paychex (payx) earnings report: q3 2015 conference call...
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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.
CompanyName:PaychexIncCompanyTicker:PAYXSector:ServicesIndustry:Diversif iedServices
EventDescription:Q32015EarningsCallMarketCapasofEventDate:18.61BPriceasofEventDate:49.47
©2014TheStreet,Inc.Al l R ightsReserved Page2of24
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
CompanyName:PaychexIncCompanyTicker:PAYXSector:ServicesIndustry:Diversif iedServices
EventDescription:Q32015EarningsCallMarketCapasofEventDate:18.61BPriceasofEventDate:49.47
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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
CompanyName:PaychexIncCompanyTicker:PAYXSector:ServicesIndustry:Diversif iedServices
EventDescription:Q32015EarningsCallMarketCapasofEventDate:18.61BPriceasofEventDate:49.47
©2014TheStreet,Inc.Al l R ightsReserved Page4of24
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
CompanyName:PaychexIncCompanyTicker:PAYXSector:ServicesIndustry:Diversif iedServices
EventDescription:Q32015EarningsCallMarketCapasofEventDate:18.61BPriceasofEventDate:49.47
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isbasedonourcurrentviewofeconomicandinterestrateconditionscontinuingwithnosignificantchange.AndI'lljustsummarizeitbysayingourguidanceisunchangedfromwhatweprovided,beginningofthefiscalyear.
BeforeIturnthingsovertoMarty,IwanttoletyouknowthatPaychexwillbehostinganInvestorDayinmid-July.Weareworkingonatransportationfriendlyday.So,youcangetinandoutonthesamedayifyouareontheEastCoastortheMidwest.SorryforthoseontheWestCoast.Can'tfigureouthowtomakethatwork.
It'sgoingtobescheduledforWednesday,July15hereinRochester.We'llpostasavethedatemessageonourIRWebsiteandwewillbeprovidingregistrationinformationandotherdetailsinmid-April.Wehopetoseemanyofyouinthesummer.I'llturnitbacktoMarty.
MartinMucci(President,CEO):
Thanks,Efrain.We'llnowopenthecalltoquestions.
QUESTIONS&ANSWERS
Operator :
(OperatorInstructions)
DavidTogutwithEvercoreISI.
DavidT ogut (Analyst-EvercoreISI):
Canyouprovidealittlemoredetailontheunderlyingdriversbehindthedouble-digitgrowthinnewannualizedrevenue,assoldduringthepeaksellingseason?Inparticular,breakdownbetweenpayrollserviceandHRservicesbookings?
MartinMucci(President,CEO):
Well,David,youknow,wedon'tusuallygivethatmuchdetailonit.ButIwilltellyouthatwewerestrongacrosstheboard.Iwouldsaybothpayroll--allareasofpayroll--aswellasHRSwerebothverystrong.And,probablythebestsales.Andwehadaprettygoodsales--we'veseenoverthelastyear--but,thisisprobablythebestsalesresultinasellingseasonwe'veseenin,Iwouldsay,sevenoreightyears.
DavidT ogut (Analyst-EvercoreISI):
Whataccountsforthat?
MartinMucci(President,CEO):
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,
CompanyName:PaychexIncCompanyTicker:PAYXSector:ServicesIndustry:Diversif iedServices
EventDescription:Q32015EarningsCallMarketCapasofEventDate:18.61BPriceasofEventDate:49.47
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hasbeendoingwiththatteamtobuildagoodreferralandpipelineaswell.
DavidT ogut (Analyst-EvercoreISI):
Withthatrateofnewannualizedrecurringrevenuegrowthtakentogetherwithyourcurrentclientretentiontrends,pointtoachangeinyourrevenuegrowthrateforFY16andFY17?
MartinMucci(President,CEO):
Well,Ican'treallygetintoguidancenow.Ithinkwe'llhaveabettersenseofthatatthenextquartertotalkabout2016.Certainlybodeswellforastart,anyway.
DavidT ogut (Analyst-EvercoreISI):
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.
GeorgeMihalos (Analyst-CreditSuisse):
Okay.Appreciatethatcommentary.Mysecondquestion,onthepriorearningscall,IthinkyouguystalkedalittlebitaboutM&Aandyourappetitetodosomethingthere.Justcuriouswhatyou'reseeingoutthereinthemarketplaceandifyoustillhaveanappetitefor,aguesswhatyouwouldconsideralarge-scaleacquisitioninadditiontoanytuck-ins.
MartinMucci(President,CEO):
CompanyName:PaychexIncCompanyTicker:PAYXSector:ServicesIndustry:Diversif iedServices
EventDescription:Q32015EarningsCallMarketCapasofEventDate:18.61BPriceasofEventDate:49.47
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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.
GeorgeMihalos (Analyst-CreditSuisse):
Justtobeclear,you'regoingtobestickingtosortofapayrollacquisitionorsomethinginthatareaorinHRservices,andnotanysortofareas?
MartinMucci(President,CEO):
Yes,that'scorrect.
GeorgeMihalos (Analyst-CreditSuisse):
Thankyou.
Operator :
JasonKupferbergwithJefferies.
RyanCarey(Analyst-Jefferies):
ThisisRyanCareycallinginforJason.IjustwanttobuildonGeorge'squestion.Althoughyoureiteratedthefull-yearguideof3%to5%forthepayrollservices,hasyouroutlookonwhereyoumightfallinthatrangechangedatallafterthisquartermeaning,doexpect4Qtomakeupforthemoderatesoftnessoralittlebitbelowthatrangewesawin3Q?
Ef rainRivera(CFO):
Youknow,excuseme,whenweissuedguidanceweexpecttobesomewherearoundthemiddlefortheyear.Ithinkthat'swherewe'reatrightnow.
RyanCarey(Analyst-Jefferies):
Okay.Great.Doyouseeanymaterialchangesinthecompetitiveenvironmentasyougotdeeperintothepeakcalendaryear-endsellingseason?Ihavetoaskaquestiononpricingaswell.Lastquarteryouseemedcomfortablepricing2%to4%band.Hasthatbeenanymaterialchangeineitherdirectionoverthelastquarter?Iwouldloveanadditionalcolor.Thanks.
MartinMucci(President,CEO):
Idon'tthinkso.Wedidn'treallysee--actually,wefeltverygoodaboutthequarterfromasellingperspective.Iwouldsaythecompetitiveenvironmentwasaboutthesame.Didn'tseeanextrapricingpressure.There'salwayscompetitivepricingpressureoutthere,butwedidn'tseeanythingpickupnecessarily.Therewasnobigcompetitorplansorthingsthattheyweredoingthatwesawthatmadeanybigdifferencethere.I'dsaypricingisgenerallyholdinglikewethoughtitwaslastquarterandcompetitiveenvironmentsaboutthesame.
RyanCarey(Analyst-Jefferies):
CompanyName:PaychexIncCompanyTicker:PAYXSector:ServicesIndustry:Diversif iedServices
EventDescription:Q32015EarningsCallMarketCapasofEventDate:18.61BPriceasofEventDate:49.47
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Great.Thankssomuch.
Operator :
SaraGubins.
DavidRidley-Lane (Analyst-BankofAmerica):
Efrain,youmentionedthatsomepayrollservicerevenuewasbeingdeferredfromthirdquarterintofourthquarter.Canyougiveusasenseofmagnitudeofthat,andthisisDavidRidley-LaneforSaraGubins.
Ef rainRivera(CFO):
It'simplicitinwhatIsaid.Thatweexpecttobesomewhereinthemiddleoftherange.IfyouheardmycommentsearlierIsaidthatfourthquarterwascomparabletothefirsthalfoftheyear.AndkindofI'llleaveitatthat.
DavidRidley-Lane (Analyst-BankofAmerica):
Okay.Andthencouldwegetanupdateonthesensitivityoftheportfoliotothefirst25or50basispointsofinterestrateincrease?
Ef rainRivera(CFO):
Yes.Ontheshort-termit'sgoingtobeabout$4million,somewhereinthatrange.Alittlebitless,alittlebitmore.Thatjustassumestheshort-termrateprices.Whatthatdoestolong-termratesisagoodquestion.Idon'thaveacrystalballonthat.Timing,atthispoint,youknowourbestguesstimateisQ2.Again,ourcrystalballhasbeenexceedinglyfuzzy.
DavidRidley-Lane (Analyst-BankofAmerica):
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.
Smitt iSrethapramote (Analyst-MorganStanley):
CompanyName:PaychexIncCompanyTicker:PAYXSector:ServicesIndustry:Diversif iedServices
EventDescription:Q32015EarningsCallMarketCapasofEventDate:18.61BPriceasofEventDate:49.47
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Canyougiveusanupdateintermsofyourplanstorollouttheofferingtomorestates?
MartinMucci(President,CEO):
Atthispoint,we'restillgettingthroughkindofafullyearofthisone.Wefeelverygoodabout,asEfrainsaid.Ithinkwe'vedoneverywellontheclaimsandsoforth,butit'sayearintoitandwedon'thaveanyimmediateplanstoexpanditoutsideofthearea,butthatiswhereabigamountofoursalesare.So,Ithinkwe'llgiveitalittlebitmoreexperiencebeforewelooktoexpandit.
Smitt iSrethapramote (Analyst-MorganStanley):
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.
Smitt iSrethapramote (Analyst-MorganStanley):
Okay.Thankyou.
Operator :
TimMcHughwithWilliamBlair.
T imMcHugh (Analyst-WilliamBlairandCompany):
Canyouhelpuscontrastthedouble-digitgrowthinannualizednewsales?Whatwasthatnumberayearortwoago?Howmuchofanimprovementisthatversuswhatyou'veseeninthelastcoupleyears?
MartinMucci(President,CEO):
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.
T imMcHugh (Analyst-WilliamBlairandCompany):
Lastyearwasimproved,butthatwasstillkindofmidsingledigitslastyeareven?
Ef rainRivera(CFO):
CompanyName:PaychexIncCompanyTicker:PAYXSector:ServicesIndustry:Diversif iedServices
EventDescription:Q32015EarningsCallMarketCapasofEventDate:18.61BPriceasofEventDate:49.47
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Itwasinsingledigits.Iwouldn'tcharacterizeitasmid-singledigits.
T imMcHugh (Analyst-WilliamBlairandCompany):
Okay.Doesitchangeyourthoughts--Ithink,you'vetalkedabouttryingtogetunitgrowthorclientgrowthbackuptokindofsomewhereinthe1%to3%range.Whereisyourthoughtsonthat,asyouexitthesellingseasonbasedonwhatyousaw?
MartinMucci(President,CEO):
It'sstillacombination.Imean,wewanttheunitsandtherevenueboth,andthat'sthewayourcompplansandourincentivesareset.So,we'restilllookingforbothandwe'restilltrying--wecertainlyexpecttobeinthatrange.Youknow,fromclientgrowthperspective.
T imMcHugh (Analyst-WilliamBlairandCompany):
But,youwanttobe--Iguess--Iwastryingtoseeifyouwouldincreasethatrange,giventhesalesseason?Or,ifit's--Iguessifyoustillwitha1%to3%?
MartinMucci(President,CEO):
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.
KartikMehta(Analyst-NorthcoastResearch):
Marty,youtalkedalittlebitaboutpriceincreasesandthisquarterwehaven'tseen,really,anyincreasedcompetition.Asyoulookatthenextpriceincrease,whichIthinkyouusuallydosometimeintheMaytimeframe,anythingchangeintheenvironmentwhichwouldchangeyourmindastothetypeofpriceincreaseyouwoulddothisfiscalyearcomparedtowhatyouwereabletodothecurrentfiscalyear?
MartinMucci(President,CEO):
No.Ithinkwe'dstillbeinthatsamerange.We'vegottenmoresophisticatedastokindofwhereweputthepriceincrease,basedonclients,products,andthecompetitivenatureofthoseproductswiththeportfolioofdifferentproductswehave.But,Istillthinkyou'dexpectustobe--youshouldexpectusto
CompanyName:PaychexIncCompanyTicker:PAYXSector:ServicesIndustry:Diversif iedServices
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beinthat2%to4%range.
KartikMehta(Analyst-NorthcoastResearch):
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.
KartikMehta(Analyst-NorthcoastResearch):
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.
GaryBisbee (Analyst-RBCCapitalMarkets):
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
CompanyName:PaychexIncCompanyTicker:PAYXSector:ServicesIndustry:Diversif iedServices
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margins.
GaryBisbee (Analyst-RBCCapitalMarkets):
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.
GaryBisbee (Analyst-RBCCapitalMarkets):
Great.Thankyou.
Operator :
JimMacdonaldwithFirstAnalysis.
JimMacdonald (Analyst-FirstAnalysisSecurities):
Onthedouble-digitnewbookingsgrowth,dothinkwe'llseethatmoreinHRorsomewhatinpayroll?Howisthatgoingtoplayout?
MartinMucci(President,CEO):
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.
JimMacdonald (Analyst-FirstAnalysisSecurities):
Great.Ithinksimilartootherquestions,butaspeoplecontinuetoadopttheminimumpremiumplan,willyoucontinuetogetalittlebitofatailwindinrevenuegrowththatyousortofhadthisyearfromthenewrevenuerecognition?
MartinMucci(President,CEO):
Yes.That'sagoodquestion.Youreallydon'tseeasmuchofitnextyear.Wereallyobviouslygottwothings.Weobviouslygotanupliftthisyear.
We'vebeencarefultocallitoutbecausewedon'twantpeopletomisunderstandwhat'sgoingonintheunderlyingnumbers.Mostpeopleunderstandit.Wewerewithin$3millionofwhatthestreethadon
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revenue.So,everyoneunderstands,kindof,what'sgoingon.Yougetamodesttickup,butafterthisyear,theimpactisnotsignificant.
JimMacdonald (Analyst-FirstAnalysisSecurities):
Okay.Onethingontherepurchase.Yoursharecountstartedtodriftbackupagain.Anythoughtsonthat?
Ef rainRivera(CFO):
Yes.Iwishthesharecountdidn'tdriftup.Yes,we--Iwouldsaywe'llrepurchaseopportunistically.Ithinkthat'swherewe'reatrightnow.Before,Gary'squestionearlier,onwouldbedosomethingmore?We'llhavetotakealookatwherewearewithM&Aandaddresswhetherwethinksomethinglargeriswarranted.
JimMacdonald (Analyst-FirstAnalysisSecurities):
Great.Thanks.
Operator :
BrianKeenwithDeutscheBank.
EvanBull(Analyst-DeutscheBank):
ThisisEvanBullonforBrian.RealquickonthebookingsgrowthintheDecemberandJanuaryquarters,maybedirectionally,wasthataheadofyourexpectations,beloworrightat?Justgiventhemagnitudeofthosemonths?
MartinMucci(President,CEO):
Ithinkitwasprettyclosetoourexpectations.Wesetprettyhighgoalsforthesalesteaminwhatweexpected.Particularlyinthesellingseason,I'dsayitwasprettymuchatourexpectationsbecausewesetprettyhighones.
EvanBull(Analyst-DeutscheBank):
Sure,thathelps.YouguyshaveintroducedanumberofSaaS-basedproductsoverthecourseofthepastyear.Canyoutalkaboutthetractionwiththoseproducts?Andmaybethecompetitionandkindofthecompetitivedynamicsthere?Whoaretheplayersthatyouarecompetingwithdirectly?
MartinMucci(President,CEO):
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,
CompanyName:PaychexIncCompanyTicker:PAYXSector:ServicesIndustry:Diversif iedServices
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thatyou'llsee.But,againwe'restartingtowinthoseback.They'reprettysmalllossesforthematthisstage.
EvanBull(Analyst-DeutscheBank):
Thanks.Thathelps,guys.
Operator :
SKPrasadfromGoldmanSachs.
SKPrasad (Analyst-GoldmanSachs):
Firstoneisprobablyjustonthetimingimpact.Youguystalkaboutdouble-digitgrowthyou'reseeinginbookings.Howlongdoesittaketoactuallyseethatfromarevenueside?
MartinMucci(President,CEO):
Starttoseethatprobablyacoupleofquartersout.That'swhen--youknow--thefirstquarter,notmuch.Dependingonwhereitoccurred,youstarttogettheclientsetup.There'salittlebitoftimeandthenprobablyafterthesecondquarter,that'swhenyou'restartingtoseetheimpact.
SKPrasad (Analyst-GoldmanSachs):
Okay.That'sclear.Ifyoucouldprovidesomecoloronsomeofthenewerproductswhichyouguyshavelaunchedoverthelastfewquarters?PEO,Iunderstandit'satalowmarginprofileonthegrouplevel.Justthinkingaboutthenewerproducts,arethereanyproductsorserviceswhichareathighermarginthanthegrouplevel?
MartinMucci(President,CEO):
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.
SKPrasad (Analyst-GoldmanSachs):
Probablyjustlastone,regardingfloatincome.Yes,there'ssomepositivecommentscomingfromandyoumightendupseeingsomebackfromthat.Justfromalong-termstrategyaroundyouportfolio,wouldyoubeopentoconsideringoptionslikesmallbusinesslending,givenyourstrongdistributionstrengthandstrongcustomerbase?
Ef rainRivera(CFO):
CompanyName:PaychexIncCompanyTicker:PAYXSector:ServicesIndustry:Diversif iedServices
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Goodquestion,SK.Wehavethatdiscussionprobably,Iwouldsay,onceaquarter.Thechallengeweseethere--sowe'relookingatwaystopartner.Wedopartnerwithbiz2creditonsmallbusinessloansandreferralarrangements.
We'rejustverycautiousabouttiptoeingintoanareathatcouldbehighlyregulated.That'swhywe'vebeencautiousaboutdoingit.It'sanareaofinterest,ifwecouldparticipatealittlebitmorefully,we'dlookatit.That,that'stheinhibitor.
SKPrasad (Analyst-GoldmanSachs):
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.
Jef f Silber (Analyst-BMOCapitalMarkets):
Thatmakessense.IwishItotakecreditforit,butsomebodypointeditouttome.Justoneotherquestion.Youmentionedonthechecksperpayroll,Iknowit'snotasbigofanissueasitwasbefore.Youexpectmorenormalizedgrowthinthefourthquarter.Isthatbecauseofthebonusissueyoumentionedthatshouldn'treallyimpactthequarter?
Ef rainRivera(CFO):
It'snotgoingtoimpactthequarterandIthinkthetimingshiftsthatIdiscussedinQ2,thesehappenfromtimetotime--I'msorrythatImentionedinQ3--thatdoesn'toccurinQ4andthenwe'rebackatamorenormalizedrate,likewhatyousawinthefirsthalfoftheyear.
Jef f Silber (Analyst-BMOCapitalMarkets):
Allright.Great.Thankssomuch.
Operator :
DavidGrossmanwithStifel.
DavidGrossman (Analyst-StifelNicolaus):
IwaswonderingifyouwouldjuststepbacktothecostinHRSandperhapshelpusbetterunderstandASOversusthePEOonwhatthetrendsareyouareseeinginthebuyersofeachofthosedifferentproducts?
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MartinMucci(President,CEO):
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.
DavidGrossman (Analyst-StifelNicolaus):
Istherelativegrowthrate--justwithoutgettingintothespecificnumbers--aretheycomparable?Ifnot,doyouexpectthemtodivergeatall?
MartinMucci(President,CEO):
Ithinkthey'regenerallycomparable.They'reprettycloseonbothsides.It'sjustthepreferenceforwhat,howtheclientthinks.Ithinktheotherthingthatweprobablydidn'tmentionissellingthismoreupfront,wehavefoundthattypicallyourmodelwassellthempayroll,thencomebackandsaydoyouneedHRservicesinthreemonthsorsixmonths?
We'resellingmuchmoreupfront,ifwethinktheclientisofa20plusinacomplexitywewillgoinandteamsell.Ithinkwe'rewinningmoreclientsrightupfrontanASOorPEObasis.
DavidGrossman (Analyst-StifelNicolaus):
Okay.Andjustoneotherquestion.Doyouselltheancillaryserviceswithoutpayroll?Ifyoudon't,wouldyouconsiderdoingthat?
Ef rainRivera(CFO):
CompanyName:PaychexIncCompanyTicker:PAYXSector:ServicesIndustry:Diversif iedServices
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Thequestion.Theanswerisyes,wedo.Although,forexample,wereported,Ibelievelastyearabout580,000clients.Wethinkwehadinexcessof20,000clientsthatdon'ttakepayrollbuttakeotherancillaryproducts.
Ithink,David,itpointstothefactthatthecompanythatwewerepriortotherecessionisverydifferentthanthecompanythatweemergedoutoftherecession.We'remuchmoreofanintegratedfull-serviceprovidertosmallandmedium-sizebusinessesandyou'restartingtoseethatintheclientbase.We'llupdatesomeofthatinformationwhenwegettotheendoftheyear.
DavidGrossman (Analyst-StifelNicolaus):
Verygood.Thankyou.
Operator :
MarkMarconwithRWBaird.
MarkMarcon (Analyst-RobertW.BairdandCompany):
Withregardstothecorepayrollgrowththatyou'veseen,canyoucharacterizewhereyouareseeingthestrongestgrowthintermsof,isitthesmallestendofyourotherclientsize?Or,justtheaveragesmallclientandwhatareyouseeingontheMMSside?
MartinMucci(President,CEO):
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.
MarkMarcon (Analyst-RobertW.BairdandCompany):
Soyou'reseeingthesamelevelofgrowthinthat50to500asinthatsub20group?
MartinMucci(President,CEO):
Yes.I'dsayprettyclose,I'dsay.Yes.
MarkMarcon (Analyst-RobertW.BairdandCompany):
Great.Youstillhavesomeimprovementstomaketothat50to500product,isthatright?
MartinMucci(President,CEO):
WhatImentionedearlierisoverthenextsixmonthsyou'llseeevenstrongerintegration.So,allonkindofthesameuserinterfaceandsoforth.They'reintegratedtodayfromdifferentlevelsbutoverthenextsixmonths,StratusTimethatweacquiredlastyear,myStaffingProandBeneTracwillseeevenenhancedintegration.
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MarkMarcon (Analyst-RobertW.BairdandCompany):
Singlesign-on,singledatabase?
MartinMucci(President,CEO):
Yes.
MarkMarcon (Analyst-RobertW.BairdandCompany):
Great.
MartinMucci(President,CEO):
Whichwillmakethatevenastrongerproductthenrightfromapplicanttracking,rightthroughtoretirement,astheysay.Particularlyonthefrontendoftheapplicanttrackingandthebenefitenrollment.
Ef rainRivera(CFO):
BuildingonwhatMartysaid,thewaywesegmentmarkets,Mark,isunder50and50to500.Ifyoulookatitfromaunitbasis,thegrowthisprettycomparable.
MarkMarcon (Analyst-RobertW.BairdandCompany):
Okay.Great.And,withregardstothesalesthatyou'veseen,canyoucharacterizethenumberofadd-onmodulesthatyou'reseeingnow,relativetosay,ayearago?
MartinMucci(President,CEO):
IguessI'dsay,ifthisiswhatyoumean,wesellalotmorebundledservices.Certainly,thanstandaroundpayroll.That'sgoneupdramaticallyoverthelastfouryears.
MarkMarcon (Analyst-RobertW.BairdandCompany):
Whatdoesdramaticallymean?
MartinMucci(President,CEO):
I'dsayfromlowdoubledigitsasapercenttomid,almost.Okay?Double-digit.Whereweusedtosell,probablystandalonepayroll--andthisisachangeofthewholesalesteam--bundledservicesrightupfront10%to20%ofthetimeandnowwearesellingacompletebundle40%to50%ofthetime.It'sprettydramatic.We'vebundledtheproducts,aswell,andthewaythatsaleshaslookedtoincreasetherevenueperclientandreallytoselltheclienteverythingtheyneedrightupfrontaspartofabundle.
MarkMarcon (Analyst-RobertW.BairdandCompany):
Then,whatpercentageofyoursalesarenowcomingfrombrand-newbusinesses?
MartinMucci(President,CEO):
I'dsayit'sstillclosetohave.Stillclosetothat50%.
MarkMarcon (Analyst-RobertW.BairdandCompany):
Okay.But,thatispickingup?
MartinMucci(President,CEO):
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Yes.
MarkMarcon (Analyst-RobertW.BairdandCompany):
Okay.Great.Iftheeconomystaysasitis,wouldyouexpectyournewbusinessrevenuegrowthtargettobasicallystayaboutthesame?
MartinMucci(President,CEO):
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.
MarkMarcon (Analyst-RobertW.BairdandCompany):
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.
MarkMarcon (Analyst-RobertW.BairdandCompany):
Congratulationsonagoodyearthisyear.
MartinMucci(President,CEO):
Thanks,appreciateit.
Operator :
JohnWilliamswithTopekaCapitalMarkets.
JohnWilliams (Analyst-TopekaCapitalMarkets):
Youhadmentionedthatintherelease,acoupleofthingsthatIthoughtwereinterestingandmaybespeaktowhat'shappeninginthewiderworld.Specifically,regarding,numberone,pricingandnumbertwo,justthefactthatyouarestartingtoseewagesmoveupalittlebit.Iwaswonderingifthereisanewbreedthatyouhave,perhaps,moreinthewagesidethanonthepricingside.
Youtalkabitaboutthepricingside,butI'mcurioustoknowwhatyouareseeingwiththewiderscaleandwageinflation,ifyouthinkthatsomethingthat'sgoingtobecomeanissueinthenextfewmonths?
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MartinMucci(President,CEO):
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?
MartinMucci(President,CEO):
Yes.Ithinkweareshowing,obviously,goodproductivityinthisthirdquarterinthesellingseasonfromastandpointofrevenueperrep.So,weareseeingprettygoodproductivitythere.Asweprojectedorsetourgoals,IguessI'dsay.
So,thatalwaysstrives--whenyoutiebacktoexpenseinthethirdquarter--becausewehavealotofsalesinthethirdquarterwithJanuarystartsforpayroll,inparticular,thatdrivesthesalesexpenseup.Iwouldsaysalesexpensepersaleisgenerallyconsistentwithwherewethoughtitwouldbe.Wearecontinuingtogetproductivityoutofthesalesteam.Ithinkthey'reexecutingverywell,asyoulookoverthelastfewyears,inparticular.
LisaEllis (Analyst-Bernstein):
Terrific.SecondoneontheASOandPEObusinesses,howmuchofthegrowththereiscomingfromgreenfieldversushowmanyofthosedealsareyouthinkthatit'scompetitiveoractuallyatakeout?
MartinMucci(President,CEO):
Iwouldsay,inthePEOside,Ithinkit'sprobably60/40.Ihaven'tseenthatnumberlately,butIwouldsaymorenew.Whenyouthinkabout--ittendstobewithouroverallbusiness.Weare50%newbusinesses,Ithinkthat'swhatyou'reaskingforthepayrollstandpoint.IthinkthePOissimilartothat,maybealittlebitmoreonthenewside,butIthinkit'srightinthatrangeof50/50.
LisaEllis (Analyst-Bernstein):
Terrific.Lastone,justalonger-termquestion.Inyourcommentsupfront,youtalkedabitaboutflexandthehealthcarereformofferinginmyStaffingProandthenmadesomecommentsinresponsetoquestionaboutlookingwereactivelyatM&A.Canyoutakeastepbackandgiveusanideaoflookingouttwo,three,fouryears,howyouenvisiontheproductportfolioevolving?
CompanyName:PaychexIncCompanyTicker:PAYXSector:ServicesIndustry:Diversif iedServices
EventDescription:Q32015EarningsCallMarketCapasofEventDate:18.61BPriceasofEventDate:49.47
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MartinMucci(President,CEO):
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.
LisaEllis (Analyst-Bernstein):
Terrific.Thanks,guys.
Operator :
Thankyou.Thenextquestioncomesfrom[JoeFarisiwithJanney].
Unidentif iedPart icipant :
Thisis[RobertSimmons]onforJoe.Actuallyjusthadmyfirstquestion.Whatarethethoughtsoninternationalexpansion?
MartinMucci(President,CEO):
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 :
CompanyName:PaychexIncCompanyTicker:PAYXSector:ServicesIndustry:Diversif iedServices
EventDescription:Q32015EarningsCallMarketCapasofEventDate:18.61BPriceasofEventDate:49.47
©2014TheStreet,Inc.Al l R ightsReserved Page22of24
Great.Thanks,guys.
Operator :
MattO 'NeillwithAutonomousResearch.
MattO'Neill(Analyst-AutonomousResearch):
Iwasjusthopingyoucouldgiveusanyupdatesyoumightbewillingtoprovideontheshortpayrollbusiness,specificallyandpossiblyifyoucouldparsetheclientgrowthrateof1%to3%onthecontributionfromtheSaaSside?Thanks.
MartinMucci(President,CEO):
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.
CompanyName:PaychexIncCompanyTicker:PAYXSector:ServicesIndustry:Diversif iedServices
EventDescription:Q32015EarningsCallMarketCapasofEventDate:18.61BPriceasofEventDate:49.47
©2014TheStreet,Inc.Al l R ightsReserved Page23of24
Withrespecttoexpense,youknow,Ithinkthereisreallygoingtobenochangeintermsoftheapproachwetake.Wearegoingtoleverageoperatingexpensesasmuchaswecan.We'regoingtocontinuetoinvestinIT,probablyalittlebitmoreofamoderateratethanyou'veseeninpastyears,morethanhasbeenembeddedintheSG&Anumber,whichiswhereitappears.
Andthenwe'regoingtocontinuetomakeselectiveinvestmentsinsaleswherewethinkthere'sopportunitiestogrowthebusiness.So,Ithinkthatwillnotchangedramatically.Quarteroverquarter,youmighthavesomechanges,asresultsarehigherthanwhereweexpected.
AshwinShirvaikar (Analyst-Citigroup):
So,theincrementalITinvestment,isthataspartofongoingtransitionasyoumovetowardsmoreproductrelated,morecloudbasisand…
Ef rainRivera(CFO):
Yes.
MartinMucci(President,CEO):
Yes,asyouknow,double-digitincreasesinITinvestmentformanyyears,andIthinkwhatwearesaying,ittendstoflattenout.We'vereachedaverygoodpointoftheamountofproductivitywearegettingandthedevelopmentneedsandthat'sstill--it'sbecomeaverylargepartofourinvestment,asyouwouldexpect,withtheSaaS-basedcompanythatisverymuchtechnologydrivenservice.
AshwinShirvaikar (Analyst-Citigroup):
Lastquestion.IfyoucouldhelpwiththerelativesizingofHR--HRSofferings,ballpark?
Ef rainRivera(CFO):
Thebiggest,now,certainly,asIsay,isHRoutsourcing.BothSSO,PEO,HRessentialsproductwhichismoretelephonicsupport,HRlight,HRoutsourcingliketoprickthesecondisourretirementservicesbusinessandthird,insurance.Nothing'schangedthere.Thoseareallbusinessesthataregrowingnicelyandperformingwellwithintheportfolio.
AshwinShirvaikar (Analyst-Citigroup):
Washopingyou'dputnumberstothat.But,okay.MaybeyouwillatyourInvestorDay.
Ef rainRivera(CFO):
You'rebiggestfollowedbythenextbiggestfollowedbythesmallest.
AshwinShirvaikar (Analyst-Citigroup):
Okay.Thankyouguys.
Operator :
Therearenofurtherquestionsinqueue.
MartinMucci(President,CEO):
Allright.Thankyou.Atthispointwewillclosethecall.Ifyou'reinterestedinreplayingtheWebcastforthisconferencecallwillbearchiveduntilapproximatelyApril25.Wethankyouforyou'reinterestin
CompanyName:PaychexIncCompanyTicker:PAYXSector:ServicesIndustry:Diversif iedServices
EventDescription:Q32015EarningsCallMarketCapasofEventDate:18.61BPriceasofEventDate:49.47
©2014TheStreet,Inc.Al l R ightsReserved Page24of24
Paychexandforyourparticipationonthecall.Haveagoodday.
Operator :
Thatconcludestoday'sconference.Youmaydisconnectatthistime.
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