Paychex (PAYX) Earnings Report: Q3 2015 Conference Call...

CompanyName:PaychexIncCompanyTicker:PAYXSector:ServicesIndustry:Diversif iedServices

EventDescription:Q32015EarningsCallMarketCapasofEventDate:18.61BPriceasofEventDate:49.47

©2014TheStreet,Inc.Al l R ightsReserved Page1of24

Paychex(PAYX)EarningsReport:Q32015ConferenceCallTranscriptThefollowingPaychexconferencecalltookplaceonMarch25,2015,09:30AMET.Thisisatranscriptofthatearningscall:

CompanyPart icipants

MartinMucci;Paychex;President,CEOEfrainRivera;Paychex;CFO

OtherPart icipants

DavidTogut;EvercoreISI;AnalystGeorgeMihalos;CreditSuisse;AnalystRyanCarey;Jefferies;AnalystDavidRidley-Lane;BankofAmerica;AnalystSmittiSrethapramote;MorganStanley;AnalystTimMcHugh;WilliamBlairandCompany;AnalystKartikMehta;NorthcoastResearch;AnalystGaryBisbee;RBCCapitalMarkets;AnalystJimMacdonald;FirstAnalysisSecurities;AnalystEvanBull;DeutscheBank;AnalystSKPrasad;GoldmanSachs;AnalystJeffSilber;BMOCapitalMarkets;AnalystDavidGrossman;StifelNicolaus;AnalystMarkMarcon;RobertW.BairdandCompany;AnalystJohnWilliams;TopekaCapitalMarkets;AnalystLisaEllis;Bernstein;AnalystMattO 'Neill;AutonomousResearch;AnalystAshwinShirvaikar;Citigroup;Analyst

MANAGEMENTDISCUSSIONSECTION

Operator :

Welcomeeveryoneandthankyouallforstandingby.

(OperatorInstructions)

Today'sconferenceisbeingrecorded.Ifyouhaveanyobjections,youmaydisconnectatthistime.NowI'dliketoturnthecallovertoMartinMucci,PresidentandChiefExecutiveOfficer.ThankyouMr.Mucci,youmaybegin.

MartinMucci(President,CEO):

ThankyouandthankyouforjoiningusforthediscussionofPaychex'sthird-quarterfiscal2015earningsresults.JoiningmetodayonthecallisEfrainRivera,ourChiefFinancialOfficer.Thismorningbeforethemarketopenedwereleasedourfinancialresultsforthethirdquarter,endedFebruary28,2015.




Wewillfileourform10-Q,whichprovidesadditionaldiscussionandanalysisoftheresultsforthequarter,bytheendoftheday.Ourearningsreleaseandform10-QwillbeavailableonourInvestorRelationspageatwww.paychex.com.

ThisteleconferenceisbeingbroadcastovertheInternetandwillbearchivedandavailableonourWebsiteforapproximatelyonemonth.Ontoday'scallIwillupdateyouonthehighlightsinouroperations,salesandproductdevelopmentareas.Efrainwilltalkthroughourthird-quarterfinancialresultsandourguidanceaswewrapupfiscal2015.Andthen,we'llopenitupforyourquestions.

Wewerepleasedwithourthird-quarterresults,aswecontinuetomakegoodprogresstowardourkeyinitiatives.Oursellingseasonexecutionwasverystrong,producingdouble-digitgrowthinnewannualizedrevenuesold.Wewerepleasedwiththat.WealsocontinuedoursuccessinaddingnewbankandfranchisereferralarrangementsandincreasingourwebleadsinadditiontoourCPAreferralchannel.

Weremainfocusedonsellinggreatvaluetoourclients,helpingthemrealizethefullbreadthoftechnologyandservicethatPaychexhastooffer.DemandforourHRoutsourcingsolutionscontinuestoadvance,withgainsinbothclientsandworksiteemployees.Thishasmadeasignificantcontributiontoourdouble-digitgrowthinHRSrevenue.

Payrollservicerevenuecontinuestoadvanceasaresultofincreasesinrevenuepercheckandclient-basedgrowth.Totalservicerevenueincreased8%forthethirdquarter,9%fortheninemonths.AswehaveexpandedourportfolioofSaaS-basedbundledofferings,PaychexFlexwhichincludesonlinetimeandattendanceandHRadministrationamongmanyothercapabilities,wehavealsogreatlyenhanceourpersonalized,dedicatedservice.PaychexFlexofferspowerfulworkforcemanagementcapabilitiesinasimpleandstreamlineduserexperience.

Ournewserviceinitiativealsooffersclientstheflexibilityofchoicefortheirserviceneeds.Thisapproachgivesclientsaccesstoavarietyofcustomerserviceoptionsbasedontheirsizeandcomplexity,includingour7by24customerservice.

Ourmobilityappcontinuestoseeafastgrowingnumberofusers,bothclientsandclientemployees.Thisappprovidesasingleeasilyaccessedmobilesourcetoalloftheproductsandinformationthattheclientsubscribestofromus.Wehavecontinuedtoaddmorefunctionality,includinglastquarter'swebtimepunchcapability.

We'realsogainingadditionalmarketacceptanceofournewfullserviceproducttohelpclientsnavigatehealthcarereform.Weareuniquelypositionedtoleveragepayrolldatawithournationallyrecognizedinsuranceagencyandourclients--andofferourclientsassistanceandvalueinunderstandingtherequirementsoftheAffordableCareAct.And,itsimpactontheirbusinessandemployees.Wehelpourclientsnavigatethesecomplexrequirements,avoidfinesandpenaltiesandreducetheadministrativeworknecessarytoremainincompliancewiththelaw.

Ouroperationsteamledusthroughagoodyearinforourclients,producingindustryW-2s,aheadofscheduleandcontinuingtokeepourclientserviceandretentionatrecordlevels.Werecentlyreleasedthenewestversionofourapplicanttrackingsystem,myStaffingPro,whichhasexpandedmobilityandnewfeaturesdesignedtoenhancethejobcandidateexperiencebyreducingdataentry,improvingcompletionratesandprovidingabilitytocreatecandidatedifferentiators.Thisimprovedcandidateexperiencehelpsourclientsincreasetheirapplicantpoolsandcanalsoutilizetheenhancedtoolstobetterscreentheirapplicants.

Insummary,wehadasolidquarterandmadeprogressonmanyfrontsincludingstrongsalesexecution,servicedelivery,productdevelopmentanddeploymentandfinancialperformance.Iappreciatethegreat




workofourentirePaychexteamacrossthecountry.IwillnowturnthecallovertoEfrainRivera,ourChiefFinancialOfficer,toreviewthefinancialresultsinmoredetail.

Efrain?

Ef rainRivera(CFO):

ThanksMarty,andgoodmorningtoeveryone.I'dliketoremindyouwhatIcustomarilyremindyouof,thatduringtoday'sconferencecall,we'llmakesomeforward-lookingstatementsthatrefertofutureeventsandassuch,involvesomerisk.Refertothe10-Qforfulldiscussionoftheserisks.

BeforeIgetintothespecificsofthequarterresults,justliketosaythefourthquarterexpectationsforpayrollandinterestrevenueindicatethatwe'llmeetthefull-yearguidancethatweprovidedthroughouttheyear.Moreonfiscal2015guidancelateron.Inaddition,weintroducedourminimumpremiumplanhealthinsuranceofferingforPEOclientsandworksiteemployeesinthethirdquarteroflastyear.WehavejustpassedtheanniversaryofthisnewhealthinsuranceofferingandwehaveseenstrongacceptancebyourPEOclients.

Duetotheselfinsuranceprovisionswithinthenewoffering,certainPEOdirectcostsarenowclassifiedasoperatingexpenses.Ratherthanareductioninservicerevenue.Thischangehadnoimpactonoperatingincome,althoughitdidhavesomeimpactonmarginasthoseofyouwhohavebeenlookingatourresultsoverthelastthreequartersunderstand.Thisnewhealthinsuranceofferingdidnothaveanimpactonourfiscal2015third-quarterandninemonthresults.

AsMartyindicated,ourthird-quarterfinancialresultsforfiscal2015representcontinuedprogress,buildingonsolidstartweexperiencedthroughthefirsthalfoftheyear.Here'ssomeofthekeyhighlights,IwillprovidedetailincertainareasandthenI'mgoingtowrapwithareviewofourfull-year2015outlook.

Totalservicerevenuegrew8%forthethirdquarterto$694million,and9%to$2billionfortheninemonths.Interestonfundsheldforclientsincreased2%forthethirdquarterand3%fortheninemonths,to$11millionand$31millionrespectively.Thesefluctuationsweredrivenbyanincreaseinaverageinvestmentbalances.

Expensesincreased10%forthethirdquarterand11%fortheninemonths,primarilyincompensationrelatedcostsandthePEOdirectcoststhatImentionedpreviously.DrivingaportionofthisincreaseinPEOdirectcosts,thenewhealthinsuranceofferingaccountedforapproximately3percentagepointsofthegrowthintotalexpensesforthethirdquarterand4percentagepointsofthegrowthyeartodate.

Theplanhasgrownsignificantlyinthenumberofworksiteemployeesenrolledintheplansinceitbeganayearago.Theincreaseincompensationrelatedcostswasdrivenbyhigheremployeebenefitrelatedcosts,togetherwithhighersalesheadcountandperformance-basedcompcostsassociatedwiththestrongsalesexecutionthatMartymentioned.Wealsocontinuetosupportinvestmentinproductdevelopment.

Operatingincomenetofcertainitemsincreased6%forthethirdquarterandfortheninemonths,grewto$254millionand$771millionrespectively.WemaintainedstrongoperatingmarginsandanticipatethatourfullyearwillremainwithinourguidancerangewhichI'lldiscussshortly.Dilutedearningspershareincreased5%to$0.46pershareforthethirdquarterand8%to$1.41persharefortheninemonths.Netincomeincreased6%to$169millionforthethirdquarterand7%to$514millionfortheninemonths.

Turningtopayrollservicerevenue,itincreased2%forthethirdquarterand4%fortheninemonths.Webenefitedfromincreasesinrevenuepercheckandclientbase.Revenuepercheckgrowthresultedfrompricingincreasesnetofdiscounting,alongwiththeimpactofincreasedproductpenetration.Checksper




payrollgrew,butatamoremoderateratethanwehadprojected.

Weexpectedpayrollrevenueresultsforthethirdquartertomoderateaswesharedduringthesecond-quarterearningscall.Asweindicatedinlastquarter'scall,timingshiftsbetweenthequartersandlowerchecksperpayrolldrovetheresults.Weexpectareturntomorenormalizedgrowthrateinthefourthquarter,expectittobecomparabletothefirsthalfoftheyear.And,full-yearguidanceforpayrollrevenueremainsunchanged.

TurningtoHRS,revenueincreased19%forboththethirdquarterandfortheninemonths.WeexperiencedstronggrowthinbothclientsandworksiteemployeesofPaychexHRservices.Thenewminimumpremiumhealthinsuranceofferingalsocontributed5percentagepointsofthegrowthinHRSrevenueduringthethirdquarter.

Retirementservicesrevenuebenefitedfrompricing,togetherwithincreasesinthenumberofplansandaverageassetvaluepurchasedfunds.Insuranceservicesbenefitedfromtherampupofournewfull-serviceofferingtocomplywithhealthcarereformrequirements.Amoderateincreaseinthenumberofhealthandbenefitsapplicantsandhigherpremiumsinourworkerscompinsuranceproduct.OuronlineHRadministrativeservicescontinuedtoexperiencegrowthinclients.

Turningtoourinvestmentportfolio,ourcontinuedgoalistoprotectprincipalandoptimizeliquidity.Weinvestinhigh-quality,lowerriskinstruments,primarilyvariableratedemandnotesandbankdemanddepositsforshort-termfundsandmunicipalbondsforourlonger-termportfolio.Ourlonger-termportfoliohasanaverageyieldof1.6%andanaveragedurationof3.2years.Ourcombinedportfolioshaveearnedanaveragerateofreturnof0.9%forthethirdquarterand1%forthenine-month,consistentwiththesameperiodslastyear.

Averagebalancesforinterestonfundsheldforclientsincreasedduringthethirdquarterandninemonth,primarilydrivenbywageinflation.Togetherwithgrowthintheclientbase.Wearenowonagradualupswingfromtheimpactofthedeclineofratesthatbeganin2008.Ouraveragereinvestmentyieldsarenowmeeting,orslightlyexceeding,theweightedaverageyieldonourlonger-termportfolio.

Assuch,wearenotseeingasignificantnegativeimpactfromturnoverinportfolio.TheFedhasindicatedthatitispossiblethattheywillraiserateslaterintheyear,whichcouldhaveapositiveimpactonourinterestincomeearnedonourclientandcorporateportfolios.

Iwillnowwalkyouthroughhighlightsofourfinancialpositionthatremainedstrongwithcashandtotalinvestmentsofapproximately$1billionasoftheendofthequarter,andnodebt.FundsheldforclientsasofFebruary28,2015,were$5.1billioncomparedto$4.2billionasofMay2014.Fundsheldforclientsvarywidelyonaday-to-daybasis,andaverage$4.4billionforthequarterand$3.9billionfortheninemonths.Thisreflectsgrowthof3%forbothperiods.

Totalstockholder'sequitywas$1.9billionasofFebruary28,2015,reflecting$414millionindividendspaidduringtheninemonths,and1.7millionshareswerepurchasedforapproximately$70million.Ourreturnonequityforthepast12monthswas36%.Cashflowsfromoperationswere$693millionforthefirstninemonths,aslightdecreasefromtheprioryear.

Thechangewastheresultoffluctuationsinworkingcapital,partiallyoffsetbyhighernetincome.Thefluctuationsinworkingcapitalbetweenperiodswereprimarilyrelatedtothetimingofincometaxpayments.Youlookattheprepaidlineonthecashflowstatementandyouseethatandcollectionsfromclients,paymentsforcompensation,PEOpayroll.It'scommonforourworkingcapitaltofluctuatebetweenquarters.

Now,letmeturntofiscal2015guidanceandI'llkeepitfairlyshort.I'dliketoremindyouthatouroutlook




isbasedonourcurrentviewofeconomicandinterestrateconditionscontinuingwithnosignificantchange.AndI'lljustsummarizeitbysayingourguidanceisunchangedfromwhatweprovided,beginningofthefiscalyear.

BeforeIturnthingsovertoMarty,IwanttoletyouknowthatPaychexwillbehostinganInvestorDayinmid-July.Weareworkingonatransportationfriendlyday.So,youcangetinandoutonthesamedayifyouareontheEastCoastortheMidwest.SorryforthoseontheWestCoast.Can'tfigureouthowtomakethatwork.

It'sgoingtobescheduledforWednesday,July15hereinRochester.We'llpostasavethedatemessageonourIRWebsiteandwewillbeprovidingregistrationinformationandotherdetailsinmid-April.Wehopetoseemanyofyouinthesummer.I'llturnitbacktoMarty.


Thanks,Efrain.We'llnowopenthecalltoquestions.

QUESTIONS&ANSWERS

Operator :

(OperatorInstructions)

DavidTogutwithEvercoreISI.

DavidT ogut (Analyst-EvercoreISI):

Canyouprovidealittlemoredetailontheunderlyingdriversbehindthedouble-digitgrowthinnewannualizedrevenue,assoldduringthepeaksellingseason?Inparticular,breakdownbetweenpayrollserviceandHRservicesbookings?


Well,David,youknow,wedon'tusuallygivethatmuchdetailonit.ButIwilltellyouthatwewerestrongacrosstheboard.Iwouldsaybothpayroll--allareasofpayroll--aswellasHRSwerebothverystrong.And,probablythebestsales.Andwehadaprettygoodsales--we'veseenoverthelastyear--but,thisisprobablythebestsalesresultinasellingseasonwe'veseenin,Iwouldsay,sevenoreightyears.


Whataccountsforthat?


Well,Ithinkverygoodexecutiononthesalesside.Ialsothinkthatthechannelsthatwe'vebeendevelopingfromourconstantCPAchannelhasbeencontinuedtobestrong.Thebankchannel,wepickedupalotfromthebankchannelfromareferralstandpoint.We'vealsoaddedanumberoffranchisearrangements,wherewe'rethesupportedorthepreferablecompanyforpayroll.AndIthinkwe'vejustdoneagoodjob,overall,alsoteamselling.

So,goinginisnotjustpayrollandthencomingbacktoselltheotherancillaryservices,butgoinginrightupfrontandsellingthefullvalueofalloftheproductstotheclientrightupfront.So,we'veseengoodgrowthinpayroll.We'veseengoodgrowthinHRS.IntheAffordableCareActproducts,ouremployersharedresponsibilityproducthasbeenstrongandcertainly,HRoutsourcing,bothPEOandASO.

Allhavebeenstrong,Ithinkit'sexecution,Ithinkit'salotoftheworkthattheheadofsales,MarkBottini,




hasbeendoingwiththatteamtobuildagoodreferralandpipelineaswell.


Withthatrateofnewannualizedrecurringrevenuegrowthtakentogetherwithyourcurrentclientretentiontrends,pointtoachangeinyourrevenuegrowthrateforFY16andFY17?


Well,Ican'treallygetintoguidancenow.Ithinkwe'llhaveabettersenseofthatatthenextquartertotalkabout2016.Certainlybodeswellforastart,anyway.


Thankyouverymuch.

Operator :

GeorgeMihaloswithCreditSuisse.

GeorgeMihalos (Analyst-CreditSuisse):

Justwantedtostartoffonthecorepayrollside,thegrowthof2%.IguessI'mcloserlike2.4%,thewaywecalculated.But,anythingelsetocalloutthereasidefromtiming,wasthereanysortofslippageonthepricingside2Qto3Qoraslowerrateofdeclinegrowth,oranythingelse?

Ef rainRivera(CFO):

Goodquestion.Clientgrowth,no.Pricing,no.Checks,alittlebitlessthanweexpected.So,alittlebitofcoloronthat.

We'veseenmoderationinchecksperpayroll.We'renotcallingitoutspecificallybecausewhenit'strendingaround1%,itreallyisnotasignificantcontributortorevenue,overall.But,whatwedidseewaschecksthathavejustbeenalittlelighter,alittlebitlighterinthequarterthanweanticipated.Now,justtwomorepointsofdetailonthat.What'sinterestingaboutthatnumber,is,again,IruledoutclientandIruledoutpricebecausethat'snotadriverhere.

Timingisprimarilythereason,butsecondarily,what'sgoingonisthateventhoughwesawanincreaseintheamountofbonusdollarsthatwepaidinchecks,that'swhatweseemtobeseeinginthedata,weactuallysawaslightdecreaseintheamountofbonuschecks.So,itlookslikepeoplewerebeingpaidalittlebitmoreinbonuses.But,thesizeofthosebonusesresultedinlowerchecks.

So,itwasalittlebitlighterandthatreallykindofdrovemuchofthe--muchofthedifferenceinpayrollservicerevenue.We'veaccountedforthat,aswelookforward.Ithinkwe'rejustinthisenvironmentnow,wherecheckperclientorcheckperpayrollgrowthisgoingtobemoderategoingforward.So,that'ssomecoloronthatpoint.


Okay.Appreciatethatcommentary.Mysecondquestion,onthepriorearningscall,IthinkyouguystalkedalittlebitaboutM&Aandyourappetitetodosomethingthere.Justcuriouswhatyou'reseeingoutthereinthemarketplaceandifyoustillhaveanappetitefor,aguesswhatyouwouldconsideralarge-scaleacquisitioninadditiontoanytuck-ins.





Yes,wedo.Westillseealotofavailable.We'relookingatmorethanweprobablyeverhaveinthepast.Everythingisprettyhighlyvalued,sowe'regoingtobeveryselectiveastowhatwedo.

But,we'relookingatbothsomethingthatwouldbeproducttuck-insbutalsojustaddto--addtothebasebecausewethinkwhetherit'sPEO,payrollorotherservices,wethinkwe'reprettyeffectiveatwhatwe're,howwe'reexecutingandit'sagoodtimetoacquire.Maynotfindsomething,butweareprettydeepintoanumberofthingswe'relookingat,atthetime.Sizewouldbe,we'dbeveryselective.Butwecertainlyhavethecashtodoitifthatmakessense.


Justtobeclear,you'regoingtobestickingtosortofapayrollacquisitionorsomethinginthatareaorinHRservices,andnotanysortofareas?


Yes,that'scorrect.


Thankyou.

Operator :

JasonKupferbergwithJefferies.

RyanCarey(Analyst-Jefferies):

ThisisRyanCareycallinginforJason.IjustwanttobuildonGeorge'squestion.Althoughyoureiteratedthefull-yearguideof3%to5%forthepayrollservices,hasyouroutlookonwhereyoumightfallinthatrangechangedatallafterthisquartermeaning,doexpect4Qtomakeupforthemoderatesoftnessoralittlebitbelowthatrangewesawin3Q?

Ef rainRivera(CFO):

Youknow,excuseme,whenweissuedguidanceweexpecttobesomewherearoundthemiddlefortheyear.Ithinkthat'swherewe'reatrightnow.


Okay.Great.Doyouseeanymaterialchangesinthecompetitiveenvironmentasyougotdeeperintothepeakcalendaryear-endsellingseason?Ihavetoaskaquestiononpricingaswell.Lastquarteryouseemedcomfortablepricing2%to4%band.Hasthatbeenanymaterialchangeineitherdirectionoverthelastquarter?Iwouldloveanadditionalcolor.Thanks.


Idon'tthinkso.Wedidn'treallysee--actually,wefeltverygoodaboutthequarterfromasellingperspective.Iwouldsaythecompetitiveenvironmentwasaboutthesame.Didn'tseeanextrapricingpressure.There'salwayscompetitivepricingpressureoutthere,butwedidn'tseeanythingpickupnecessarily.Therewasnobigcompetitorplansorthingsthattheyweredoingthatwesawthatmadeanybigdifferencethere.I'dsaypricingisgenerallyholdinglikewethoughtitwaslastquarterandcompetitiveenvironmentsaboutthesame.





Great.Thankssomuch.

Operator :

SaraGubins.

DavidRidley-Lane (Analyst-BankofAmerica):

Efrain,youmentionedthatsomepayrollservicerevenuewasbeingdeferredfromthirdquarterintofourthquarter.Canyougiveusasenseofmagnitudeofthat,andthisisDavidRidley-LaneforSaraGubins.

Ef rainRivera(CFO):

It'simplicitinwhatIsaid.Thatweexpecttobesomewhereinthemiddleoftherange.IfyouheardmycommentsearlierIsaidthatfourthquarterwascomparabletothefirsthalfoftheyear.AndkindofI'llleaveitatthat.


Okay.Andthencouldwegetanupdateonthesensitivityoftheportfoliotothefirst25or50basispointsofinterestrateincrease?

Ef rainRivera(CFO):

Yes.Ontheshort-termit'sgoingtobeabout$4million,somewhereinthatrange.Alittlebitless,alittlebitmore.Thatjustassumestheshort-termrateprices.Whatthatdoestolong-termratesisagoodquestion.Idon'thaveacrystalballonthat.Timing,atthispoint,youknowourbestguesstimateisQ2.Again,ourcrystalballhasbeenexceedinglyfuzzy.


Gotit.Thankyouverymuch.

Operator :

SmittiSrethapramotewithMorganStanley.

Smitt iSrethapramote (Analyst-MorganStanley):

Ijusthadacouplefollow-upquestionsontheminimumpremiumplan.Maybeyoucantalkabouthowtheclaimshavetrendedversusyourexpectationsonwhetheryougotinanycloserthrowingouttheofferingtomorestates?

Ef rainRivera(CFO):

Yes.So,Iwouldsaythatclaimsexperience,thusfar,hasbeenaboutwhatweexpected.We'reprettyconservativeintermsofourapproachandtakesabeltandsuspendersfeelfromanactuarialperspective.Wehavetwoactuarieslookatitandhaveprettyextensiveconversationsabouthowwesetprices.

IthinkonethingthatI'djustliketoreiterate,fromourperspective,thePEOisnotaninsuranceplayit'sanHRoutsourcingplay.So,weunderstandtheperilsofsellingcheapinsuranceinthePEOandit'snotadirectionwewanttogoin.So,Ithinkclaimshavetrendedaboutwhereweexpectedthemtobe.Ididn't--Iforgotthesecondhalfofyourquestion,Smitti.





Canyougiveusanupdateintermsofyourplanstorollouttheofferingtomorestates?


Atthispoint,we'restillgettingthroughkindofafullyearofthisone.Wefeelverygoodabout,asEfrainsaid.Ithinkwe'vedoneverywellontheclaimsandsoforth,butit'sayearintoitandwedon'thaveanyimmediateplanstoexpanditoutsideofthearea,butthatiswhereabigamountofoursalesare.So,Ithinkwe'llgiveitalittlebitmoreexperiencebeforewelooktoexpandit.


Justfollowingalongontheminimumplan.Canyoutalkabouthowtheclientramphaslookedlikeoverthepastyearandwhetheryouswitchexistingclientsover,orwhetherit'sreallynewclientssigningupfortheproduct?

Ef rainRivera(CFO):

Isprimarilynewclientsthatwe'resigningup.Whenweinitiallydidit,weobviouslymovedexistingclientsontotheplan.Nowwhatwe'redoingiswe'resellingnewclients.

I'dsayPEOclientbaseisgrowingnicely,double-digit.So,onethingIhopewe'renotleavingtheimpressionthatit'stheminimumpremiumplandrivingPEOgrowth.ItreallyisthatthereisalotofinterestinthemarketnowforbundledHRoutsourcingsolutions,plusthatitalsoincludehealthcareandthat'sdrivingthemarket.


Okay.Thankyou.

Operator :

TimMcHughwithWilliamBlair.

T imMcHugh (Analyst-WilliamBlairandCompany):

Canyouhelpuscontrastthedouble-digitgrowthinannualizednewsales?Whatwasthatnumberayearortwoago?Howmuchofanimprovementisthatversuswhatyou'veseeninthelastcoupleyears?


Well,Iwouldsayit'scertainlygonefromsingledigit--fairlyflat,actually--tosingledigitandnowdouble-digitgrowthinpart,annualizedrevenue.So,thisis,asIsaid,Ithinkthisisprobablythebestsellingseasonwe'veseeninsevenoreightyears.Ithinkverygoodexecution.Ithinkit'smuchstrongerthanlastyear,whichwasprettygood.And,asIsaid,it'sverymuchacrosstheboard,soit'snotjustPEOintheHRSservices.

It'sagoodteamselling.We'reseeinggood--bothpayrollandHRoutsourcing,401(k),reallyacrosstheboard.Verygoodexecution.Idothink,obviously,themarketiscomingbackalittlebitfromasmallbusinessandmidsizebusinessenvironment,too.So,I'dsay--Iwanttocharacterizeitasthebestinsevenoreightyearsfromanincreasedstandpoint,fromatotalparstandpoint.


Lastyearwasimproved,butthatwasstillkindofmidsingledigitslastyeareven?

Ef rainRivera(CFO):




Itwasinsingledigits.Iwouldn'tcharacterizeitasmid-singledigits.


Okay.Doesitchangeyourthoughts--Ithink,you'vetalkedabouttryingtogetunitgrowthorclientgrowthbackuptokindofsomewhereinthe1%to3%range.Whereisyourthoughtsonthat,asyouexitthesellingseasonbasedonwhatyousaw?


It'sstillacombination.Imean,wewanttheunitsandtherevenueboth,andthat'sthewayourcompplansandourincentivesareset.So,we'restilllookingforbothandwe'restilltrying--wecertainlyexpecttobeinthatrange.Youknow,fromclientgrowthperspective.


But,youwanttobe--Iguess--Iwastryingtoseeifyouwouldincreasethatrange,giventhesalesseason?Or,ifit's--Iguessifyoustillwitha1%to3%?


Yes.Iwouldsayinthatrangefromclientgrowthperspective.Thisisanabilitytosellhigherrevenueperclientasmuchasproduct,itissellingmorecompletebundlestoclientsandmorecompleteandmoreancillaryservices,aswell.So,Ithinktheclientgrowth,youknow,wouldstillbeinthatsamerange.Iwouldn'tnecessarilybringthatup,butIthinkwe'resellingmorerevenueperclientbecauseofthebetterexecutioninteamselling,etcetera.Okay.Great.Thankyou.

Operator :

KartikMehtawithNorthcoastResearch.

KartikMehta(Analyst-NorthcoastResearch):

Youtalkedalittlebitaboutthefloat.Areweatapoint,now,ifweassumethatratesstaykindofwheretheyareanddon'tworryaboutincreases,thatfloatincomeyearoveryearshouldbeflatandifratesgoupyoucouldstartseeinganincreasethere?

Ef rainRivera(CFO):

Ithinkyoucouldshouldseeitpickupmodestly.Ithinkthat'swherewe'reat.Weweatheredthestormandthestormappearstohavepassed.Hopefullywe'renotintheeyeofsomething.Butit's--itseemstobethattheworstcertainlyispassedandfromtheperspectiveoftheportfolioandhowwewillmanageit,interestrates,nowjustrepresentupside.AsIliketosay,theembeddedoptionalityofthestock.


Marty,youtalkedalittlebitaboutpriceincreasesandthisquarterwehaven'tseen,really,anyincreasedcompetition.Asyoulookatthenextpriceincrease,whichIthinkyouusuallydosometimeintheMaytimeframe,anythingchangeintheenvironmentwhichwouldchangeyourmindastothetypeofpriceincreaseyouwoulddothisfiscalyearcomparedtowhatyouwereabletodothecurrentfiscalyear?


No.Ithinkwe'dstillbeinthatsamerange.We'vegottenmoresophisticatedastokindofwhereweputthepriceincrease,basedonclients,products,andthecompetitivenatureofthoseproductswiththeportfolioofdifferentproductswehave.But,Istillthinkyou'dexpectustobe--youshouldexpectusto




beinthat2%to4%range.


Onelastquestion.Efrain,youalludedtothisalittlebitwhenyouweretalkingaboutthePEO.I'mwondering,isthereawaytoquantifyanyATAbenefitsyou'regetting?And,ifthatbenefitgoesawaynextyear?Or,isthePEOatleastthewayyoulookatitandtheHRSbusiness,thetrendsarefairlystrong,soweshouldcontinuetoseethegrowthyou'vebeenwitnessing?

Ef rainRivera(CFO):

Myinitialanswertothat,isthatIwouldexpectacontinuationoftrends.Havingsaidthat,wearegoingthroughtheplanningprocessandhavingourusualdiscussionswithsalesaboutwhatwethinkisattainable.Ithinkit'sfairtosaywe'reinafavorableenvironment.Howwesetthatfornextyear'splanstillremainstobedecided.


Thankyouverymuch.

Operator :

GaryBisbeewithRBC.

GaryBisbee (Analyst-RBCCapitalMarkets):

Justgoingbacktotheminimumpremiumplanforonemorequestion.Canyougiveusasense,isthatgoingmuchmorequicklythanotherPEO?Nowthatwe'veannualizedyouaddingthat,I'mtryingtothink,willthatbegrowingfasterandthusbesomewhatofadragonmarginseventhoughthere'salittleprofitimpactforseveralmorequarters?Or,ismostofthatbehindyounowthatyou'vegottheintroductionofthat?

Ef rainRivera(CFO):

Ithinknextquarteriswhenit'llprettymuchanniversary,Gary.We'llstillseealittlebitofdragintonextquarter.Startingthefollowingquarter,itshouldbeamorefaircompare.Thepointyou'remakingisafairone.TotheextentthatmorePEOclientsattachhealthcare,itdoeshaveaslightdragonmargins,becausewedon'tgetmuchofamarginflow-through.But,afterfourthquarter,itshouldn'tbesignificant.


Okay.Great.WeallknowPEO--becauseofthepassthrough,somewhatlowermargin.Whenyoulookatthemixofnewbusiness,thecompositionofyourgrowthinthelastyearortwogoingforward,howdowethinkabouttheputsandtakesaroundmargins?Isstuff--alotofstuffcominginatalowermargin?Or,someofitisincrementallymoreprofitabletoexistingcustomers?Whatarethemainissues?

Ef rainRivera(CFO):

Gary,that'sagoodquestion.Theansweris,ifyoulookatmostofHRSwiththeexceptionofPEO.IfItakeallofthoseproducts,they'reallgrowingprettystronglyandtheyallhavemarginsthatarecomparabletopayroll.Oneexceptiontothatisinsurance,butit'sstilltoosmalltoexertanoveralldragonmargin.

Sotheansweris,weshouldn'tseesignificantdilution.TheremaybeamoderateimpactifPEOreally,reallystartstogrowmuchfasterthaneverythingelse.It'sbeengrowingnicely,butit'spartofthemixandit'sreflectedinourresults.Sounlessthatreallytookoff,itshouldn'thaveasignificantimpactonoverall




margins.


Great.Onelastone.Lasttimethecompanygotnorthof$1billionofnetcashincorporateinvestmentstherewasasizablebuyback.Ithinkitseemslikeyou'vebeenmorelikelytodosomesteadybuybacksovertimeratherthantheonebig.Iwonderedifyou'vegivenanythoughttomaybeaspecialdividendorsomeotherwayofreturningmorequicklyaportionofthatexcesscash?

Ef rainRivera(CFO):

Yes.So,Iguessmynuancedanswertothat,iswhenit'sabove$1billionwehavetothinkaboutwhatwedowithit.It'safunctionofwherewearewithrespecttoopportunitieswithintheM&Aportfolio.Totheextentwedon'tseethosematerializinginashorter-termtimeframe,thenwehavetohavethatconversationwiththeBoardandthey'reultimatelygoingtodecidewhatmakessense.But,we'llbehavingthoseconversations.


Great.Thankyou.

Operator :

JimMacdonaldwithFirstAnalysis.

JimMacdonald (Analyst-FirstAnalysisSecurities):

Onthedouble-digitnewbookingsgrowth,dothinkwe'llseethatmoreinHRorsomewhatinpayroll?Howisthatgoingtoplayout?


Ithinkbothofthemhavebeenprettystrong.Ithinkit'salittlestrongerintheHRside.That'sobviouslywherewehavemoreopportunitytoselltheancillary,thewidebreadthofancillaryproductsthatwehave.AlittlebitstrongerontheHRside,particularlyasEfrainsaid,betweenPEO,ASO,401(k),ouronlineservices,timeandattendanceandeverything.Everythingbutpayrollisinthere.Ithinkit'scertainlybeenalittlestrongerontheHRside,butbothhavebeengood.

Ef rainRivera(CFO):

I'dsaythis,Jim.Martymentioneditwasdoubledigit.Itwasinthefourthquarter--thirdquarter,itwasdoubledigitinpayroll.So,toMarty'spoint,wewereprettystrongacrosstheboard.


Great.Ithinksimilartootherquestions,butaspeoplecontinuetoadopttheminimumpremiumplan,willyoucontinuetogetalittlebitofatailwindinrevenuegrowththatyousortofhadthisyearfromthenewrevenuerecognition?


Yes.That'sagoodquestion.Youreallydon'tseeasmuchofitnextyear.Wereallyobviouslygottwothings.Weobviouslygotanupliftthisyear.

We'vebeencarefultocallitoutbecausewedon'twantpeopletomisunderstandwhat'sgoingonintheunderlyingnumbers.Mostpeopleunderstandit.Wewerewithin$3millionofwhatthestreethadon




revenue.So,everyoneunderstands,kindof,what'sgoingon.Yougetamodesttickup,butafterthisyear,theimpactisnotsignificant.


Okay.Onethingontherepurchase.Yoursharecountstartedtodriftbackupagain.Anythoughtsonthat?

Ef rainRivera(CFO):

Yes.Iwishthesharecountdidn'tdriftup.Yes,we--Iwouldsaywe'llrepurchaseopportunistically.Ithinkthat'swherewe'reatrightnow.Before,Gary'squestionearlier,onwouldbedosomethingmore?We'llhavetotakealookatwherewearewithM&Aandaddresswhetherwethinksomethinglargeriswarranted.


Great.Thanks.

Operator :

BrianKeenwithDeutscheBank.

EvanBull(Analyst-DeutscheBank):

ThisisEvanBullonforBrian.RealquickonthebookingsgrowthintheDecemberandJanuaryquarters,maybedirectionally,wasthataheadofyourexpectations,beloworrightat?Justgiventhemagnitudeofthosemonths?


Ithinkitwasprettyclosetoourexpectations.Wesetprettyhighgoalsforthesalesteaminwhatweexpected.Particularlyinthesellingseason,I'dsayitwasprettymuchatourexpectationsbecausewesetprettyhighones.


Sure,thathelps.YouguyshaveintroducedanumberofSaaS-basedproductsoverthecourseofthepastyear.Canyoutalkaboutthetractionwiththoseproducts?Andmaybethecompetitionandkindofthecompetitivedynamicsthere?Whoaretheplayersthatyouarecompetingwithdirectly?


Ialwayshatetonamecompetitorsbecauseitjustgivesthemcredibility.ADPistheonewerunintothemost.There'sacoupleofotherthathaverecentlygonethroughIPOsyouruninto,butwe'rewinningsomeofthoseclientsbackactuallyrightnow,overserviceissuesandsoforth.FromIthinkfromaproductstandpointwestandupverycompetitively.

AllSaaS,theabilityoftheSaaSproductsinthebundlingoftheseandtheintegrationissocriticaltousandwe'recontinuing,you'llseeoverthenextsixmonthstoreallyevenmorefullyintegratealotof,Ithink,thebest-in-classproducts.SowehavemyStaffingPro,forexample,whichissoldandintegrated,butit'llseeevenbetterintegrationthisyear.AswellasStratusTimewhichis,Ithink,theleadingtimeandattendanceSaaSofferingthatwepurchasedlastJune,andnowyou'llseeitnotonlyasitintegratednowbutitwillgomuchmoreofafullintegration.

Wecompeteverywell.It'sstillprimarilywithADPandthenthere'ssomeofthepays,thatwecallthem,




thatyou'llsee.But,againwe'restartingtowinthoseback.They'reprettysmalllossesforthematthisstage.


Thanks.Thathelps,guys.

Operator :

SKPrasadfromGoldmanSachs.

SKPrasad (Analyst-GoldmanSachs):

Firstoneisprobablyjustonthetimingimpact.Youguystalkaboutdouble-digitgrowthyou'reseeinginbookings.Howlongdoesittaketoactuallyseethatfromarevenueside?


Starttoseethatprobablyacoupleofquartersout.That'swhen--youknow--thefirstquarter,notmuch.Dependingonwhereitoccurred,youstarttogettheclientsetup.There'salittlebitoftimeandthenprobablyafterthesecondquarter,that'swhenyou'restartingtoseetheimpact.


Okay.That'sclear.Ifyoucouldprovidesomecoloronsomeofthenewerproductswhichyouguyshavelaunchedoverthelastfewquarters?PEO,Iunderstandit'satalowmarginprofileonthegrouplevel.Justthinkingaboutthenewerproducts,arethereanyproductsorserviceswhichareathighermarginthanthegrouplevel?


I'dsayasEfrainmentionedearlier,mostoftheproductsareataprettystrongmarginlevelacrosstheboard.Ithinkinsurance,Efrainmentioned,wasprettystrongmarginand,butthat'sstillasmallpartofthebusinessalthoughtheinsurance,thehealthinsuranceinparticular,Worker'sComphasalwaysbeenprettystrong.Thehealthinsuranceisreallystartingtopickupnow.That'sinadditiontotheAffordableCareActproductsthatwehave.

Ithinkasabusinessweworkedveryhardtomakesurewehavethestrongestmarginspossible,obviously,withourhighmarginsintheindustrynow.Wekeeptryingtodrivethose.Ithink,whenyoulookatthenewerproductsthatweeitherpurchasedorbuilt,StratusTimefromatimeandattendanceSaaSproduct,myStaffingProfromarecruitmentandapplicanttrackingproduct,BeneTrac,thebenefitenrollment.

Allthosehave--willhaveprettygoodmargins,particularlyaswebuildscale.Andmorefullyintegratethemintothebundle.Allthoseproductsaredoingwellandtheyaregettingoutofthegateandthisisevenbeforewe'vemorefullyintegratethemintothePaychexFlex,ourSaaSbaseforthewholething.


Probablyjustlastone,regardingfloatincome.Yes,there'ssomepositivecommentscomingfromandyoumightendupseeingsomebackfromthat.Justfromalong-termstrategyaroundyouportfolio,wouldyoubeopentoconsideringoptionslikesmallbusinesslending,givenyourstrongdistributionstrengthandstrongcustomerbase?

Ef rainRivera(CFO):




Goodquestion,SK.Wehavethatdiscussionprobably,Iwouldsay,onceaquarter.Thechallengeweseethere--sowe'relookingatwaystopartner.Wedopartnerwithbiz2creditonsmallbusinessloansandreferralarrangements.

We'rejustverycautiousabouttiptoeingintoanareathatcouldbehighlyregulated.That'swhywe'vebeencautiousaboutdoingit.It'sanareaofinterest,ifwecouldparticipatealittlebitmorefully,we'dlookatit.That,that'stheinhibitor.


Thanks,Martin.Thanks,Efrain.

Operator :

JeffSilberwithBMOCapitalMarkets.

Jef f Silber (Analyst-BMOCapitalMarkets):

Efrain,nottonitpickherebutinlookingatthesupplementalschedule,ifyoulookattheoperatingmarginguidanceforthefourthquarter,35%to36%,Ithinklastquarterthatnumberwas36%to37%.Istheresomethinggoingonthatweshouldbeaware?

Ef rainRivera(CFO):

Yes.Ithink,Jeff,firstofall,eagleeyesthere--Ididnotcallitoutexceptthatinmycomments,whatyousawweresomediscussionabouthighercostinthequarterandthehighercostsweredrivenby,primarily,bysalesrelatedexpense.So,we'rejustsimplycallingoutthatwethink,givenstrongsalesperformancenow,we'remoderatingalittlebitthemargin,giventhestrongsalesperformanceinthebackhalfoftheyear.That'swhat'sdrivingthatmodestchange.


Thatmakessense.IwishItotakecreditforit,butsomebodypointeditouttome.Justoneotherquestion.Youmentionedonthechecksperpayroll,Iknowit'snotasbigofanissueasitwasbefore.Youexpectmorenormalizedgrowthinthefourthquarter.Isthatbecauseofthebonusissueyoumentionedthatshouldn'treallyimpactthequarter?

Ef rainRivera(CFO):

It'snotgoingtoimpactthequarterandIthinkthetimingshiftsthatIdiscussedinQ2,thesehappenfromtimetotime--I'msorrythatImentionedinQ3--thatdoesn'toccurinQ4andthenwe'rebackatamorenormalizedrate,likewhatyousawinthefirsthalfoftheyear.


Allright.Great.Thankssomuch.

Operator :

DavidGrossmanwithStifel.

DavidGrossman (Analyst-StifelNicolaus):

IwaswonderingifyouwouldjuststepbacktothecostinHRSandperhapshelpusbetterunderstandASOversusthePEOonwhatthetrendsareyouareseeinginthebuyersofeachofthosedifferentproducts?





Yes.Ithink,primarily,thePEOistypicallybeeninstateswherethey'rejustmorecomfortableandmoreusedtoPEOs.What'sexpandedalittlebitfromaPEOside,David,isbecauseoftheAffordableCareAct,they'relookingmoretokindoffeelmorecomfortableinthecallemployerrelationship.So,there'salittlebitmoreacceptance,Ithink,tothePEOandnotjustthetypicalstates,theFlorida,Texas,etceteratypeofstates.Wedoseethatgrowing.

That'sbeen,frankly,alotoftheAffordableCareActhaspushedmorepeopleintoseeingtheopportunityandjustfeelingmorecomfortablebeingpartofasharedkindofemploymentservice.Thosewhodon'tneedtogothatfarandhavetheASOandboth,IthinktheASOisstillcomingprimarilyaddedfromanHRoutsourcingtypeofbusiness.We'veseenthatdropdown.So,whereclientsdidn'tthinkaboutHRoutsourcingat30employeesor20employees,nowdobecauseofthecomplexityoftheregulationsofthehiringandfiringandothercomplianceissues.So,botharegrowing.

IthinkPEOstilltendstogrowalittlebitmorefromthinking--startingtothinkaboutinsurance,butthenrealizingthattheHRsupportisthereandthat'swhytheybuytotally.Because,that'sreallyhowwesellit,isthevalueofHRsupport.But,theASOcontinuestobeHRandIjustthinkit'ssocomplexnow,theAffordableCareAct,there'sanumberofimmigrationreformissuesthatareoutthereforhiringandsoforth.Allofthesethingsaddmorepeopletosay,IwanttooutsourcemyHRtosomebodywho'sgoingtostaycurrent.

Ofcourse,we'vebeenaleaderinthisbusiness,andwehavemoreclientemployeesthananybodyelseinthebusinessbyfar,thatweservice.Over400individualsaroundthecountrywhoservicetheclientsface-to-faceandIthinkthat'smadeforgreatgrowth.

Ef rainRivera(CFO):

Andtobuildonthat,David,Ithinkwhenyoulookathowwearegoingtomarketandhowwesellthatproduct,ASOtendstobe,asMartymentioned,tendstobealittlebitlower,typicallyworksiteemployeesandwithinthebase.PEOtendstobealittlebitbigger,andacombinationofinsidethebaseandoutsidethebase.So,ourPEOsalesarenotjusttoexistingPaychexclients,butalsooutsidethebase.


Istherelativegrowthrate--justwithoutgettingintothespecificnumbers--aretheycomparable?Ifnot,doyouexpectthemtodivergeatall?


Ithinkthey'regenerallycomparable.They'reprettycloseonbothsides.It'sjustthepreferenceforwhat,howtheclientthinks.Ithinktheotherthingthatweprobablydidn'tmentionissellingthismoreupfront,wehavefoundthattypicallyourmodelwassellthempayroll,thencomebackandsaydoyouneedHRservicesinthreemonthsorsixmonths?

We'resellingmuchmoreupfront,ifwethinktheclientisofa20plusinacomplexitywewillgoinandteamsell.Ithinkwe'rewinningmoreclientsrightupfrontanASOorPEObasis.


Okay.Andjustoneotherquestion.Doyouselltheancillaryserviceswithoutpayroll?Ifyoudon't,wouldyouconsiderdoingthat?

Ef rainRivera(CFO):




Thequestion.Theanswerisyes,wedo.Although,forexample,wereported,Ibelievelastyearabout580,000clients.Wethinkwehadinexcessof20,000clientsthatdon'ttakepayrollbuttakeotherancillaryproducts.

Ithink,David,itpointstothefactthatthecompanythatwewerepriortotherecessionisverydifferentthanthecompanythatweemergedoutoftherecession.We'remuchmoreofanintegratedfull-serviceprovidertosmallandmedium-sizebusinessesandyou'restartingtoseethatintheclientbase.We'llupdatesomeofthatinformationwhenwegettotheendoftheyear.


Verygood.Thankyou.

Operator :

MarkMarconwithRWBaird.

MarkMarcon (Analyst-RobertW.BairdandCompany):

Withregardstothecorepayrollgrowththatyou'veseen,canyoucharacterizewhereyouareseeingthestrongestgrowthintermsof,isitthesmallestendofyourotherclientsize?Or,justtheaveragesmallclientandwhatareyouseeingontheMMSside?


Iwouldsayontheaverage,notnecessarilythesmallestclients,althoughnewbusinessformationhaspickedupsome,obviously,andwe'rekindofgettingbacktowherewewerepre-recessionlevels.And,Ithinkoursalestonewbusinessesarebackupoverlastyear,atthistime.So,Ithinkthere'ssomesmall,butIthinkprimarilyit'snetaveragebase,ifnotslightlyhigherI'dsay,meaningoneortwoemployeesorsomethinglikethat.

Ithinkwe'rerightintheaverage,andinthemid-marketIthinkit'saboutthesame.Wefocusedveryheavilyonthe50to500inthatmid-marketspaceandIthinkthat'sbeenaverygoodsweetspotforus.Wecertainlyhaveclientsthatareabovethat,butwe'rereallyfocusingtheteamonthat50to500.It'saveryhotspacerightnowformultipleproducts.ThosearetheclientsthatneedmultipleproductsthatareintegratedandSaaS-basedandwefitreallywellthere.


Soyou'reseeingthesamelevelofgrowthinthat50to500asinthatsub20group?


Yes.I'dsayprettyclose,I'dsay.Yes.


Great.Youstillhavesomeimprovementstomaketothat50to500product,isthatright?


WhatImentionedearlierisoverthenextsixmonthsyou'llseeevenstrongerintegration.So,allonkindofthesameuserinterfaceandsoforth.They'reintegratedtodayfromdifferentlevelsbutoverthenextsixmonths,StratusTimethatweacquiredlastyear,myStaffingProandBeneTracwillseeevenenhancedintegration.





Singlesign-on,singledatabase?


Yes.


Great.


Whichwillmakethatevenastrongerproductthenrightfromapplicanttracking,rightthroughtoretirement,astheysay.Particularlyonthefrontendoftheapplicanttrackingandthebenefitenrollment.

Ef rainRivera(CFO):

BuildingonwhatMartysaid,thewaywesegmentmarkets,Mark,isunder50and50to500.Ifyoulookatitfromaunitbasis,thegrowthisprettycomparable.


Okay.Great.And,withregardstothesalesthatyou'veseen,canyoucharacterizethenumberofadd-onmodulesthatyou'reseeingnow,relativetosay,ayearago?


IguessI'dsay,ifthisiswhatyoumean,wesellalotmorebundledservices.Certainly,thanstandaroundpayroll.That'sgoneupdramaticallyoverthelastfouryears.


Whatdoesdramaticallymean?


I'dsayfromlowdoubledigitsasapercenttomid,almost.Okay?Double-digit.Whereweusedtosell,probablystandalonepayroll--andthisisachangeofthewholesalesteam--bundledservicesrightupfront10%to20%ofthetimeandnowwearesellingacompletebundle40%to50%ofthetime.It'sprettydramatic.We'vebundledtheproducts,aswell,andthewaythatsaleshaslookedtoincreasetherevenueperclientandreallytoselltheclienteverythingtheyneedrightupfrontaspartofabundle.


Then,whatpercentageofyoursalesarenowcomingfrombrand-newbusinesses?


I'dsayit'sstillclosetohave.Stillclosetothat50%.


Okay.But,thatispickingup?





Yes.


Okay.Great.Iftheeconomystaysasitis,wouldyouexpectyournewbusinessrevenuegrowthtargettobasicallystayaboutthesame?


Ithinkso,yes.

Ef rainRivera(CFO):

Mark,it'sreallybeentypicallybetweenabout45%andlow50s,52,53.It'shardtoenvisionthatthatchangesthatmuch.Partofwhatdistinguishesusfromalotofcompaniesisthatweareliningthatnewbasetogetourcustomers.So,wegotthethree-personpayrollonthateventuallybecomeaneight,10,20%payrollbecausewemindthatbase.So,that'spartofthewaywesellhowwedothat,howwego-to-marketovertimeachange,butthat'sreallycoretohowwe'reapproachingthemarket.


Lastly,thisiscompletelyseparatefromnewbusinessformation,intermsofthequestion.But,specifictoyourbookingsgrowth.Whenwetakealookatthetargetthatwassetandiftheenvironmentstaysthesame,intermsofhowyourjudged,doyouthinkthatyou'retargetlevelwillroughlysaythesameaswhatwe'verecentlyseenincertaindocuments?

Ef rainRivera(CFO):

That'saverywonderfullyellipticaleuphemisticwayofsayingwetypicallyhaveaprettytoughtarget.Managementdoesn'tgetpaid.Wedon'tstarthavingconversationsuntilwearegettingclosetodoubledigits.So,wewillexpectthatwewillhaveadouble-digittargetandwe'llexpectthatifwedon'tmeetit,we'llsuffertheconsequences.So,that'skindofwhereweareatfrommanagementcompperspective,obviously,saleshasitsownsetofcomp.


Congratulationsonagoodyearthisyear.


Thanks,appreciateit.

Operator :

JohnWilliamswithTopekaCapitalMarkets.

JohnWilliams (Analyst-TopekaCapitalMarkets):

Youhadmentionedthatintherelease,acoupleofthingsthatIthoughtwereinterestingandmaybespeaktowhat'shappeninginthewiderworld.Specifically,regarding,numberone,pricingandnumbertwo,justthefactthatyouarestartingtoseewagesmoveupalittlebit.Iwaswonderingifthereisanewbreedthatyouhave,perhaps,moreinthewagesidethanonthepricingside.

Youtalkabitaboutthepricingside,butI'mcurioustoknowwhatyouareseeingwiththewiderscaleandwageinflation,ifyouthinkthatsomethingthat'sgoingtobecomeanissueinthenextfewmonths?





Wageswegenerallyseenaround2%.So,itwouldn'tsayit'sanythingoverlystrong.Ithinkwesaw,Efrainmentionedearlier,fromabonusperspective,whichwewatch,bonuseswerehigher.Theredidn'tseemtobeasmany,necessarily,ormuchofanincreaseaswethoughtthattheywerehigher.Generalwagehasbeenprettyconsistentataround2%increase.

Ef rainRivera(CFO):

Thinkyouarepickingup,John,onthe3%clientfundbalances.So,thatincorporatesnotonlywages,butanythingelsethatwe're.Itlookslikeit'stickingupmoderately.

JohnWilliams (Analyst-TopekaCapitalMarkets):

Okay.That'shelpful.Thankyouguys.

Operator :

LisaElliswithBernstein.

LisaEllis (Analyst-Bernstein):

Canyoucomment,justfollowingup,onthestrongbookings?Also,increaseinsalesexpense?Canyoujustgivealittlebitmorecoloraroundsalesproductivityandhowthat'strendingcomparedto,say,growthinthesalesforce?


Yes.Ithinkweareshowing,obviously,goodproductivityinthisthirdquarterinthesellingseasonfromastandpointofrevenueperrep.So,weareseeingprettygoodproductivitythere.Asweprojectedorsetourgoals,IguessI'dsay.

So,thatalwaysstrives--whenyoutiebacktoexpenseinthethirdquarter--becausewehavealotofsalesinthethirdquarterwithJanuarystartsforpayroll,inparticular,thatdrivesthesalesexpenseup.Iwouldsaysalesexpensepersaleisgenerallyconsistentwithwherewethoughtitwouldbe.Wearecontinuingtogetproductivityoutofthesalesteam.Ithinkthey'reexecutingverywell,asyoulookoverthelastfewyears,inparticular.


Terrific.SecondoneontheASOandPEObusinesses,howmuchofthegrowththereiscomingfromgreenfieldversushowmanyofthosedealsareyouthinkthatit'scompetitiveoractuallyatakeout?


Iwouldsay,inthePEOside,Ithinkit'sprobably60/40.Ihaven'tseenthatnumberlately,butIwouldsaymorenew.Whenyouthinkabout--ittendstobewithouroverallbusiness.Weare50%newbusinesses,Ithinkthat'swhatyou'reaskingforthepayrollstandpoint.IthinkthePOissimilartothat,maybealittlebitmoreonthenewside,butIthinkit'srightinthatrangeof50/50.


Terrific.Lastone,justalonger-termquestion.Inyourcommentsupfront,youtalkedabitaboutflexandthehealthcarereformofferinginmyStaffingProandthenmadesomecommentsinresponsetoquestionaboutlookingwereactivelyatM&A.Canyoutakeastepbackandgiveusanideaoflookingouttwo,three,fouryears,howyouenvisiontheproductportfolioevolving?





Yes.Ithinkwhenyoulookoutitwillbeafullyintegratedsoftware-as-a-serviceoffering,meaningsingledatabase;UI;veryclientfriendly;mobilitywillbetiedintoitverydirectly.Oneofthethingswedidn'treallycommentontodayjustquicklyinthecomments,ismobility.

Ourmobileapphasbeencontinually-we'veaddedtothemobileapp,anditisseeingprettydramaticusagebeingpickedupevenmorefromclientemployeesandclients.So,weareseeinganiceroll-upofclientemployees,whichwethinkwilladdtoretention,bytheway,becausetheclientemployeesnowwillbeinterfacingwithourproductsandwe'll--wehadverypositivefeedbackonthemobility.

Whenyoulookout,it'sgoingtobethatsinglesourceforclienttocomeforusforeverythingfromhighertoretire,astheydonowandIthinkwe'lljustbeaveryfullproductsthat.IthinktheM&Apieceofitissomeproducttuck-inswhereneeded,thattobestraightforward,we'vegotprettymuchtheproductsthatweneed.

Now,it'sfinishingthefullyintegrationofasingledatabasewithinthisyearandthenitwillbeadding,Ithink,wherewecanexecuteandaddmobilityandmakethecompanymoreefficient.So,PEOs,payrollcompanies,probably401(k)salwaysoutthereandanyoffshootofanythingfromrecruiting,etcetera.Thosekindofbusinesses.Sothere'saprettywidescopethatwelookatfroman[M&A]perspective.Ourjobwillbetodriveuppersingle-digitrevenuegrowthonthetoplineandstillbeoneofthemostprofitablecompaniesinthebusiness.


Terrific.Thanks,guys.

Operator :

Thankyou.Thenextquestioncomesfrom[JoeFarisiwithJanney].

Unidentif iedPart icipant :

Thisis[RobertSimmons]onforJoe.Actuallyjusthadmyfirstquestion.Whatarethethoughtsoninternationalexpansion?


I'vebeeninGermany,now,49or10years.Wedoubledoursizelastyearwithanacquisitionandcontinuedsalesgrowth.So,we'vegotanicebasethere.Result,westartedlastyearandwearekindofchuggingalong.Itdidn'thelpthatthekindofBrazil,theeconomysloweddownatatimewherewestartedupthere.

Wearelearningthereandbreakingintothebusiness.WinningovertheCPAssotheywillrefermoreoftheirpayrollbusinessouttous.Ourstillveryinterestedinit.We'regoingtofocusontwoorthreecountries,kindofthethirdcountry.Wehaven'tquitefoundagoodentrywayin,yet.We'velookedatanumberofthem.

Itwillalways,Ithink,atthispoint,ittendstobesmall.It'sgoingtotendtobeasmallpartofwhereweareasweapproach$3billioninrevenue,butit'sstillofinteresttous,andwecontinuetolookatacquisitionopportunitiesandwaystoincreasesalesandprofitthere.

Unidentif iedPart icipant :




Great.Thanks,guys.

Operator :

MattO 'NeillwithAutonomousResearch.

MattO'Neill(Analyst-AutonomousResearch):

Iwasjusthopingyoucouldgiveusanyupdatesyoumightbewillingtoprovideontheshortpayrollbusiness,specificallyandpossiblyifyoucouldparsetheclientgrowthrateof1%to3%onthecontributionfromtheSaaSside?Thanks.


Sure.Wedon'treally--the,SaaS,mostofourproductsnow,mostofourclientsareonSaaS.So,wellover80%ofthem.Fromagrowthstandpoint,wedon'tbreakoutSurePayrollanymore.But,theyaredoingfine.

Really,they'vehadgoodclientgrowthyear-over-yearandIthinktheyarecompetingveryeffectivelywith,particularly,themicrobusinessesforpayroll.AllofthatisdonethroughWeb.Webmarketingandsalesonthephone,oncepeoplecallin.Ithinkthey'vebeenveryeffectiveatthatingrowingtheirclientbase.

Wecontinuetobepleasedwiththatandcontinuetoalwayswatchwearecompetingagainst.Notalotofnewcompetitors,there.Somestartups,somegotquiteabitofpressforawhile,butthenit'sdroppedoutalittlebitbecausetheyarenotafullproductandassure.So,Ithinkprimarily,it'sintowiththatwerunintoasacompetitorthere.Folksjustwantingtostaymanualanddoingtheirpayrollmanually.

Ef rainRivera(CFO):

TheotherthingIwouldadd,yousurftheWeb,there'sabunchofthesedifferentratingservices,buttheyjustwonarecentawardintermsofuseraccessandappearance.So,theyarevery,veryformidablecompetitorinplatforminthatmicroenterprisespace.

MattO'Neill(Analyst-AutonomousResearch):

Thanksverymuch.

Operator :

OurlastquestioncomesfromAshwinShirvaikarwithCiti.

AshwinShirvaikar (Analyst-Citigroup):

Goodjobonthebookings.Myquestionis,asthebookingsrollintorevenues,canyoutalkabout--arethereincrementalexpensesinvolvedandtakingthequestionlonger-term,justlonger-termexpensegrowthassumptions[whereyou'remakinginmedicines]?

Ef rainRivera(CFO):

Ashwin,twothings.Inthequarterwhenwehaveparticularlystrongsalesexecution,thenourexpensestendtorampup.So,we'vehadprobablyalittlehigherexpensegrowthinthequarterandtheninthebackhalfoftheyearbasedontheperformanceweareseeing,hopefully,obviously,thatleadstoalittlebitbetterbuildrevenuegoingforward.So,unlesswesentourplanstoslowandtheyconstantlybeatthem,that'snotthewaywetendtodoit.Wetendtosetthemprettyhigh.Salesforcehasdoneagreatjobofrisingtothechallenge.




Withrespecttoexpense,youknow,Ithinkthereisreallygoingtobenochangeintermsoftheapproachwetake.Wearegoingtoleverageoperatingexpensesasmuchaswecan.We'regoingtocontinuetoinvestinIT,probablyalittlebitmoreofamoderateratethanyou'veseeninpastyears,morethanhasbeenembeddedintheSG&Anumber,whichiswhereitappears.

Andthenwe'regoingtocontinuetomakeselectiveinvestmentsinsaleswherewethinkthere'sopportunitiestogrowthebusiness.So,Ithinkthatwillnotchangedramatically.Quarteroverquarter,youmighthavesomechanges,asresultsarehigherthanwhereweexpected.


So,theincrementalITinvestment,isthataspartofongoingtransitionasyoumovetowardsmoreproductrelated,morecloudbasisand…

Ef rainRivera(CFO):

Yes.


Yes,asyouknow,double-digitincreasesinITinvestmentformanyyears,andIthinkwhatwearesaying,ittendstoflattenout.We'vereachedaverygoodpointoftheamountofproductivitywearegettingandthedevelopmentneedsandthat'sstill--it'sbecomeaverylargepartofourinvestment,asyouwouldexpect,withtheSaaS-basedcompanythatisverymuchtechnologydrivenservice.


Lastquestion.IfyoucouldhelpwiththerelativesizingofHR--HRSofferings,ballpark?

Ef rainRivera(CFO):

Thebiggest,now,certainly,asIsay,isHRoutsourcing.BothSSO,PEO,HRessentialsproductwhichismoretelephonicsupport,HRlight,HRoutsourcingliketoprickthesecondisourretirementservicesbusinessandthird,insurance.Nothing'schangedthere.Thoseareallbusinessesthataregrowingnicelyandperformingwellwithintheportfolio.


Washopingyou'dputnumberstothat.But,okay.MaybeyouwillatyourInvestorDay.

Ef rainRivera(CFO):

You'rebiggestfollowedbythenextbiggestfollowedbythesmallest.


Okay.Thankyouguys.

Operator :

Therearenofurtherquestionsinqueue.


Allright.Thankyou.Atthispointwewillclosethecall.Ifyou'reinterestedinreplayingtheWebcastforthisconferencecallwillbearchiveduntilapproximatelyApril25.Wethankyouforyou'reinterestin




Paychexandforyourparticipationonthecall.Haveagoodday.

Operator :

Thatconcludestoday'sconference.Youmaydisconnectatthistime.

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Paychex (PAYX) Earnings Report: Q3 2015 Conference Call...

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