wage inflation was offset by client mix.

Now let's look at our financial position.

It remains strong.

Cash and total corporate investments were $820 million as of November 30, 2017.

Funds held for clients as of the same day were $4.9 billion compared to $4.3 billion.

Funds held for clients vary widely, as you know, and averaged $3.7 billion for the quarter.

Total available-for-sale investments, including corporate investments and funds held for clients reflected net unrealized losses of $14 million as of November 30, compared with net unrealized gains of $32 million as of May 31, and that's just a reflection of rising interest rates.

Our longer-term portfolio has seen an increase in the unrealized losses for this reason.

Total stockholders' equity was $2 billion as of November 30, 2017, reflecting $359 million in dividends paid and 94 million of shares repurchased during the first half of fiscal 2018.

Our return on equity for the past 12 months was a stellar 43%.

And I would just point out, it was only a few years ago when return on equity is 34%.

So we have really worked hard on driving that number.

Our cash flows from operations were $519 million for the first 6 months, and I would just also point out that we had a very strong cash flow quarter.

The increase was 26%.

And although there is some timing in that, that also is a function of our cash-generating power.

Let's look at the guidance for 2018.

It's unchanged from what we provided last quarter.

This guidance, though, doesn't reflect any impact from tax reform legislation.

What we tried to do in both the press release and you'll hear it in a second is praying for what we think the ongoing benefit from tax reform will be for us.

I would just caveat heavily that we don't know the exact details of the legislation and there will be regulations written that interpret the legislation that could have some impacts and changes to what we are discussing.

We, obviously, are anxious to see the final bill, just like everyone else is, but we recognize that it will have a important impact to us.

Payroll revenue is anticipated to grow in the range of 1% to 2%.

Overall, we anticipate full year growth now will be at the lower end of the range, with growth for the second half of 2018 comparable to the growth in the first half of the year.

HRS revenue by contrast is anticipated to increase in the range of 12% to 14% for the full year, incorporating HROI.

We were below the low end of the range for HRS growth for the first quarter at 7%.

We were above the range for the second quarter at 15%, and now anticipate being above the range for the second half of the year.

Total revenue is expected to grow approximately 6%.

Interest on funds held for clients is expected to grow in the mid- to upper teens.

This doesn't include the most recent increase in the fed funds rate that we made earlier this month, and the reason for this is it's comprehended within that range, and we think the -- by the time the increase is rolled through, the impact for this year will be modest, obviously, will be beneficial to next year, but impact at this point is going to be modest.

Operating income margin anticipated to be in the range of 39% to 40%.

Effective income tax rate, excluding any potential impact from tax reform legislation, is expected to be in the range of 35%-35.5%.

Let me just add a note of explanation here.

If you recall our guidance, when we started the year, our guidance was that our tax rate would be between 35.5% and 36%.

That's what we consider our normalized tax rate currently, when you don't include discrete tax benefits.

The discrete tax benefits that we recognize year to date relating to stock comp expense drive that rate down.

So when we say 10% to 12% benefit, we're working off at a normalized rate between 35.5% and 36%.

And at this point, I would anticipate that we will provide more guidance, but it could be anywhere along that spectrum.

At this point, if I had to peg it, I'd say it's at the low end of the range rather than higher.

Investment income net anticipated to be in the range of $9 million to $11 million.

Adjusted net income is expected to increase approximately 7%.

Adjusted net income excludes the impact of the discrete tax benefit recognized in fiscal 2017 and the first half of fiscal 2018, relating to employee stock-based compensation payments.

We currently don't plan any additional discrete tax benefits for the remainder of the year.

We simply don't know whether we'll realize any.

Please refer to our non-GAAP financial measures discussion in our press release and in our investor presentation for reconciliation of this non-GAAP measure to the GAAP basis net income for the second quarter and 6 months of the year.

GAAP basis net income is anticipated to increase approximately 5%.

Adjusted diluted earnings per share is anticipated to increase in the range of 7% to 8%, and again, we laid this out in the presentation that we posted with website, and this measure, as I mentioned, now about 3x, excludes the impact of the discrete tax benefits recognized.

And then finally, we -- as I mentioned before, we haven't recognized any benefit of tax reform in our guidance.

We anticipate it to be in the range of 10% to 12%, on an -- on our annualized effective income tax rate.

I mentioned what -- how we measure that.

That is before we include any discrete tax amounts related to employee stock-based compensation things.

And again, one more caveat.

This is based on our current understanding of the legislation, maybe subject to change upon further review of the final law and interpretive guidance that may be issued.

As discussed previously, we said this -- Marty said, it was in the press release, when you have an opportunity, we expect that a portion of the benefits will be used to be reinvested in the business to drive future growth.

And we will provide additional guidance in the upcoming quarters.

One final comment on that, and I suspect that this will be true for many companies, although the statutory rate will drop to 21%, that won't be the effective rate because there will be puts and takes in terms of benefits and deductions that are no longer allowed under the law.

And that's the analysis that we're undergoing.

The other thing that I would say is that we're undergoing an analysis of the opportunities that we have to reinvest.

Some of that benefit to drive growth in efficiency and enhance our customer experience, and we're actively working on that as we speak.

And with all of that, I will turn it back to Marty.

Great.

Thank you, Efrain.

And we will now open the call to questions.

Operator?

(Operator Instructions) Our first question is from the line of Danyal Hussain from Morgan Stanley.

Just on the tax rate.

I know Efrain, you talked about this being very preliminary at this point.

But could you just walk us through where there are offsets at this point, to your understanding versus federal rate decrease?

So I'd -- like, are you losing, for example, the domestic production?

Yes, yes, yes, that's one -- that's an important one, Danyal.

There's changes and deductibility of executive stock comp, and then there's other deductions to which we avail ourselves.

So the combination of all of those will drive us up from the 21% range.

Got it.

So what is it that gets you, I guess, from 10% to 12%?

And is that just an understanding of...

Yes, it really is an understanding of the range.

There's some complexity on a number of items in the bill that we're looking at.

It also -- there are also may be some tax planning opportunities that we think we might be able to take advantage of, and we're in that discussion.

Okay.

And then just to clarify, you said the low end of the range, but you're referring to that 10% to 12%, the low end of the decrease?

Yes, correct.

Yes, right.

Yes, yes.

I said, if I had to peg it, I'd peg it at 10% rather than 12%.

Okay.

And then just one follow-up.

I know you also caveated this, but the reinvestment.

Could you just talk a bit about what that means.

Is it sales product, maybe incremental M&A and to the extent you can quantify this at all?

Yes, Danyal, it's Marty.

Yes, I think it's all of those.

We're taking a look at the opportunity.

Once we have a sense of the size of this.

I mean, there's some technology, but we're feeling good about the technology investments that we are making in the level that we're making.

There are some things that are always there that we'd like to accelerate.

We'd rather not mention those yet, because we're kind of going through those, and we want to talk to the board about them as well in an upcoming meeting this quarter.

But it's a number of technology investments that could accelerate.

And we just think that it's a great opportunity to focus.

It obviously takes some to the bottom line, but also to take the opportunity to invest in sustaining long-term growth, both top line and profitability.

And our next question is from the line of Mr. James Berkley of Barclays.

Just wanted to touch on -- did you see any potential impact from hurricanes in the quarter?

If you could just size that potential -- size it if you could.

And then if you did see an impact, are you starting to see a rebound at all or -- similar to what you saw with Sandy?

Go ahead -- do you want to go ahead?

We've seen -- I think there's been some, not as big of a rebound as Sandy.

But I don't think, particularly when you look at Florida, it wasn't quite as -- while it was widespread, it wasn't quite as catastrophic damage.

We're definitely seeing some small business improvement there coming back as you'll see particularly and what you'd expect roofers and contractors, and things like that.

I wouldn't say it's been significant yet, but I think it will be -- I think it will be a smaller increase, but a longer period of time because it appears that the work is kind of have to go on for a while for the repair.

So they are not as catastrophic.

So you don't hear a -- see a big huge change, but you see an increased number of small businesses in those areas of improvement.

And then I think they'll probably hang around a little bit longer.

I wouldn't say it's significant or any -- certainly, not making any significant change to the results.

Is there something you want to add, Efrain?

No.

I just said it was modest, that's what I was saying.

Okay.

That's helpful.

And then just a quick follow-up.

Any detail around the size or timing some of the synergies you guys are expecting or seeing, starting to see with HROI acquisition on both the revenue and cost side would be helpful.

Well, we're -- I -- one thing we are seeing is much faster than I think we even expect it by at least the quarter or so, the integration has gone extremely well.

We -- the plan was to move the -- to kind of combine a lot of the sales teams, not all, but a lot of the PEO sales teams across the country with HROI.

And we've got a very experienced sales and operations teams that we had in PEO and their leadership.

And that seems to have really picked up the pace of the PEO at a great time for PEO sales anyway.

And so, I wouldn't say we could quantify the benefit yet, but it certainly right at the level that we expected and probably a little bit better from the sales and not a profit per se, but certainly integration of cost perspective, both very positive in this first quarter with them.

And for our next question, it's from the line of Mr. Jim Schneider of Goldman Sachs.

I guess I wanted to start out, maybe talking about the -- what you're seeing in terms of mid-market sentiments.

Clearly, with ACA uncertainty in calendar 2017, there was lot of questions about and a lot of kind of stalled decision-making, which we've talked about many times.

Can you maybe talk about looking forward now that there appears to be kind of the repeal of the individual mandate, whether you've seen any kind of improvement in terms of clarity of decision-making or increased decision-making in the mid-market segments?

Well, I think it's a little bit early.

We're right in selling season now.

And while we feel there's some momentum out there, I think that mid-market is very competitive as it has been, no real change to that in the number of competitors or anything.

I don't see at this stage a lot more decision-making.

I think, we're still kind of, as we said, we're kind of -- we had a lot of decisions made because of ACA, and we certainly aren't seeing it back to that level.

And if anything, I think, it's a little slower, because people made those decisions for a fully integrated HCM model that included payroll and insurances and everything else.

So we're feeling good about selling season for mid-market, but I wouldn't say it's any -- nothing like a big pop in demand, like we saw when there was ACA.

And ACA, I think, still very confusing, while the individual mandate is lifted, there's still -- it's not clear what the reporting requirements are going to be and, in fact, they don't seem to be -- they're not eliminated yet.

A lot of reporting requirements that will have to be done.

And so we're seeing good retention on our ACA products and some interest in new clients in -- and still taking those products to be sure that they can monitor, record, and track and report or we can report for them their insurance.

Okay, fair enough.

And then, I guess, if you look forward, you talked about reinvestment, you talked about, I believe, potential M&A as one aspect of that reinvestment of the benefits from the tax reform.

So can you maybe just kind of update or refresh your thoughts on overall M&A beyond the kind of tuck-ins you've done before?

Are you considering essentially something of bigger scale that would be little bit more transformative to the business or not?

Well, I think that's always a possibility.

We're looking at a number of opportunities in M&A, and there's a lot of opportunity out there.

Evaluations are still pretty high.

So we're being very selective.

I'm very proud of the fact that we've -- while we've looked at hundreds of opportunities over the years, we picked very few and we've been very selective, which have turned out to be very good, like Advance Partners, like HROI, and just recently SurePayroll, et cetera.

So we're going to be very selective about what we pick.

There are good opportunities out there.

I would say that we'll look at this as an opportunity to possibly invest a little bit more.

I would say transformational is always out there, but it has to be really something that we're very comfortable with if that is to happen.

And our next question is from the line of Mr. David Togut of Evercore ISI.

You talked, Marty, about the beginning of the critical year-end holiday selling season, particularly the mid-market.

But I'm wondering if you could broaden your comments to talk about the small business, payroll, outsourcing and HR services market.

And in particular just the passage of tax legislation, particularly the reduction of the statutory tax rate impact to the propensity of a small business owner to buy your services.

Yes, I -- it's, obviously, very early with it just passed, but I certainly think there is increased opportunity with anything.

Whenever there is more complication and change, there's more opportunity for them to outsource, right, and to say -- to go to someone.

Look, this is going to be a huge compliance work load in the next month to 45 days to make -- take all the changes, the IRS getting through all this, everyone understanding it and getting back into forms and explaining it to clients.

I think that's good for us, obviously, because the more complexity from that standpoint.

It's not necessarily -- and typically, complexity can stop new businesses from forming.

I don't see that happening here in case, and in fact, some may be encouraged, as I think you're saying given the tax changes.

And I think existing clients will find that the value of Paychex is really -- they can really see, even increased value of Paychex going through all this change.

So I think there's some real opportunity there.

From a selling season perspective overall, it's pretty early.

We saw some momentum in November on the small business side that we're hopeful will continue, and we'll see.

A lot of things are shifting.

So the go-to-market strategy that we put into effect, which put more on the web, changes in our website, putting -- adding chat to our website, making it easier for clients to search Paychex, understand what Paychex is and then buy either online or buy -- really buy through telesales.

It looks like it's really starting to pick up.

But it's early, Dave.

And we'll have to kind of see -- we got to get to the end of January to really see what the big impact is on small business.

HR -- by the way, HR services as we've noted and you've seen, growing very strong; very strong market for PEO, retirement services, and time and attendance, for example, all growing well.

Understood.

And then I'm curious if you saw anything during ADP's proxy fight with Pershing Square, particularly their greater disclosure about their innovation strategy with their new intended back-end payroll engine and tax filing engine.

Whether any of that disclosure impacts the way you think about your own innovation path, particularly given the excess cash you'll have under the new tax bill?

No, I don't think so.

I mean, I think, we've -- the ADP has always been a good competitor.

I think, we feel very comfortable with the technology investments that we've made in Flex and just introduced our new product bundles in October, our express product, payroll product on the low end, SurePayroll's investment.

Now I think we feel good about the investments, but there's always some things that you'd like to do a little bit more in a quicker period of time, and that's really from a technology side what we're reviewing is can we do that.

It really hasn't -- wouldn't -- haven't been influenced by ADP.

They continue to be a good competitor, and we feel very comfortable with competing against them.

And just a quick final one for me.

As you contemplate a use of proceeds from the tax cut, you mentioned particularly higher R&D.

But what about dividend payout?

I mean, you have a terrific payout ratio around 80%.

Should we expect accelerating dividend growth once the tax cuts come through?

And would the payout ratio stay at approximately the same level?

Well, I think, obviously, that's a board decision.

And so as we approach the next board meeting in the next month, that will be a good discussion to have.

I think the board has been very consistent with paying out a generous dividend in a -- from a -- from when you look at others.

But I think, this -- how big of a change that this is, I think they'll continue to evaluate whether that's the proper level.

But I don't have any doubt that we'll continue to be a leader in the way we pay out and it will be somewhat consistent, certainly with what we've done in the past.

And our next question is from the line of Mr. Bryan Keane of Deutsche Bank.

Just want to ask about payroll services growth.

I think Marty or Efrain, you suggested that the growth to be towards the lower end of the range.

Just trying to think a little bit about maybe the causes of that.

I think you did mention client mix.

So just want to make sure I understand it.

I think, Bryan, the 2 biggest impacts of that and then there is one additional factor that could impact it in the back half of the year.

But if I go through the first 6 months of the year, what you're seeing are the impacts of going from an average client size in the upper 16s to about 16, and we disclosed that.

So we get that drag in the first half of the year and that's impacting us.

On the pricing side, we -- our pricing range is about 2% to 4%, and we're netting around in that 2% range.

So the combination of those 2 is driving us to where we are.

In the back half of the year, the wild card will be how strong the selling season is.

So if we have a strong selling season, we could start to build up from that number.

And we are anticipating and hoping that we will.

So as client size gets smaller, then you get -- the revenue yield is lower?

Yes, yes, yes.

Okay.

And then just my question on the tax reform.

So it sounds like some of that benefit than you're suggesting it might got reinvested, so it would potentially go into investments which would lower margin.

So therefore, we wouldn't see the full 100% impact to the bottom line of that.

I just want to make sure I got that correct.

Yes, yes.

Let me just add some nuance to that, Bryan.

So the concept here is not that we simply reinvest and up the amount of expenses we have in the business.

The idea is that we reinvest over a period of time over the next couple of years, say, and that those investments pay out in future growth in the company in 2 forms: number one, top line growth; and number two, could be earnings growth by becoming more effective and more efficient.

So that's our thought process here.

Now that we think the current rate of spend needs to be upped and we have an opportunity, but instead that we have, as Marty suggested earlier, the opportunity to take a look at a range of different projects, both on the operation side and on the technology side, to see if we can accelerate them.

And if they were on a road map that's say was 3 to 4 years, could we do that in 2 and can we start to pull some of those projects forward, and we have a robust list of things that we are looking at.

And for the next question, it's from the line of Mr. Gary Bisbee of RBC Capital Markets.

I'll start by following up on this client mix shift.

So in your 10-K for 20 -- fiscal '17, you said total clients, payroll clients, I guess, it was, was flat at 605,000.

So if the mix is -- does this mean the mid-market clients or larger clients actually declined, but it was offset by growth in smaller clients?

Well, I mean, no, Gary.

I think that the growth that we saw was on the lower end of our client base.

We didn't see declines in the mid-market in terms of number of clients, but as a percentage of the client base because the rest of the client base shifted down to lower-size clients.

We've been seeing over the last, I would say, certain last couple of years, more growth on the low end of the client base than on the higher end of the client base.

And so let me ask about that metric.

That 605,000, and I know it's rounded and everything else, right?

But the number you put in the 10-K every year, is that just payroll and so is the number bigger, if you have some segments that are doing HRS, but not buying payroll or is it proactive?

No, that includes clients that were on payroll.

So that will capture.

So some of those clients have additional ancillaries, but we'd count them if they were on payroll as payroll clients.

Yes.

Right.

Okay.

All right.

And so, I guess, the next question then continuing on the theme.

So you've talked about the new bundles and the simpler pricing and adding some things there.

I know it's early, but what's the -- how is that being received in the market as your people are out ahead of the key selling season?

Is that helping competitively or is that -- is there any feedback you have at this point?

Yes, Gary, it's positive feedback from a couple of different standpoints.

One is the bundles being a little more competitive by adding things that other competitors don't have, like paperless onboarding.

The 2 mid-level bundles have paperless onboarding.

And this new do-it-yourself handbook.

We've always had a handbook product, but we -- it's very expensive and so we give information to the client and we work with them kind of personally over the phone or in person to put that together.

We found that the new do-it-yourself online handbook, that is a little simpler and it's more self-directed by the client, is getting very good feedback in that bundle.

So -- and then express on the low end is getting good feedback.

So yes -- and so far it's good feedback.

It's early in selling season, you really can't see it until January or particularly in small business and it's harder to predict.

But we're getting positive feedback on it from what's in the bundle.

We think we kind of hit it right.

So we'll see how the selling season comes out.

Okay, great.

And then just a final one from me.

Each of you said in your remarks, alluded to PEO being poised for -- or PEO and ASO maybe what it was -- being poised for some acceleration over time.

And was that comment aimed at the comment you made about integrating the sales force HROI with your own and that going well?

Or was there some other reason that you're optimistic about the positioning of the combined business there?

I'd say both.

One, the integration is going very well.

So we added good leadership at HROI and their experience with a very experienced team on the Paychex side across the country.

So I think that's been very -- that's been positive and I think is helping the growth in PEO.

But overall I would say that, right now PEO is -- really is doing well, HR Outsourcing in general, but PEO is doing well.

I think it's just because of all the changing regulations, and it's been very positive from that standpoint.

When you think about -- if you just about -- just think about minimum wage changes and how many are in different states, what we're finding and I've mentioned this before.

What these businesses are going through now is even before tax reform changes, was the fact that while federal regulations are trying to be reduced and are being reduced to some degree, state regulations are making it even more complex if you're a multi-state employer.

Different minimum wage changes, paid family leave act is different in New York than New Jersey, different from other states, and now a lot of rules are even coming out on scheduling employees.

And so, I think, it's just that, "Hey, shared employer is getting a lot of attention right now."

And our next question is from the line of Mr. Kartik Mehta of Northcoast research.

Marty, as you look at the selling season and you kind of compare it to what you've seen in the last couple of years and the changes that are going on, maybe more people going to the Internet to look for payroll.

Has that at all changed in how you're managing the sales process and what you're investing in?

And, ultimately, could some of the investments that you're talking about as a result of tax reform be related to that?

Well, certainly, and we've already started those investments.

Kartik, we talked about how we've really upped the investment in digital marketing and in getting more leads.

We've invested in the website.

We've now rolled out chat, different forms of live chat on the website, because definitely what you're saying -- small business, micro in particular, let's say, less than 5 employees, there's 60% of the way through the sales process just in the search online by themselves and they are ready to buy.

So the change that we made beginning of this fiscal year where we added more sales reps and the virtual teams or telesales, has really started to pay off.

And we're learning and tweaking on the leads and how to get more leads, and how to do that and how to do it in the most efficient way but that certainly could be part of the investment.

Now if you go back to what Efrain said though, on top of that to be clear, this is not just about saying, okay, we're going to raise the level of ongoing expense, but we're looking for some -- is there some technology investments that could be made over the next -- this fiscal, next fiscal, that while you're getting the biggest benefit of the tax reform that we could accelerate those investments to maybe speed that up.

So we're feeling pretty good.

Selling season, again, I won't comment because it's too early, particularly, for small business, but we're very bullish on how the virtual sales is going to take off.

The field then also gets very focused on kind of the 5-plus and larger clients and has more time for that in the -- when clients want to call in and buy telesales is ready to do it.

And then Marty, in the past, you've focused on acquiring companies that are maybe private and bolting on those companies.

As you look at this tax reform, do you think there is any change in valuation?

I know valuation has kind of kept you on the sidelines.

But do you think there is any change in valuation because of the tax reform?

Could that have any impact on what you look at or what happens to valuations?

I suppose, it -- it depends certainly on the company and their profitability, right?

If it's -- many of these companies -- or at least their -- depending on their size and profitability, whether the tax reform will leave any impact on them or not or whether they have carry losses and forwards and things like that.

So I think it could have some impact.

I don't think we're seeing that right now but that certainly would measure into things that we're looking at.

I think the other thing I'd add, Kartik, the inability to deduct interest expense above certain caps makes certain targets more attractive than they otherwise would be at the margin.

Now I just want to caveat that I'm not saying that we have a target in mind, but that those opportunities will be there.

It's not a great place to be if you have a significant amount of debt in your capital structure and companies like Paychex that don't operate that way, can bring value in those situation.

So I would say at the margin, those opportunities will be more attractive.

And then Efrain, just one last question.

The interest on client fund.

Does the rate change and/or the tax reform change at all?

How you will invest these funds?

Yes, it actually could have an impact.

So I was reticent or we were reticent.

We had a discussion internally about attempting to modify guidance with all of these changes going on.

But it certainly could impact the composition of the portfolio, which in turn could impact the effective tax rate.

And the point I'm making is that, you may end up in a world where corporates are more -- a corporate taxable bonds are more favorable investment vehicles, which would drive the effective tax rate up, but it won't have much of a change to the bottom line, and we're looking at the composition of the portfolio to understand if it makes sense over time to change the ship from almost all municipals and some corporates to more corporates and if you're municipals.

So that's all part of the raft of considerations that we need to think about.

And our next question is from the line of Mr. Ashwin Shirvaikar of Citi.

I wanted to go once more to sort of the derivative impact of tax reform.

Now you addressed the propensity to outsource might go up because these things are complex.

But what are your SME clients saying to you about potential higher employment and things like that?

And can that down the road affect that client mix metric that's hurting payroll growth?

I -- frankly, Ashwin, at this point, they're not seeing anything, because I think they're still trying to figure it all out.

But I think that they will certainly -- if to the degree that a small business gains a benefit on tax reform, they -- many small businesses aren't that profitable, so they might not pick up that much gain.

But they will certainly, I think, the overall feeling is, "Hey, they will have an opportunity to invest in their business, hire more people and they'll do it in their way so that they can expand." So that certainly should be another positive opportunity for us to even existing clients be able to add more employees, which will help us with more checks.

And they may now say, "Okay, I can spend on a 401(k) and make a contribution, so I'll take a 401(k)." And we're looking at all of our marketing to our clients and prospects to say, hey, you may -- this may be the time that you want to invest in health insurance, invest in 401(k), retirement plans or an IRA or something else that Paychex can provide you and make it easy for them as they see their benefit.

I'd say the other thing, Ashwin, to build on what Marty says, our thinking as we go forward is that the tilt will be in the future towards comprehensive outsourcing solutions.

So bundling benefits, bundling other ancillaries that if there was a tend to do that in the past, there is more.

And we think we have made -- we have shown by our investment dollars that we think the PEO is going to be a beneficiary.

But to Marty's point, we think there's going to be other areas of the business on the ancillary side that will benefit from more available cash in the hands of small business owners, small medium-sized business owners.

Understood.

And is it for the near-term possible to quantify or have you put in your forward expectations here, so the strength of any onetime reporting relating to this complexity in the next 1 to 2 quarters?

I think, it's early and I think where you would see and where it would be easier to do is really on the PEO side more than anything else.

But I think we're early in the process to see what's going on.

Got it.

One more along those lines, lower withholding because of this, will that effect your investment plans?

Yes, yes, yes.

So the impact we think would be between $200 million to $300 million on client funds.

At the margin, we think that's about $0.01 EPS going forward -- or I'm sorry, on an annualized basis.

I don't want to cause an estimate revision at this point.

This is yet another -- Kartik, asked earlier about the portfolio, client funds will decline as a result of this.

It's a modest impact given the portfolio, but it will have an impact and we're rolling through all of those impacts to be able to speak with more certainty as we go forward.

Got it.

And one question, not related to any of this.

The cash flow for the last 6 months has been quite good.

How much of that is timing versus sustainable for the course of the year and you can compare...

No, I think 26 was high.

I don't have an exact percentage.

Obviously, 26 through the first half of the year, there were some unique items that occurred.

We had -- fourth quarter was artificially low and the first 6 months are probably a little artificially high.

But we -- I think double-digit certainly is where we're going.

And I think, I'd just add one other point on that.

Our cash generation has been tremendously strong.

So we continue to deliver high-quality earnings.

And our next question is from the line of Mr. Rick Eskelsen of Wells Fargo.

Just the first one, again, following on the tax reform theme.

You guys are talking about reinvesting.

I assume some of your competitors are probably looking at similar things.

So in terms of overall market competition or -- and what you see, what impact do you think you could see from tax reform on the competitiveness of the market?

Well, I'd say this Rick, that Marty can also build on it.

"Hey, if you've got more in your war chest, you're in a better position." So I would say those who have more in the war chest are in a better position to be able to compete in a landscape where resources matter.

So I would say we're -- that's one reason why as we looked at the opportunity, we said, there are opportunities to accelerate some high-value projects and opportunities, and this is the time to start thinking about doing that over the next couple of years.

Yes, I think, as Efrain said, it's an interesting point when you think about there's companies that are going to gain from this in our competitive environment and there's others they won't because they don't have the profitability and the tax reduction that we're going have and we'll be able to invest more where others aren't going to gain that much that -- so I think it will continue to put companies who are already profitable and who've been paying a high tax and now will pay lower, that should help us to -- if we plan this right and invest correctly, this will make us even more competitive than we are today with some others who can't do this same level of increased investment.

That's helpful, and just sort of building on that a little bit.

Two questions on the CapEx.

I noticed it was a little bit higher this quarter.

I think based on your disclosure it's due to the campus buildout, so I guess the question...

(inaudible) Yes, if you look on the presentation we posted on the website, it's -- CapEx is going to be, I think, we said $180 million to $190 million for the year.

I think it's going to be -- come in a little bit lower.

You can see what we spent in the quarter on the campus.

One thing I would -- I think it's very important to emphasize, I keep saying this, the buildout on the campus permits us to consolidate leases and save expenses on an operating basis going forward.

So that's why we did it not -- no reason other than that.

It gets efficiencies.

But I should say from a financial standpoint, it was a very attractive field for us.

And is that primarily -- the campus buildout, is that primarily going to happen this year?

And then thinking about CapEx and the investments you guys have talked about, how should we think about some of those investments being on the technology and CapEx side moving forward?

Yes, so it's primarily this year, Rick.

So we may have some spillover capital into next year but most of it occurs this year.

And the longer term, I mean, is there -- with you accelerating some investments and should we look for that CapEx number to maybe drift up slightly and then next coming year?

It could.

So if you look at what we've been spending, we're in that, call it, 3.5% of revenue range somewhere in that, sometimes we bounce up a little bit higher to closer to 4%.

That's sort of our normalized CapEx -- I'm sorry, capital expense amount.

We could bounce a little higher if we saw projects that made sense.

It's not going to -- I wouldn't anticipate at this point that it would bounce up to the level that we're spending this year because of the building.

And our next question is from the line of Mr. Jason Kupferberg of Bank of America Merrill Lynch.

So just one more on tax.

I just wanted to push a little bit on the reinvestments.

I know it's premature to have kind of precise numbers as far as how much you may reinvest, but can you just maybe roughly dimension it for us.

I mean, we're talking about 10% of the benefit, 40%, just some rough order of magnitude to give investors a sense of how you guys are thinking about the reinvestment opportunities?

So Jason, here is how precise I -- about as precise as I could be.

I'd say, it's half or less.

Okay.

I'll take it.

The reason why I don't mean to be flippant and that wasn't a flippant comment.

It actually is a serious comment.

The process when you're doing this is that you collect a lot of opportunities and Marty will sit down and management team will sit down and say, what do we think are the things that really move the needle as opposed to or just opportunities to spend and give us a bit of an incremental bump?

And then we're going to go through a conversation at the board level to discuss what their comfort level is and then we're going to look at it all together and does it make sense from both an investor standpoint and from a business standpoint.

And so we're in inning 1.5 to 2 of that process.

It will accelerate certainly over the next month or so.

But it is a little bit early.

We know the opportunity is there.

We certainly wouldn't drop all of it into the opportunities.

But we think we do have opportunities to spend and we're going to rank order them and then do that.

All right.

So you think by the time of the next earnings call, we'll have...

Absolutely.

Yes, yes.

Definitely.

Yes, yes.

Yes?

Okay.

Okay, great.

Great.

I don't think I heard much just about kind of bookings and retention in the quarter.

I mean, at least qualitatively and I know you don't give hard numbers, but you were facing some easier comparisons.

I know you were targeting for bookings to be positive on a full year year-over-year basis for '18.

Is that still on track?

And are you seeing further upticks in retention post the implementation of the new client service model?

I think retention has been very consistent through the year.

So I think that's been positive.

It's near all-time highs that we had, and we're rebounding back from last year where we dropped off just a little bit.

So I think it's been pretty consistent, pretty positive there, and, again we will have a good -- the best sense after January.

And certainly the same for sales.

We don't normally, Jason, talk about it until after we get through the selling season.

But we had good -- some momentum in November, and so it's always hard to tell exactly, but we're feeling pretty good about it and we'll see how we come out with the new bundles, with the service model changed, with the sales go-to-market stuff that we've done with the virtual team inside and the increase in web investment, we're feeling good.

It's just early and a little tough to talk about until we know.

Okay.

And just a last one, on core payroll, I guess we have a slight tweak here to the low end of 1% to 2% for the year.

So I guess what around the edges kind of changed in your guys mind over the last 3 months?

Because it doesn't sound like the hurricane impacts were any worse than you had feared.

And I think we had talked about the smaller client sizes last quarter, but just wanted to see if there was anything discernable that led you to the lower end?

Yes, Jason, I think the thing that beyond the things that I mentioned, the speed and the pace of ramp always impacts payroll revenue growth.

And so the -- we tweaked it based on what we're seeing in terms of the pace of the ramp through the year.

That I think is our -- the reason we tweaked at this point.

Just the ramp of the metric itself?

You mean, like in other words, now you've taken a check point halfway throughout the year and just feel like the low end is more likely?

Yes.

And our next question is from the line of Mr. Tim McHugh of William Blair & Company.

Just a follow-up on the comments you referenced, I guess, once or twice on November.

Is that related to macro data or your, I guess, company-specific comment?

And if it's company specific, can you elaborate on what the momentum was that you're referring to that makes you feel better?

Yes, I mean, just generally you're starting to head into that selling season and it -- we had some momentum there, that was specific to us, Tim.

So not in the macro sense, but more specific to us.

Just as you're getting into this year-end time, we felt pretty good about -- the first part of the quarter was okay, was kind of like -- I'm sorry first part of the second quarter, was kind of like the first quarter.

And then November seemed to have a little bit of an uptick, but that doesn't make the selling season.

So we hate the comment much more than that, just that we feel pretty good.

And particularly if you look at the HRS side of it, and we certainly saw a nice uptick in the PEO side.

So I think we're feeling pretty -- I'm feeling pretty positive coming out of November, but again I could tell you a lot more after this next quarter.

Okay.

And the one other question, just HROI, I guess when I do the math on the revenue and the contribution and the expense impact, it looks like it was breakeven, even maybe slightly worse than that?

It was modestly negative, Tim, but really not a significant impact.

Can you -- why is -- was that integration expense or...

Well, with the first deal, you always have integration costs, Tim.

So there is -- the -- when we do a deal, we're assuming that we've got to do a number of...

Investment.

Investments.

And then there is the amortization associated with the deal itself that adds to expense and that starts to lessen as the quarter go -- as we go through the quarter.

And our next question is from the line of Mr. David Grossman of Stifel Financials.

I'm just wondering if I could just go back to the unit growth questions that have been coming up in terms of -- and the impact of mix on that number.

I mean, my recollection is that a typical economic cycle is that as it matures you have a tendency to be adding -- new business creation improves.

And our mix naturally skews to smaller companies or smaller clients than the average.

And So that's a natural phenomenon.

So in fact that pressuring perhaps payroll growth for the lower end.

Are there other dynamics maybe that are really at work that really are driving that number down, because typically you would get volume in terms of total units that would offset that decline.

And I'm just wondering is this cycle different or is there anything else going in the business that may be impacting that growth of that number?

Yes, I think, David.

I think, it really boils down and you kind of summarize it by saying last year we didn't have client growth.

We talked a bit about why that was at the end of the year, a lot of that related to service disruptions and the spike in retention -- I'm sorry, the spike in attrition that we had.

We dropped by a point.

When you put that together with the result -- the sales results and the mix shift that we're seeing, you're driving client -- I'm sorry, you're driving payroll service revenue to the rate that we're experiencing.

So I think what's a little idiosyncratic now is that we're anniversarying some of that, that retention issue that we had last year and it's driving payroll service revenue down.

Right, so then your -- I guess, this question was asked in a different context.

So then the difference since we knew about the retention and the headwind that we would have going into the next year, is the difference primarily related to a pricing dynamic then or what is it then that specifically is...

No, no.

It's not a pricing dynamic.

I would say at the margin, pricing is a little bit more competitive, it's more market payroll under 50 than it was last year.

So we're realizing about 2%.

But again, I'm comparing against growth against last year, where I experienced -- started to experience some of these effects in the back half of that year so the front half is a little more challenged than the back half will be.

I got it.

Okay.

And then the second question I have relates to the PEO.

When you back out the distortion from HROI, can you give us a sense of at least organically what the worksite employees, how that growth is trending?

Yes, I don't know that I've got the exact number currently, we haven't disclosed it.

But I would say this, David, it's pretty solid.

It's certainly upper single digits, maybe double digits.

I'd have to go back.

But I would say that's the range.

I won't be more specific than that.

But I think the point -- if I can think about the point beyond your question, we've had obviously very good worksite employee growth, but it's not all because of HROI.

We had worksite employee growth on our PEO also.

Yes.

It's -- and it's been pretty consistent.

We went over 1 million worksite employees that we serve and that was -- that's without -- that was before HROI.

So I think those numbers are in that range.

Yes, or in that -- that's the range.

And any thoughts on just had a high-level how pass-throughs are impacting revenues this year, is there any noticeable difference in terms of insurance pass-throughs and how they may be impacting revenue growth in that segment?

Not really, David.

I think, there is a little bit more impact.

By the way, I just looked it up.

So the best that I will say on it is that our organic worksite employee growth was double digit.

So we're seeing nice performance.

Marty alluded to that, I didn't have the number in front of me.

I looked it up.

So pass-throughs are not -- I shouldn't say that.

There is at the margin more pass-through because of the addition of HROI, is not significantly distorting the growth numbers.

I would say, as the percentage of business that we're deriving from PEO growth, you'll see more.

One other thing I would say because -- and I will take this under advisement as to whether we reported more regularly through that every single year is form 10-K pass-through.

So we'll look at whether we add that disclosure, so you get a sense to what that is.

Right.

And then just one last thing on the PEO.

You made this acquisition.

And I don't remember what your historical exposure was to the (inaudible) segments.

So just curious, you made this acquisition, how do you see the market evolving over the next couple of years vis-à-vis, kind of what your historical perspective was, let's say, 2 or 3 years prior to this?

You mean -- and so in general for the PEO, what's that -- from a -- I think we're still looking at it consistently as we've always had.

And that's one of the things we liked about HROI is they were very consistent from a way they went after clients, selected clients.

We, I think, not -- we had a very good way to -- compliance way there to look at it in underwriting, and I think they were very consistent with that as well.

So I don't think we're increasing risk as we take on these PEOs -- as we take on a company like HROI, because they're very consistent with the way we looked at it.

And I don't see us getting more risky.

We don't see it that way.

We've always been pretty careful on that and have actually had a very strong PEO because of that.

So we have the growth without taking on really additional risk over the parameters that we've always had in the past.

But...

And we think that segment of the market, David, also will continue to grow and, particularly, grow in areas where HROI is strong, we're strong.

And our next question is from the line of Mr. Mark Marcon of Baird.

With regards to HROI, was the contribution this past quarter was somewhere around $20 million?

I think you can derive that, Mark.

It's in that range.

Okay.

And then with regards to the effective yield for the back half of this year, just given what the recent rate increase, how should we think about that in terms of we'll think about the float balance coming down by 200 to 300...

But that won't be all in the back half of the year, Mark.

I'd just caution you to -- that's in the...

No, I know with the duration and everything, that's why I was asking the question.

Yes.

So I think we still feel comfortable with the guidance that we've given.

So that's where we peg it at.

The reason why I'm not -- I can't be more specific than that, Mark, is that we're looking at the composition of the portfolio and over the next 3, 4, 5 months it could change.

So -- but we're comfortable with where we are right now.

Okay.

And then with regards to the small business formations, there has been a lot of discussion about just the way pass-throughs are going to work.

When do you think that there's going to ultimately end up being a little bit more in terms of small business formations that could end up occurring because of this change?

And if so, how would you take advantage of that?

Well, I think -- yes, I do think that you would expect that given the reform that you're seeing in that, that would drive some of that.

We, obviously, haven't seen it yet, but we certainly get that feeling that, that will happen.

We would take advantage of it by being out there and marketing to the fact that if you're going to incorporate as small business for the first time in particular, you would best have someone like Paychex there to support you.

So I would think we're already looking at how can marketing take advantage of anything that comes out of tax reform and that would -- that is certainly one of them.

Great.

And then just with regards to the capital expensing, provisions and the ability to deduct all of that related to over the next 5 years, to what extent would you end up really taking advantage of that?

I mean, could you -- do you have -- are there ways to take advantage of it to a greater extent than just marginally increasing your CapEx?

There may be, Mark, and I would just say it's early in the process and so we're going to take a look at that.

Okay.

And then in terms of just very short-term onetime impacts, to what extent are you going to have to spend more in very short-term just to get the systems into compliance?

It sounds like the IRS is basically not going to give the new withholding tables until February, so you're going to have to -- it's going to be a bit of a scramble here in terms of calendar Q1?

Yes.

No, I don't think.

I mean, we're ready, we're dealing -- working with the IRS almost daily on what's happening and how we'll be able to support them.

And if that's the strength of a company of our size and our compliance team and tax team that they are ready, they know it's going to be a scramble, they're expecting it and we worked very closely with the IRS to help them and work with them so that everything is up and running as quickly as possible.

I don't think it's not going to cost us additional expense in the quarter or something like that.

I mean, I'm sure there's going to be a lot of extra work, but our teams will be ready to do it.

I don't see a big -- any big investment or change because of it.

Okay, great.

And anything to think about with regards to your deferred income tax liability?

Yes, there will be a reval.

We will -- and it will produce a benefit and working through that.

Okay.

I mean, obviously, everybody will know to look through it, but I just brought it up.

No, no.

I know.

I appreciate it, Mark.

But yes, we are not ready to quantify it yet, but there will be some benefit, one time.

And our next question is from the line of Mr. Jeff Silber of BMO.

This is actually Henry Chien for Jeff.

Just -- I wanted to ask a more high level, just competitive kind of positioning question.

There does seem to be a ton of investment going into the HR Services and HR bundles from both ADP and software providers.

I was just wondering if you could share any updated thoughts on how Paychex is doing this season in terms of HR sales and where Paychex is doing better?

Or just how you're thinking about positioning in general?

Yes, I think -- Henry, I think the competitive environment is pretty much the same.

Everybody is investing.

We feel very good about the investments we've made.

In fact, we've really taken it to -- we've taken our entire development team really a year or more ago, over to really agile teams.

We develop and rollout changes much faster.

Now we rolled out the new bundles in October that include -- so it's not just payroll bundles.

There are bundles with HR components to them, like paperless onboarding for our clients so that you can basically recruit -- post, recruit, hire and bring them on all in a paperless fashion as in part of one of our bundles that they can buy.

Or a Do-It-Yourself handbook, because we found instead of the more complicated handbook and more thorough handbook that needs personal interaction, more clients want to do it themselves and have a scaled-down one that they can complete it at their own pace and when they want to do it.

And all that innovation has been quick and rolls out, and rolls out very successfully, and we haven't even talked on the call at all about mobile.

Our mobile adoption and the use of our mobile app has picked up dramatically, and it's been by -- more by the employees of the clients versus the employers.

So these innovations have been very good.

We see tax reform as an opportunity, as we've said a number of times to possibly accelerate a few things that are around the outskirts of what we wanted to do and bring them forward a little bit.

But we're very comfortable with our level of innovation and competitiveness in the market.

And I think it has been pretty consistent.

We expect -- you got to innovate, you got to have great service, you got to deliver and, I think, Paychex and our folks are doing that.

Got it.

Okay.

That's great.

And just in terms of the kind of macro environment, it's sounding like that the smaller client sizes, the number of, I guess, business formations has been picking up from your view.

Is that sort of a normal kind of pattern that you've seen from your experience over cycles?

And is there anything that we should watch out for, that you're watching out for to just to be careful in terms of the macro-employment?

Yes.

I don't -- we haven't talked too much about the formation itself, but it's kind of flattened out, it's kind of gotten back to the levels pretty close to the levels that it was the pre-recession.

I think the big thing on this after this recession was how long it took.

It didn't pop right back, it took a lot longer, but it was sustained longer.

The thing I mentioned earlier is on our monthly employment report what we're seeing is that job growth, the small business job growth under 50 employees has moderated, but there is still job growth and consistent job growth, but it moderated down, as you would expect, as we are around full employment.

But the wage increases now are picking up and part of that is scarcity of the resource because of full employment.

So the wage increases are now getting up from that 2% and getting closer to 3% and running around 2.8% or so.

And I think -- so you're seeing pretty good wage increase and then you're seeing the moderate small business job growth that's all pretty positive.

The thing to look out for maybe what was mentioned a couple of questions ago, which is with the pass-throughs and the tax reform, does that generate new business formation for someone who was not going to formulate a business before now it may make sense for them we may see a pickup in that and just a little bit early to tell.

And our last question is from the line of Mr. Tien-tsin Huang of JPMorgan.

Real quick.

Just on the -- I want to clarify on the pricing side.

Just with all the bundling and pricing simplification, any change in pricing in the quarter and sort of your outlook?

I didn't think so, but just wanted to make sure.

No, really the product, the bundles were more combining the features, making the pricing simpler in the way that we presented to the client.

We don't see that is changing the revenue per client or what we're getting from it in price.

We haven't seen it yet.

It's early, but didn't expect it and haven't seen it yet.

Anymore calls?

At this time, there are no further questions on queue.

Great.

At this point, we'll close the call.

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And that concludes today's conference.

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