U.S. Markets closed

Edited Transcript of PAYX earnings conference call or presentation 18-Dec-19 2:30pm GMT

Q2 2020 Paychex Inc Earnings Call

ROCHESTER Jan 7, 2020 (Thomson StreetEvents) -- Edited Transcript of Paychex Inc earnings conference call or presentation Wednesday, December 18, 2019 at 2:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Efrain Rivera

Paychex, Inc. - Senior VP, CFO & Treasurer

* Martin Mucci

Paychex, Inc. - President, CEO & Director

================================================================================

Conference Call Participants

================================================================================

* Andrew Owen Nicholas

William Blair & Company L.L.C., Research Division - Analyst

* Bryan C. Bergin

Cowen and Company, LLC, Research Division - Director

* Bryan Connell Keane

Deutsche Bank AG, Research Division - Research Analyst

* David Mark Togut

Evercore ISI Institutional Equities, Research Division - Senior MD

* David Michael Grossman

Stifel, Nicolaus & Company, Incorporated, Research Division - MD

* James Robert Berkley

Wolfe Research, LLC - Research Analyst

* Jason Alan Kupferberg

BofA Merrill Lynch, Research Division - MD in US Equity Research & Senior Analyst

* Jeffrey Marc Silber

BMO Capital Markets Equity Research - MD & Senior Equity Analyst

* Kartik Mehta

Northcoast Research Partners, LLC - Executive MD, Director of Research, Principal & Equity Research Analyst

* Kevin Damien McVeigh

Crédit Suisse AG, Research Division - MD

* Lisa Ann Dejong Ellis

MoffettNathanson LLC - Partner

* Mark Steven Marcon

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Matthew Casey O'Neill

Autonomous Research LLP - Partner of Payments and Financial Technology

* Ramsey Clark El-Assal

Barclays Bank PLC, Research Division - Research Analyst

* Samad Saleem Samana

Jefferies LLC, Research Division - Equity Analyst

* Steven Matthew Wald

Morgan Stanley, Research Division - Equity Analyst

* Tien-Tsin Huang

JP Morgan Chase & Co, Research Division - Senior Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for standing by, and welcome to the Paychex Second Quarter FY '20 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions) I would now like to hand the conference over to your speaker today, Martin Mucci, please go ahead.

--------------------------------------------------------------------------------

Martin Mucci, Paychex, Inc. - President, CEO & Director [2]

--------------------------------------------------------------------------------

Thank you, and thank you for joining us for a discussion of the Paychex Second Quarter Fiscal 2020 Earnings Release. Joining me today is Efrain Rivera, our Chief Financial Officer. This morning before the market opened, we released our financial results for the second quarter ended November 30, 2019. You can access our earnings release on our Investor Relations webpage, and our Form 10-Q will be filed with the SEC within the next few days. This teleconference is being broadcast over the Internet and will be archived and available on our website for about 1 month.

On today's call, I will review the business highlights for the second quarter, Efrain will review our second quarter financial results and discuss our guidance for fiscal 2020, and then we'll open it up for your questions.

Financial results for the second quarter of fiscal 2020 reflect good progress on our key initiatives. Total revenue growth was 15% for the quarter, management solutions revenue grew 6% and PEO and insurance services revenues grew 57%, including the results from the Oasis acquisition.

We have been investing significantly in the area of sales, marketing, service and technology. These investments are paying dividends as we've seen continued momentum in new sales, efficiencies, in operations and the introduction of new and enhanced products. Paychex is being known much more as a provider of innovative HR technology solutions than ever before. Our investments in demand generation and sales are contributing to solid growth in new sales revenue and in particular, we are pleased with the strong performance of the mid-market space aided by greater attachment of our broad suite of HCM SaaS-based software solutions, such as our time and attendance and HR administration products. We are now in the main selling season. We believe we are well positioned for continued momentum.

We are also continuing to experience improved efficiencies in our operations through the use of self-service functionalities and our robotic process automation efforts. By automating more routine processes, we are reducing operating costs and providing more time for more high value client service interactions with our team. The evidence of high-quality service by our teams is demonstrated by our client retention and satisfaction scores, which remain consistent with record-high levels. We have seen continued increases in Net Promoter Scores, most notably in the mid-market space.

Let me touch briefly on what we are seeing in the small business environment. The Paychex IHS Markit Small Business Employment Watch showed hourly earnings growth at its highest level since 2011, while job growth has been holding steady. Wage increases are beginning to reflect the tight labor market for small businesses. The constant battle for talent highlights the importance of having a partner like Paychex, who can provide solutions to simplify HR recruiting and on-boarding and a competitive benefits package to attract and retain top talent. We are currently operating in an unpredictable regulatory environment. Compliance with the rapidly evolving regulatory landscape is one of the many reasons employers choose Paychex for their HR needs. We're proud of our leadership role within the industry, partnering with regulatory agencies, keeping our clients informed and quickly updating our systems to be in compliance and support changes as they become effective.

Just this month, the IRS released the final version of the new Form W-4 to be used by all new employees and for all adjustments effective January 1, 2020. By remaining actively engaged with the IRS and providing feedback throughout their process, we were able to have the new forms and related calculations integrated into our systems within minutes of the issuance by the IRS. The workplace continues to evolve both in technology and the way people work. And we are very proud that Paychex has been included on the Fortune Magazine's future 50 list of companies that are best positioned for long-term growth. In addition to solid financial results, Paychex was recognized for its commitment to innovative technology offerings designed to meet the needs of the evolving workplace. We continue to focus on enhancing our product offerings and the use of technology to remain a leader in this industry.

Last quarter at HR Tech, we discussed some of the newest products being introduced. This month, we launched one of those products, Pay-on-Demand, which enables workers to access wages they have already earned before payday. This pay option is a great tool for recruitment and retention of talent as it allows employees to be paid when they want, allowing flexibility -- more flexibility than the traditional weekly, biweekly or monthly pay schedule. Other companies in the industry offer similar services on a smaller scale, but our solution is unique in that it provides our clients flexible payment options, including direct deposit, pay card and digital payment into Amazon or PayPal accounts; however the client employee wants it.

The other exciting products we demonstrated at HR Tech are progressing on track and will be launching in the coming months. We continue to focus our investments in emerging technologies such as wearables, real-time payments, product integrations, data analytics and artificial intelligence.

We are proud that Paychex' commitment to tech innovation has been recognized by industry experts. We were very proud to earn the awesome New Technologies for HR award at the HR Technology Conference & Expo in October. This recognizes the enhancements and increased flexibility of our Paychex Flex service product. We were also named to the HRExaminer 2020 watch list for artificial intelligence and HR. This recognized our innovation using AI tools and machine learning to strengthen existing operations. Our Flex Assistant chatbot currently answers over 200 commonly asked questions, spanning the Flex suite of products and seamlessly integrates with real-time live chat capability with a Paychex service agent 7/24/365 days a year.

In addition, we have intelligent tools within Flex architecture that deliver a more personalized user experience through learning individual user preferences over time. That can be listing out how to do something or even watching now short videos to learn how to use the Flex product. Paychex Flex also won a gold award for excellence in technology from Brandon Hall Group in the category of best advance in HR or workforce management technology for small and midsized businesses. This is the fourth straight year that Paychex Flex has been honored with a technology excellence award, which validates our tech vision, investment in that vision and the value tech brings to our clients. We are proud of the experience our Flex platform (inaudible) and their employees enhanced through automation we have built into the application based on individual patterns and preferences.

We also continue to see increased utilization of our industry-leading, 5-star rated mobile app. During the quarter, we experienced an increase of over 50% in the number of mobile sessions and a 35% increase in the number of mobile-only users. This increased mobile usage by clients and their employees has led to efficiencies internally and higher Net Promoter Scores. We are serving clients and their employees the way they want to be served.

Shifting to our PEO business. The acquisition of Oasis was the largest acquisition in our history and doubled the number of worksite employees we serve in our PEO. As with any significant acquisition, the integration efforts can cause some initial disruption in sales cadence and some operating inefficiencies as we realize the expected synergies. As we discussed last quarter, we realized some of this in the first part of this fiscal year as we went through that process.

That has led to slower-than-anticipated revenue growth for the year. However, we believe we are in a good position now as we progress with full sales rep headcount and our operation teams continue to focus on what's most important. That is serving our clients and providing them the right combinations of solutions to help them succeed. We are excited about the continued strong demand for PEO services in the markets that we serve.

In summary, we continue to focus on growing our business by making things simple for our clients. Our innovative technology allows us to service our clients in a way that they want, when they want and where they want. We're focused on continuing to introduce innovations to our technology-enabled service to improve business efficiency and drive even more value for our clients. Our full suite of HR solutions has been the recipe for growth and positions us for continued growth going forward. The efforts of our employees and our commitment to our clients are definitely making a difference. I will now turn the call over to Efrain Rivera, our Chief Financial Officer, to review our financial results for the second quarter. Efrain?

--------------------------------------------------------------------------------

Efrain Rivera, Paychex, Inc. - Senior VP, CFO & Treasurer [3]

--------------------------------------------------------------------------------

Thanks, Marty, and thanks to everyone on the call. I'd like to remind you that today's conference call will contain forward-looking statements, refer to the customary disclosures. In addition, I'll periodically refer to non-GAAP measures, such as EBITDA, et cetera, again, refer to our investor presentation, press release for a reconciliation of second quarter to related GAAP measures. I'll begin by providing some of the key highlights for the quarter, and then I'll follow up with some greater detail in certain areas and wrap up with a review of the fiscal 2020 outlook.

As you saw, total revenue growth was 15% for the second quarter; Oasis contributed approximately a little bit less than 9% to this growth. Expenses increased 18% for the second quarter to $649 million. Similar to last quarter, increases in compensation-related costs, PEO direct insurance costs and amortization of intangible assets contributed total expense growth. Total expense growth was primarily driven by the acquisition of Oasis. Operating income increased 11% to $342 million.

Operating margin was 34.5% for the second quarter, and EBITDA increased 16%, and EBITDA margin was approximately 40% for the quarter. The EBITDA margin increased slightly compared to a year ago, while operating margin declined due to the amortization of intangibles associated with the Oasis acquisition, as you all know.

Other expense net for the second quarter of $5 million includes interest expense of approximately $8 million related to long-term borrowings.

As a reminder, we borrowed $800 million bonds to fund a portion of the Oasis purchase price. The effective tax rate was 23.2% for the second quarter compared to 23.8% for the same period last year. Net income increased 10% to $259 million and adjusted net income increased 8% to $254 million. Diluted earnings per share were up 11% to $0.72 for the second quarter, and adjusted diluted earnings per share increased 8% to $0.70.

We received a little over $0.01 of benefit from stock-based comp payments during the second quarter, which is included for GAAP, but we exclude it for adjusted diluted EPS.

Let me provide some additional color in certain areas. Total service revenue was up, as I said, to $971 million, 15%. Within service revenue, management solutions revenue increased 6% to $727 million, and PEO and insurance services increased 57% to $244 million. Management solutions revenue growth of 6%, which actually exceeded our expectations, included a contribution from Oasis of slightly less than 1%. The remaining growth was primarily driven by increases in our client bases across many of our services, along with growth in revenue per client. Revenue per client improved as a result of higher price realization and increased penetration of our suite of solutions, particularly time and attendance, retirement services and HR outsourcing, and this has been a focus of our efforts over the last several years. And if you chart our growth in revenue per client, you've seen a pretty steady increase. Retirement services revenue also benefited from an increase in asset fee revenue earned on the asset value participant funds. PEO and insurance services revenue growth of 57% was largely due to the acquisition of Oasis, which contributed 47% to this growth.

In addition, the increase reflects growth in clients and client worksite employees across our existing PEO business. Insurance services revenue benefited from an increase in the number of health and benefit applicants, partially offset by the impact of softness in workers' compensation premiums, as we've been discussing all year.

Interest on funds held for clients increased 9% for the second quarter to $20 million, primarily as a result of higher realized gain, average investment balances and interest rates. Funds held for clients' average investment balances were impacted by wage inflation and increases within our base, offset by changes in client base mix and timing of collections and remittances.

Turning to our investment portfolio. We continue to invest in high credit quality securities. Our long-term portfolio has an average yield now of 2.1%, average duration of 3.1 years. Our combined portfolios earned an average rate of return of 2% for the second quarter, up from 1.9% last year.

Quickly looking at year-to-date results, total revenues up 15% to $2 billion. Service revenue, up 15% to $1.9 billion, with management solutions reflecting growth of 6% to $1.5 billion. PEO and insurance is reflecting growth of 57% to $491 million. Interest on funds has grown 14% to $40 million. Operating income, up 10% to $691 million and net income and diluted earnings per share each increased 9% to $523 million and $1.45 per share, respectively. Adjusted net income increased 7% to $511 million and adjusted diluted earnings per share increased 8% to $1.42 per share.

Let me walk through the highlights of our financial position. It remains strong with cash, restricted cash, total corporate investments of $708 million. As of the end of the quarter, funds held for clients were $3.7 billion compared to $3.8 billion as of the end of last year, May 31, 2019. Funds held for clients, as you know, very widely on a day-to-day basis, and averaged $3.7 billion for the second quarter.

Total available-for-sale investments, including corporate investments and funds held for clients reflected net unrealized gains of $39 million as of the end of the quarter compared with $20 million as of the end of last year, May 31, 2019. Total stockholders' equity was $2.6 billion as of November 30, 2019, reflecting $444 million in dividends paid and $172 million of shares repurchased during the first 6 months. Return on equity for the past 12 months has been a stellar 42%.

Cash flows from operations were $565 million for the first 6 months, a robust increase of 14% from the same period last year. So strong performance on cash flow. The increase was primarily driven by higher net income and noncash adjustments. Increase in noncash adjustments was primarily due to higher amortization expense, largely driven by intangible assets acquired through the acquisition of Oasis.

Let me talk about 2020 guidance. I remind you that our outlook is based on our current view of economic conditions continuing with no significant changes. Though we have reflected the impact of the 3 interest rate cuts that have already occurred this fiscal year, I'll provide our current outlook and some color on a couple of areas.

We provided update to the guidance, as you saw. Our management solutions revenue has been trending positively. And now, we anticipate it to grow in the range of 5% to 5.5%. This is raised from the previous guidance of approximately 5% growth, and we're doing well in almost all of the buckets that comprise that revenue stream.

PEO and insurance services are now anticipated to grow in the range of 25% to 30%. As Marty previously mentioned, we got off to a slow start with the Oasis, slower than we anticipated. We still maintain a strong long-term outlook and continue to execute on our plans to integrate our PEO business. Interest on funds held for clients is now anticipated to grow approximately 4%, modified from a range of 4% to 8% we started the year, and this simply reflects the most recent federal fund rate cuts. And diluted earnings per share growth has been increased to a range of 9% to 10% growth, raised from our guidance of approximately 9%. Other guidance remains unchanged as followed: total revenue, 10% to 11%; operating income as a percent of total revenue, approximately 36%; EBIT margin for the full year expected to be approximately 41%; effective income tax rate expected to be in the range of 24% to 24.5%; net income, adjusted net income and adjusted diluted earnings per share are all expected to grow at approximately 9% for fiscal 2020.

Now let me provide a little color on the back half of the year. As I indicated, PEO and insurance revenues are now anticipated to grow in the range of 25% to 30%. While the second quarter results were within the range provided, 56% to 60%, we have taken a more conservative approach for the back half of the year given our current trends. In particular, we've continued to experience lower compensation -- lower workers' compensation insurance rate that have moderate our insurance -- moderated our insurance services growth. We anticipate that this trend will likely ease as we enter the next fiscal year. We're also seeing modestly lower at-risk insurance attachment in the PEO.

In addition, this change reflects impacts from the slower start from the Oasis acquisition. We now anticipate that growth for the third quarter of PEO and insurance will be approximately 10%. Management solutions guidance was increased to a range of 5%, 5.5% growth from our previous guidance of approximately 5% due to favorable trends that we've seen in the first half of fiscal 2020. This incorporates the higher-than-anticipated growth achieved in the second quarter and assumes that third quarter will come in the full year range.

I refer you to Slide 16 in our investor presentation, which shows the impact of the reclass in the fourth quarter of fiscal 2019 of an immaterial amount of Oasis revenue. Please note that the as-adjusted numbers on this slide represent the base on which we apply the growth rates we are guiding to in management solutions and PEO and insurance revenues. And the reason I call that out is when I look at your models, 2/3 of you do it that way, and 1/3 have split between third and fourth quarter. Please look at that number, so that you can adjust your models correctly.

Operating margins, which for the full year anticipated -- for the full year, are anticipated to be approximately 36%, do vary quarterly. Our margins for the second quarter exceeded the guidance we provided in the last call, which was a range of 33% to 34%. That beat was impacted by delays in hiring related to the tight labor market. We still anticipate margins of approximately 38% for the back half of the year. We expect to continue to invest significantly in sales and marketing in the back half of the year while still achieving our target of a full year operating margin of approximately 36%.

And with all that, I'll turn the call back over to Martin.

--------------------------------------------------------------------------------

Martin Mucci, Paychex, Inc. - President, CEO & Director [4]

--------------------------------------------------------------------------------

Thank you, Efrain. We'll now open the call to questions, please.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Your first question comes from the line of Ramsey El-Assal from Barclays.

--------------------------------------------------------------------------------

Ramsey Clark El-Assal, Barclays Bank PLC, Research Division - Research Analyst [2]

--------------------------------------------------------------------------------

I wanted to ask about the trend and the lower workers' comp insurance rates, and I just was trying to get an idea of your visibility to how those rates trend. How do you -- what gives you confidence about those rates over time going into next year? I think you indicated sort of becoming more favorable. What type of reads do you gain on that rate?

--------------------------------------------------------------------------------

Efrain Rivera, Paychex, Inc. - Senior VP, CFO & Treasurer [3]

--------------------------------------------------------------------------------

Well, I'd say a couple things. One is that because we had an insurance agency and our pricing policies on a virtually daily basis, we get a sense -- a pretty clear sense of where that pricing is trending. That's one part. The second is it's influenced by what state Workers' Compensation Board, where they're setting pricing, and we know we have a pretty good sense of what states are contemplating or have contemplated changes in workers' compensation insurance. So I think the combination of those, and then the final thing is we're looking at the mix of revenue quarter-by-quarter, and we know that we started the year with a strong compare, and it starts to ease as we get into the back half year a little bit.

--------------------------------------------------------------------------------

Ramsey Clark El-Assal, Barclays Bank PLC, Research Division - Research Analyst [4]

--------------------------------------------------------------------------------

Got it. Okay. And then could you talk about your retention trends and the degree to which those trends are, I would imagine, moving in the right direction, giving you confidence in terms of raising the management solutions segment guidance for the year?

--------------------------------------------------------------------------------

Martin Mucci, Paychex, Inc. - President, CEO & Director [5]

--------------------------------------------------------------------------------

Yes. We're continuing to see pretty much near-record levels on retention across both small and midsized clients. We're seeing very good retention numbers, and so they've been very solid. And you know how conservative we are, as we look forward, we still think they're going to -- we're going to maintain that going forward. So we feel that the value of the products, obviously, and along with the needs of the clients during this -- particularly this kind of tight labor market, I think are really keeping the retention. And we're not seeing out of businesses really increase either. So all -- both from an environment and from our performance, I think are both keeping our retention numbers at record levels.

--------------------------------------------------------------------------------

Operator [6]

--------------------------------------------------------------------------------

Your next question comes from the line of Kevin McVeigh with Crédit Suisse.

--------------------------------------------------------------------------------

Kevin Damien McVeigh, Crédit Suisse AG, Research Division - MD [7]

--------------------------------------------------------------------------------

Seems like the organic growth, particularly in managed services, is settling in at higher levels despite much tough comps. Can you just frame out like how much of that is retention? Because -- and Marty, I know you mentioned kind of maintaining those levels. Is it possible you kind of set a new level based on more the SaaS offering as opposed to the traditional service? So maybe just the sensitivity on SaaS for service, and what that can do to the retention over the course of time?

--------------------------------------------------------------------------------

Martin Mucci, Paychex, Inc. - President, CEO & Director [8]

--------------------------------------------------------------------------------

Yes. I think it certainly does. I think we're appealing to the clients the way they want to be served, as I mentioned earlier, and their employees. The employees are playing a pretty strong role these days, more than, I think, ever in the past. As you see the mobile app, 70% of the usage of the mobile app is the employee of the client. And so they're having a bigger impact on retention, and we started talking about that a couple of years ago.

So I think that, that does have an opportunity. The issue, though, is still when you see improvement, particularly on the small client bases, there are so many businesses that go out of business every year, and we've been in this a long time, and it hasn't changed that dramatically. So what I think where you do have room for improvement is certainly from a service value standpoint. I think the need for clients' small businesses, midsized businesses to have software-as-a-service, to have mobile apps, to have self-service available to their employees, all those things are making them more valuable and stickier, I would say, to a client.

So we certainly see some -- we're optimistic, but we still also know that so many businesses start-up and go out of business on the small end.

--------------------------------------------------------------------------------

Kevin Damien McVeigh, Crédit Suisse AG, Research Division - MD [9]

--------------------------------------------------------------------------------

And then just to follow up on that, Marty, real quick. If it's -- if you're bumping up at that 82% level, any sense of how much of that is failures versus maybe other parts that are driving the attrition?

--------------------------------------------------------------------------------

Martin Mucci, Paychex, Inc. - President, CEO & Director [10]

--------------------------------------------------------------------------------

I think if you put all together, kind of no employees, out of business, bought or acquired, it's typically been 50%-plus a little bit. So that accounts for about half of it, and a little bit more even sometimes, and then the other pieces are price and it's still just as competitive as it's always been, hasn't really increased. But that number has been pretty consistent and then service value kind of stuff. So I'd say 50% to 60%, if you rolled all those things together, are kind of out-of-control type of thing.

--------------------------------------------------------------------------------

Operator [11]

--------------------------------------------------------------------------------

Your next question comes from the line of James Berkley with Wolfe Research.

--------------------------------------------------------------------------------

James Robert Berkley, Wolfe Research, LLC - Research Analyst [12]

--------------------------------------------------------------------------------

So just a quick question on the PEO side. Would it be possible just to break out in more detail, just kind of that segment, PEO and insurance separately? How bookings have been trending on the PEO side? And maybe how much of the guidance drop was attributable to Oasis, which you expect to turn around?

--------------------------------------------------------------------------------

Martin Mucci, Paychex, Inc. - President, CEO & Director [13]

--------------------------------------------------------------------------------

Well, let me start, and I'll have Efrain jump in. I think what we've seen there is, one, we have our -- we think the market is still very strong for PEO in particular. So the demand continues to be strong. You're still seeing a very tight labor market, so they're looking for help in recruiting and retaining employees. They're looking for benefit packages that will retain employees and HR, kind of mobile app and strength to not only recruit but retain in that mid-market -- small-ended market. The other thing is that the integration of Oasis certainly has impacted this somewhat. We got off to a slower start. We mentioned it in the first quarter last year. We really began the active integration around June, so about 6 months ago. And once we started aligning underwriting procedures, sales comp models, service processes and those things, it kind of slowed our sales cadence down at Oasis, and it was definitely impacted by underwriting. We've always been very tight on the underwriting side. We wanted the processes to be very tight, and so that gave a slower ramp-up to the sales, and then we had to ramp up the sales headcount, and that was a little slower than we expected. Now we're at that full -- near that full ramp-up of the sales headcount, and also, we got through a couple of insurance renewals. It's always important to kind of see where we're coming out for the first time with a major integration like that with insurance renewals, and we came through fine. But that and the underwriting, I think certainly, it impacted some existing clients. Now that all -- we're that -- we're through that, we have a much better sense of the first year of Oasis and where we're going to come out for this first fiscal year -- the remainder of the first fiscal year. We think the market is very strong. Our organic PEO business, non-acquisition, was very strong year-to-date. And so we feel still very strong about it. We just got off to a slower start than we thought, and that's going to impact the full year's performance.

--------------------------------------------------------------------------------

James Robert Berkley, Wolfe Research, LLC - Research Analyst [14]

--------------------------------------------------------------------------------

I guess asked another way, if it's okay, would -- if you didn't do the Oasis acquisition, would have organic PEO growth been in line with expectations? Like would that have been unchanged?

--------------------------------------------------------------------------------

Martin Mucci, Paychex, Inc. - President, CEO & Director [15]

--------------------------------------------------------------------------------

I think it would have been pretty much unchanged. I mean when you look -- because we feel very -- we're actually performing -- sales have been stronger than we expected in our organic PEO business. And so yes, I think it would have been stronger. I mean this is -- we really feel like this is kind of around first part of the integration, and although we've had the company -- we purchased the company in December, we kind of let the fiscal year play out. We had a number of things we were organizing around, running some synergies than in our beginning of our fiscal year, we kind of put new processes in place. And frankly it had a little bit stronger impact than we thought in slowing things down from a sales and even retention perspective. Now we've kind of got that turned around, and we just wanted to make sure we're conservative kind of on the rest of the year and how that'll come out. But we feel very good about the market, and yes, it would have been stronger. If you just look at without the integration, we certainly would have been above, I think, our expectations on PEO-only side.

--------------------------------------------------------------------------------

James Robert Berkley, Wolfe Research, LLC - Research Analyst [16]

--------------------------------------------------------------------------------

That's great to hear. And obviously doing really well on the merchant -- I mean on the management solutions side as well. And so just last question on that point. Just given the tight labor market, any thoughts -- incremental thoughts on kind of where we are in the economic cycle? How you think about things like labor participation rate, how much slack there might be left in that? And room for you guys to run on the small business side?

--------------------------------------------------------------------------------

Martin Mucci, Paychex, Inc. - President, CEO & Director [17]

--------------------------------------------------------------------------------

Yes. I think we're still feeling pretty strongly about how the market is -- how the market outlook is. The optimism still, it bounces around a little bit, business optimism, but what we're seeing is the wage increases are the highest, as I said, since 2011, from small businesses under 50 employees. This is what's in that watch. And the hours worked are up also for the highest in like 3 years. So we look at that as demand for the employees. So the business is -- the toughest thing for small, in particular, small, but midsize businesses right now is, I can't find the people to finish -- to get the work done for the demand I have. That, to me, points to a pretty strong economy still, and that's how it feels to us. When hours worked are up and the wages are up, it's because, hey, I've got the demand and -- from client -- from customers that want that. So I think that's very good. The tariffs and the trade issues, we've seen impact roughly 1/3, maybe 25% to 1/3 of small businesses. Most of those are much more regional, and so they're not going to be impacted by that. The 1/3 -- 25% or 1/3 that are impacted by tariffs and so forth have had a harder time, but most small businesses are not impacted by that.

--------------------------------------------------------------------------------

Operator [18]

--------------------------------------------------------------------------------

Your next question comes from the line of David Togut with Evercore ISI.

--------------------------------------------------------------------------------

David Mark Togut, Evercore ISI Institutional Equities, Research Division - Senior MD [19]

--------------------------------------------------------------------------------

Good to see the strength in bookings in the quarter. Could you perhaps dimension the rate of growth that you've seen, Marty, both in the small business managed solutions market and also mid-market? And then you called out strength from a macro standpoint. Any additional color about which solutions are getting the most traction, where you think you might be gaining market share?

--------------------------------------------------------------------------------

Martin Mucci, Paychex, Inc. - President, CEO & Director [20]

--------------------------------------------------------------------------------

Yes. I think one, retirement continues to be very strong, and I think the SECURE Act, I think most of you probably know, got through the House yesterday and it's headed for the Senate. If that gets approved, that's giving tax credits for new retirement plans. And I think that would continue to be a boost for small businesses starting retirement plans. And we continue to be just very solid on retirement services, both what we would call large market and small market, generally are doing very well. Time and attendance, when you think about the overtime changes that have been recently made in providing overtime to more, it's hitting more employees of our clients. Time and attendance continues to be very strong double-digit growth as well. And we're -- we try to stay -- we've really stayed, I think, ahead of even the market from a technology standpoint. So it's not just the old punch cards, it's finger scan, which has now gone to eye scan, which has gone to face scan, and now wearables, we'll be introducing very soon that you can punch in and punch out on your on your watch. And these are all things that are being demanded by clients. So I think time and attendance, retirement, certainly HR overall, and the technology that goes with that, meaning I want to see data analytics that help me as a small or midsized business compared to other businesses. We have that database that other clients -- our other businesses don't have. We can use data from 600,000-plus clients that say, hey, here's what your turnover looks like compared to others, here's what your wages look like. So I think data analytics in HR and all of those things all are pretty strong. And so overall, we see pretty good growth. Now we're heading into -- we're in the selling season, so it's too early. We really need third quarter to kind of give us that look on sales. But so far, year-to-date sales have been good, and particularly in the mid-market, we feel very strong about the pickup that the products have done in the marketplace.

--------------------------------------------------------------------------------

Operator [21]

--------------------------------------------------------------------------------

Your next question comes from the line of Steven Wald with Morgan Stanley.

--------------------------------------------------------------------------------

Steven Matthew Wald, Morgan Stanley, Research Division - Equity Analyst [22]

--------------------------------------------------------------------------------

So just maybe going through the pieces of the revenue guide. I know you guys didn't change the overall revenue guidance. But if I look at your adjusted numbers, I believe, Efrain, we talked about this after last quarter, the 2 different adjustments you made there and sort of map out those pieces of your segment guidance. Sort of getting to a 9% to 11% range, at the bottom and top end of those pieces added together, is that generally how we should be thinking about it? It sort of seems like at the midpoint, you'd be at the low end of your prior 10% to 11% guidance, that's not changed.

--------------------------------------------------------------------------------

Efrain Rivera, Paychex, Inc. - Senior VP, CFO & Treasurer [23]

--------------------------------------------------------------------------------

Yes. I don't think you're far off, Steven. I think that, that's fair.

--------------------------------------------------------------------------------

Steven Matthew Wald, Morgan Stanley, Research Division - Equity Analyst [24]

--------------------------------------------------------------------------------

Okay. Cool. I just wanted to make sure I understood that. And then -- because I know this caused some questions last quarter. The Oasis components, I know that you reclassified a piece of it last quarter as to how to think about it. But I think in the press release, you said it added about 1% to the management solution. So should we think about it as Oasis minus $7 million to $8 million is all in the PEO and the rest goes into management solutions?

--------------------------------------------------------------------------------

Efrain Rivera, Paychex, Inc. - Senior VP, CFO & Treasurer [25]

--------------------------------------------------------------------------------

Yes. I'd have to -- I'm doing mental math really quickly. I think it's a little bit lower, maybe $6 million to $7 million, but I'm not looking at the detail, but I don't think that's far off.

--------------------------------------------------------------------------------

Steven Matthew Wald, Morgan Stanley, Research Division - Equity Analyst [26]

--------------------------------------------------------------------------------

Okay. Yes. Just wanted to make sure I was clear on those things.

--------------------------------------------------------------------------------

Efrain Rivera, Paychex, Inc. - Senior VP, CFO & Treasurer [27]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Operator [28]

--------------------------------------------------------------------------------

Your next question comes from the line of Andrew Nicholas with William Blair.

--------------------------------------------------------------------------------

Andrew Owen Nicholas, William Blair & Company L.L.C., Research Division - Analyst [29]

--------------------------------------------------------------------------------

Just wanted to talk a little bit about technology in the PEO business. I was wondering if you could talk maybe about your plans for Oasis, and maybe even HROI from a tech perspective. Are both businesses still running on a third-party software? Or are there plans to transition to an internal proprietary software in the near to medium term? And then maybe relatedly, I was just wondering if you could maybe speak to big tech capabilities of your PEO business relative to the competition?

--------------------------------------------------------------------------------

Martin Mucci, Paychex, Inc. - President, CEO & Director [30]

--------------------------------------------------------------------------------

Yes. I think the capabilities -- well, first of all, yes, they're both on third party and license software. And so far, that seems to be going very well. So we're watching that closely, but we're not looking to necessarily move to any quick integration or client conversion to disrupt the base or anything like that.

So we think that the third-party software is doing fine, and in fact, gets upgraded pretty consistently, and so we feel good about that. The integration, we're tying it in as much as possible to our products as well.

So I think the technology that we're focused on with the HROI and Oasis is how to tie it into our -- for our retirement integration, into our retirement, time and attendance and so forth, so that they can benefit most from those products, and that's going well. And so we'll determine over time whether it makes sense to get them to our PEO in-house product or not. I think you never want to necessarily move clients through a conversion if you don't have to and if that's taking care of it, we're still continuing to watch that. It's not a focus right now. Our technology on the PEOs that we feel is very competitive. We can see, as I said, the demand is good in the street, and we're selling well, particularly on the organic side, if you look kind of non-acquisition and integration, we're doing very well on the organic PEO, and in fact, are ahead of sales. So I think our product is performing very well competitively in the marketplace.

--------------------------------------------------------------------------------

Efrain Rivera, Paychex, Inc. - Senior VP, CFO & Treasurer [31]

--------------------------------------------------------------------------------

Just to add a little bit more color there, Andrew. So our -- we run on both the Flex platform for our PEO business and we also run on a third-party software, which many of you know what it is. But it's a customized instance of that software. So there have been a lot of upgrades and adjustments -- enhancements made to that system. And I think the challenge, as Marty mentioned, is with those customizations and enhancements over time, we want to figure out what the right decision is in terms of bringing all one -- on our internal platform, and that will take a little time to sort out.

--------------------------------------------------------------------------------

Andrew Owen Nicholas, William Blair & Company L.L.C., Research Division - Analyst [32]

--------------------------------------------------------------------------------

Makes sense. That's very helpful. And then maybe sticking with the PEO space. Just wondering if you could update us on your appetite for M&A there. And maybe more broadly, how you would characterize pricing in this space? And last thing there would be, does some of the slower-than-expected start with Oasis tied to kind of integration issues change that appetite at all?

--------------------------------------------------------------------------------

Martin Mucci, Paychex, Inc. - President, CEO & Director [33]

--------------------------------------------------------------------------------

Yes. Let me start at the end and go back. I think, yes, with any integration, when you update -- and they -- and remember, Oasis has had a number of companies as well, and so we had to go across the number of companies that they had acquired as well. We wanted to be sure that we felt comfortable with all the underwriting processes, the sales comp models, getting tighter process on service. When we pull all that stuff together, you have some consternation that goes on and some slower ramp-up of hiring of the sales folks, et cetera. And we really think that was tied to just getting things all aligned, and we really didn't push those things until about June into the summer, and so that put us a little bit behind this year as far as starting out. So think it was really geared around that.

M&A, still very interested. Certainly always looking at what opportunities are there. From a -- when you talk about pricing, if it's pricing of the M&A, the valuations are still, I think, pretty high, but it all depends. There's so many PEOs, it's such a fragmented environment, but there's a lot of opportunity, I think, out there, and we're just trying to make sure that we get the right valuations. From a pricing -- from the market standpoint, I think we're extremely competitive. I don't think the competition in that market has changed very much, and I think we're very competitive, and we're seeing that by being above sales -- our sales forecast in the first part of the year with our organic PEO. So where there's no distractions or anything at the beginning of the first half of the year, we've seen very good sales results from our organic PEO.

--------------------------------------------------------------------------------

Operator [34]

--------------------------------------------------------------------------------

Your next question comes from the line of Jason Kupferberg with Bank of America.

--------------------------------------------------------------------------------

Jason Alan Kupferberg, BofA Merrill Lynch, Research Division - MD in US Equity Research & Senior Analyst [35]

--------------------------------------------------------------------------------

I wanted to ask a follow-up, just on Oasis. Just so we have the numbers right. I think originally, the expectation was for Oasis to generate $335 million to $375 million in revenue this year. Can you just help us get a sense of what the new range would look like, obviously just given the integration challenges that you talked about?

--------------------------------------------------------------------------------

Efrain Rivera, Paychex, Inc. - Senior VP, CFO & Treasurer [36]

--------------------------------------------------------------------------------

I think, Jason, we're still in that range, but we're certainly towards the lower end of that range.

--------------------------------------------------------------------------------

Jason Alan Kupferberg, BofA Merrill Lynch, Research Division - MD in US Equity Research & Senior Analyst [37]

--------------------------------------------------------------------------------

Okay. Got it. And then just on the sales force side of Oasis. I mean, I guess as you went through the integration process, was there any unexpected uptick in voluntary turnover among Oasis salespeople?

--------------------------------------------------------------------------------

Martin Mucci, Paychex, Inc. - President, CEO & Director [38]

--------------------------------------------------------------------------------

Yes, Jason, I think we lost a few. It was a very -- we started making changes to underwriting process and sales comp and things like that at the beginning. It's pretty minor number. But we lost a few, because at the same time you had some PE firms buying up a couple of other small companies that were trying to attract sales reps. So I think we lost a few. I wouldn't say it was -- it was not a big number, and then that put us a little behind ramping up the sales force to the number that we wanted, which we're back at now. So that's a bit of what we encountered at the beginning.

--------------------------------------------------------------------------------

Jason Alan Kupferberg, BofA Merrill Lynch, Research Division - MD in US Equity Research & Senior Analyst [39]

--------------------------------------------------------------------------------

Okay. And then just a final clarification, Efrain. Just on the EPS side, I know, because there's a couple of EPSs out there. So diluted EPS, you did uptick, but your adjusted EPS growth expectations are unchanged, correct? And I think that's the number you focus on more.

--------------------------------------------------------------------------------

Efrain Rivera, Paychex, Inc. - Senior VP, CFO & Treasurer [40]

--------------------------------------------------------------------------------

That's correct. Because -- yes, that's reflecting -- well, we focused on both, Jason, but that's reflecting taxes. I mean look, I get the question frequently, why do you guys call that out? I think in an effort to be transparent about what we think is underlying operating performance and what's underlying financial performance. Underlying operating performance, we exclude the impact of stock comp. Not everyone does, we do. And then financial performance is what it is. So that's what we're trying to be clear on.

--------------------------------------------------------------------------------

Operator [41]

--------------------------------------------------------------------------------

Your next question comes from the line of Tien-Tsin Huang with JP Morgan.

--------------------------------------------------------------------------------

Tien-Tsin Huang, JP Morgan Chase & Co, Research Division - Senior Analyst [42]

--------------------------------------------------------------------------------

The ancillary services. Can you give us an update on penetration from the services like time attendance and retirement services? How much more room is there to go?

--------------------------------------------------------------------------------

Efrain Rivera, Paychex, Inc. - Senior VP, CFO & Treasurer [43]

--------------------------------------------------------------------------------

Tien-Tsin, sorry for the mispronunciation, but for some reason, at the beginning of the question, we didn't -- you didn't come in.

--------------------------------------------------------------------------------

Martin Mucci, Paychex, Inc. - President, CEO & Director [44]

--------------------------------------------------------------------------------

You cut out. Yes.

--------------------------------------------------------------------------------

Efrain Rivera, Paychex, Inc. - Senior VP, CFO & Treasurer [45]

--------------------------------------------------------------------------------

So we didn't hear the full question. So to answer it, if you -- could you repeat it? You mind repeating it?

--------------------------------------------------------------------------------

Tien-Tsin Huang, JP Morgan Chase & Co, Research Division - Senior Analyst [46]

--------------------------------------------------------------------------------

Yes. No, happy to. Hopefully, this is a little better. Just the penetration rate of some of the ancillary services? Like time and attendance, retirement services, I think both were called out as being positive. Where are you in that?

--------------------------------------------------------------------------------

Martin Mucci, Paychex, Inc. - President, CEO & Director [47]

--------------------------------------------------------------------------------

Yes. We're definitely picking up. We don't give detailed penetration rates on those, but we definitely are picking up penetration across the baseline time and attendance, retirement continues to go up. The other thing on retirement that has been very helpful to us is in the mobile app, we've not -- we have released probably 6 months ago, where you could sign up on the mobile app, I think I've talked about it before, as opposed to all of the paper that employees of our clients would go through. So the participation rate is up and that's now retaining more 401(k) clients that otherwise would have dropped out because they didn't have the correct participation of their employee base. So we're -- not only are the sales stronger, but the retention of 401(k) and retirement is stronger as well. Health and benefit insurance up -- ticking up a bit as well. Of course, we're still strong on the insurance side, and we've linked the PEO to our agency. Being a top-20 agency we have -- if you don't qualify for underwriting in the PEO, we take you over to the insurance agency to write you. We have a very unique offering at that point by the ability to do that. So I think all have picked up pretty strongly. Those are certainly the best that I can think of right off hand right now.

--------------------------------------------------------------------------------

Efrain Rivera, Paychex, Inc. - Senior VP, CFO & Treasurer [48]

--------------------------------------------------------------------------------

Yes. So Tien-Tsin, we fully update those at year-end. But I think just to underscore what Marty said, we're trending above where we ended last year. And if you look at it from a revenue standpoint and break out the revenue on each of those areas that we called out time and attendance, HR and retirement services, those are trending above where management solutions as a whole is growing. So we're experiencing good results. And by the way, just want to make sure that it's clear. That is our strategy. Our strategy is to approach a client and sell them on the full bundle, which is why we present the revenue in the way we do.

--------------------------------------------------------------------------------

Tien-Tsin Huang, JP Morgan Chase & Co, Research Division - Senior Analyst [49]

--------------------------------------------------------------------------------

Right. Yes. No, it's been clear you want to drive up revenue per. So I get that. So just as a quick follow-up then. And I know, Marty, you mentioned -- I remember last quarter you talked about improving enrollment on 401(k), what have you. So sensitivity to AUM and asset value, given some of the move up here, I'm curious is there an update or any rule of thumb we can use? Because the equity market has been strong, it sounds like that that's helping you quite a bit here, maybe.

--------------------------------------------------------------------------------

Efrain Rivera, Paychex, Inc. - Senior VP, CFO & Treasurer [50]

--------------------------------------------------------------------------------

Yes. That's a good question. So it's really assets under administration, Tien-Tsin. We'll have to come back. It's not a huge number, so we wouldn't anticipate a significant change. But in the back half of the year, as we get into -- thinking a little bit about next year, we'll talk about it. Right now, I don't think it would be a significant -- unless it was something dramatic in the market, wouldn't be significant, in the order of pennies in terms of EPS, but we'll update as we go through the year.

--------------------------------------------------------------------------------

Operator [51]

--------------------------------------------------------------------------------

Your question comes from the line of Bryan Keane with Deutsche Bank.

--------------------------------------------------------------------------------

Bryan Connell Keane, Deutsche Bank AG, Research Division - Research Analyst [52]

--------------------------------------------------------------------------------

Yes, to me, it sounds like the Oasis, a little bit of an integration challenges, more onetime in nature. So I'm trying to think about what the normalized organic growth rate for Oasis might be post 1 year out?

--------------------------------------------------------------------------------

Efrain Rivera, Paychex, Inc. - Senior VP, CFO & Treasurer [53]

--------------------------------------------------------------------------------

Yes. So when we bought them, people asked me this, they were growing kind of mid- to upper-single digits organically. That's where they were. They -- we expect that we will be able to bump that growth rate with additional salespeople. Obviously, as Marty mentioned, we're off to a slow start there. But our expectation is we can get it growing above those rates in the future. We've got to get through this year, get through the disruption of this year.

--------------------------------------------------------------------------------

Bryan Connell Keane, Deutsche Bank AG, Research Division - Research Analyst [54]

--------------------------------------------------------------------------------

Yes. Guessing that the growth rate this year will be a little bit below their historical average as a result?

--------------------------------------------------------------------------------

Efrain Rivera, Paychex, Inc. - Senior VP, CFO & Treasurer [55]

--------------------------------------------------------------------------------

Yes. It will.

--------------------------------------------------------------------------------

Bryan Connell Keane, Deutsche Bank AG, Research Division - Research Analyst [56]

--------------------------------------------------------------------------------

Yes. And then 1 follow-up I had on the revenue per client increase. It also sounded like you're getting a little bit of higher price realization. Just trying to figure, is that normal higher prices? Or is that something that you're seeing a little bit different, a little bit more pricing power than usual?

--------------------------------------------------------------------------------

Efrain Rivera, Paychex, Inc. - Senior VP, CFO & Treasurer [57]

--------------------------------------------------------------------------------

I think we've had a little bit more pricing power this year than other years. I think that we do a lot of work on the analytics side to understand how to price each client. I think we've done a good job on the pricing side to do that. So you hope every year, there's opportunities to do it. Obviously, we hope to hold that kind of pricing power, but every year brings another set of challenges. And it also depends on competition. So while I think the level of competitive intensity remains high, it certainly has dramatically increased. And one thing we haven't talked about, Bryan, which I think is important is we're having a really good year to begin the year in our mid-market business, which also helps management solutions. So a continuation of those trends in the back half of the year going into next year then has a solid, I was going to say buoyant effect. That's a little bit too strong, but a positive effect on management solutions revenue.

--------------------------------------------------------------------------------

Martin Mucci, Paychex, Inc. - President, CEO & Director [58]

--------------------------------------------------------------------------------

I think the investments are really paying off that we've made in the product and the technology on the HR side, the mobile app, those things are paying off. And as Efrain said, mid-market is really coming on strong. We've had a couple of years where it wasn't as strong as we would have liked, but we're feeling this year -- well, certainly, we're seeing this year, the first half of the year, and now -- we can tell you more after this quarter, but it feels really solid about the performance there on the sales side and retention side.

--------------------------------------------------------------------------------

Operator [59]

--------------------------------------------------------------------------------

Your next question comes from the line of Kartik Mehta with Northcoast Research.

--------------------------------------------------------------------------------

Kartik Mehta, Northcoast Research Partners, LLC - Executive MD, Director of Research, Principal & Equity Research Analyst [60]

--------------------------------------------------------------------------------

Efrain, just to maybe get a little bit more color on the pricing comments you made for the payroll business. I'm wondering, from a competition standpoint, have you seen a change, are your competitors getting less aggressive? Or is this strictly a Paychex issue where you're able to raise prices? And maybe the competition for new business is still the same?

--------------------------------------------------------------------------------

Efrain Rivera, Paychex, Inc. - Senior VP, CFO & Treasurer [61]

--------------------------------------------------------------------------------

I think it's primarily internal. I think we have -- I think our algorithms internally get better and better every year. And I think we understand what clients are okay with certain price increases and what clients are not. I think you have to be very -- do it with a great -- a lot of care. If you raise prices carelessly, you end up creating shopping behavior. I think the other part is that there are -- I think the strength of our model permits us to understand because of the level of customer intimacy we have, permits us to understand what segments of the client base we can get better pricing out of. So I think it's more internal than it is external, but I think it's important in that equation that the rest of the market is not acting irrationally from a price standpoint.

--------------------------------------------------------------------------------

Kartik Mehta, Northcoast Research Partners, LLC - Executive MD, Director of Research, Principal & Equity Research Analyst [62]

--------------------------------------------------------------------------------

And then, Marty, just on the PEO M&A question, I know you said obviously, valuations are everywhere. But just from a Paychex standpoint, you said Oasis, you want to get this integration done, maybe it didn't go as smoothly in the beginning as you wanted. Has that slowed down, maybe M&A? Would you wait a little while and get Oasis running to the point you want before you acquire another PEO? Or do you think you're in a position where, if an asset came up, you'd be -- you're ready to acquire it?

--------------------------------------------------------------------------------

Martin Mucci, Paychex, Inc. - President, CEO & Director [63]

--------------------------------------------------------------------------------

No. I think, Kartik, we're very much in position, and we really feel like Oasis is in good shape now. It was really this kind of first half of the year that was most of the integration, kind of just a lot of changes that we had to make that always cause some slowdown. But I think, no, we're very much ready. And in fact, looking at a number of things today that are out there and available. And no, I think from a management leadership standpoint and our organization. Now we're very much ready. Remember how large -- Oasis was the largest private PEO in the country. So you knew you were going to have some integration there that we had to do more, but as far as everything else from HROI to all the acquisitions we've done, we've had a very solid track record from integrating and then hitting or beating the numbers that we expected from those acquisitions.

--------------------------------------------------------------------------------

Operator [64]

--------------------------------------------------------------------------------

Your next question comes from the line of Lisa Ellis with MoffettNathanson.

--------------------------------------------------------------------------------

Lisa Ann Dejong Ellis, MoffettNathanson LLC - Partner [65]

--------------------------------------------------------------------------------

First one for me is on the rollout of the Pay-on-Demand product. You called out, I think that you just launched one of them in in the prepared remarks. But if I recall correctly, I think you're launching 2, right, one that's more targeted toward employers and one targeted at employees? Can you just give us a little more color on the exact timing and the monetization models for those 2 products?

--------------------------------------------------------------------------------

Martin Mucci, Paychex, Inc. - President, CEO & Director [66]

--------------------------------------------------------------------------------

Yes. Sure, Lisa. The one we rolled out this month, a few weeks ago, was the one for employees. That was the basically Pay-on-Demand. And as I mentioned, it's an expanded, we think options better than most have out there. This is -- you can not only select when you want the money but not only -- and not only put it in your bank account, but you can put it on a pay card if you want. You can put it in your Amazon account, you can put it in your PayPal account. We think this has the broadest selection of options and flexibility that we've seen in the marketplace and we get a percentage. Obviously, we're doing that with a third party, and we get a percentage of that back into the business. And we think, for the most part, though, that the monetization of that is really in the retention of the clients and their employees that we're adding another thing to get to employees that's going to want them to stay with Paychex, stay with the mobile app, stay with the pay flexibility, et cetera, which is going to be good for the clients in a very tight labor market. In the real-time payments, which is really more geared toward the clients, as you mentioned, that's geared toward the end of the first quarter of the calendar year, as it consistently has. It's right on track, and we feel that we'll be one of the first to offer real-time payments. There will be a charge for that, as we've mentioned in the past. We're still working through all of that in looking at the marketplace and so forth. But as we get closer to rolling that out, on schedule, then we'll -- we can talk about the monetization of it.

--------------------------------------------------------------------------------

Lisa Ann Dejong Ellis, MoffettNathanson LLC - Partner [67]

--------------------------------------------------------------------------------

Terrific. And then second one for me. Maybe, Marty, can you comment on how the new -- it looks like this, the AB5 law impacting gig workers in California is going to go into effect. Can you comment just on how you see that type of law impacting Paychex? And what -- how you'd handicap your expectation that, that spreads across the country?

--------------------------------------------------------------------------------

Martin Mucci, Paychex, Inc. - President, CEO & Director [68]

--------------------------------------------------------------------------------

Yes. I think -- it's funny, 2 years ago, the gig economy was very big and expected to kind of take over employment, and then it really has kind of quieted down to a certain degree. I think those laws and similar ones will come up. I think it's the flexibility that we want to give employees. I think it'll be picked up by states, like you said, like California and New York, places like that first. I think we'll be ready to handle that. And I think, frankly, having a mobile app, having Pay-on-Demand, having flexible retirement plans things like that, we're very well -- we're pretty well geared for that, and we're continuing to look at our product set to see how we can do things more -- even more around an employee versus an employer, which has obviously been our model for many years. So I'd say it's still early stages, but it's still pretty early on the gig economy too, that seem to be the -- it was going to be the wherewithal -- it was going to be everything a few years ago, but it's quieted down. I think we're able to handle some of that now, and we're continuing to look at our product set with our Head of Product to see what else we can do to make it easy and to be able to comply with any new employment laws that come out.

--------------------------------------------------------------------------------

Lisa Ann Dejong Ellis, MoffettNathanson LLC - Partner [69]

--------------------------------------------------------------------------------

Okay. Great. Yes, and I guess just to like completely clarify. I think this law impacts like workers that'll be classified as like W-2 full-time employees versus ones that are classified as contractors. But you currently essentially cover or process payroll for both of those, right? I mean, does this...

--------------------------------------------------------------------------------

Martin Mucci, Paychex, Inc. - President, CEO & Director [70]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Lisa Ann Dejong Ellis, MoffettNathanson LLC - Partner [71]

--------------------------------------------------------------------------------

Yes. Yes. So it's sort of a neutral effect?

--------------------------------------------------------------------------------

Martin Mucci, Paychex, Inc. - President, CEO & Director [72]

--------------------------------------------------------------------------------

Yes. Correct. Neutral effect right now. Yes, that we -- I was thinking more of a wider look at that issue of the whole gig economy, and there's a real opportunity there. But you're right, yes, we cover both of those now, whether they're contractors, 1099s or W-2s, either way.

--------------------------------------------------------------------------------

Operator [73]

--------------------------------------------------------------------------------

Your next question comes from the line of Bryan Bergin with Cowen.

--------------------------------------------------------------------------------

Bryan C. Bergin, Cowen and Company, LLC, Research Division - Director [74]

--------------------------------------------------------------------------------

Wanted to ask on margins, so the maintained margin guide following a good first half here, is there a ramp in the investments absorbing this somewhat in the second half? Or maybe is it a function of just getting Oasis back on the path you expected? Or is it more broad than that? If you can just go into some of the moving pieces?

--------------------------------------------------------------------------------

Efrain Rivera, Paychex, Inc. - Senior VP, CFO & Treasurer [75]

--------------------------------------------------------------------------------

I think, Bryan, when you look at first half versus back -- I'm sorry, second half versus first half, the key thing that occurs is that in Q4, you have your highest margin quarter. So you have expenses that are -- that don't ramp anymore because now you've anniversaried Oasis. And so expense growth is more moderate, but then revenue is higher, particularly in the third quarter where margins typically are going -- approaching or above 40%. So I think that's what drives it. That quarter is unique in terms of the amount of revenue that it has, and then the fourth quarter also has a high revenue and expenses aren't ramping along with the revenue in driving margins higher.

--------------------------------------------------------------------------------

Bryan C. Bergin, Cowen and Company, LLC, Research Division - Director [76]

--------------------------------------------------------------------------------

Okay. I wanted to follow up then also on the on-demand pay product. Can you just talk about some of the early adoption levels on the employee side? And how should we think about the funding mechanisms of these pay products and any potential impacts to the full portfolio?

--------------------------------------------------------------------------------

Martin Mucci, Paychex, Inc. - President, CEO & Director [77]

--------------------------------------------------------------------------------

No, it's all done through third parties. So there won't be any impacts on our float. We're not taking any of the risk on it or anything else. We're just getting a percentage of the fees that are paid. And it's very early -- Bryan, it's very early in the adoption. I mean we've heard certainly the demand for it, but it just -- we rolled it out a few weeks ago. So it's really too early to say. But there seems to be a great demand for it. And again, I think this is the most full-featured from our full flexibility from an opportunity. So we're anxious to see how it goes. I'd be able to give you a better read after the next quarter.

--------------------------------------------------------------------------------

Bryan C. Bergin, Cowen and Company, LLC, Research Division - Director [78]

--------------------------------------------------------------------------------

Okay. That's fair. And Efrain, just a last one on Oasis. You lapped acquisition over, I guess part of the third quarter. Anything to call out in the expected contribution of Oasis to 3Q? Anything seasonal in that mix between the 2 segments to note here?

--------------------------------------------------------------------------------

Efrain Rivera, Paychex, Inc. - Senior VP, CFO & Treasurer [79]

--------------------------------------------------------------------------------

Nothing that's not contemplated in the guidance. Yes, nothing significant.

--------------------------------------------------------------------------------

Operator [80]

--------------------------------------------------------------------------------

Your next question comes from the line of Samad Samana with Jefferies.

--------------------------------------------------------------------------------

Samad Saleem Samana, Jefferies LLC, Research Division - Equity Analyst [81]

--------------------------------------------------------------------------------

So the company has mentioned mid-market strength multiple times in the call this morning. I was curious if maybe you can give us an idea of what the average number of employees for new deals in the quarter look like? Just to see if it's -- how much it's impacting the mix versus the historical average closer to about 16 employees? And then I have 1 follow-up question.

--------------------------------------------------------------------------------

Martin Mucci, Paychex, Inc. - President, CEO & Director [82]

--------------------------------------------------------------------------------

It definitely is much larger than that. So it would pull that mix up. We don't normally give that number out, Samad. But I mean it's much -- it's -- I would say look, somewhere between probably 50 to 150, give you a wide range, but the average is somewhere under 100 kind of thing on a client ID perspective. So it's much larger than that 15 or 16. That's what pulls that up.

--------------------------------------------------------------------------------

Samad Saleem Samana, Jefferies LLC, Research Division - Equity Analyst [83]

--------------------------------------------------------------------------------

Yes. I guess I was wondering more about what the overall average then would have been for this quarter? Just to kind of get a sense of how much it's pulling up the overall average?

--------------------------------------------------------------------------------

Martin Mucci, Paychex, Inc. - President, CEO & Director [84]

--------------------------------------------------------------------------------

It's -- right now, it's pretty consistent. So I don't think it's moving it enough. I think we -- I don't know if we really give that out other than annual, if that. But it has some -- I think it would have some adjustment, but not much, pretty consistent.

--------------------------------------------------------------------------------

Samad Saleem Samana, Jefferies LLC, Research Division - Equity Analyst [85]

--------------------------------------------------------------------------------

Okay. And then maybe just as a follow-up, as I think about the sales headcount investments that you're making. Is there -- other than the products that you guys have rolled out, as I think about the mid-market, are you also hiring reps that are more geared toward selling to that 50 to 150 employee type of customer? And should we see, as we think about the ramping investments in the back half, should we continue to see that trend in terms of the type of salesperson you're hiring as well?

--------------------------------------------------------------------------------

Martin Mucci, Paychex, Inc. - President, CEO & Director [86]

--------------------------------------------------------------------------------

Yes, I think we definitely are. We're promoting some from within and from a career path standpoint, and we're always excited about that. And by the way, that market goes anywhere -- I don't want to get you the sense that, that's only to what that market is. That market goes anywhere from 20 -- frankly, 20 or 30 employees these days to 1,000. But I would say it's primarily in that 20 to 500 space, but it goes pretty broad. Yes, we're hiring people with more experience, some from competitors, some from other industries and then promoting some as well from internally, and we'll continue to invest in that. We're pretty much up to full -- up to full hires where we are now, but we're always looking for good people and I think success is helping us, from that standpoint, recruit as well. That always helps.

--------------------------------------------------------------------------------

Operator [87]

--------------------------------------------------------------------------------

Your next question comes from the line of Jeff Silber with BMO Capital Markets.

--------------------------------------------------------------------------------

Jeffrey Marc Silber, BMO Capital Markets Equity Research - MD & Senior Equity Analyst [88]

--------------------------------------------------------------------------------

I know the call has been going long. I just had a quick follow-up actually for Efrain. I know you don't give a fiscal '21 guidance. But at least in terms of tax rate, is the tax rate that we're using or you're guiding for this year, is that something we should use for next year as well?

--------------------------------------------------------------------------------

Efrain Rivera, Paychex, Inc. - Senior VP, CFO & Treasurer [89]

--------------------------------------------------------------------------------

Yes, Jeff, look, I'm going to say right now, I don't see significant things that would change it. State taxes and stock comp expense move it, but it's probably not a bad proxy right now.

--------------------------------------------------------------------------------

Operator [90]

--------------------------------------------------------------------------------

Your next question comes from the line of David Grossman with Stifel.

--------------------------------------------------------------------------------

David Michael Grossman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [91]

--------------------------------------------------------------------------------

So each of the PEOs reported some issue in the most recent quarter, and while each was different, there was typically some element of health insurance involved. So can you provide some context to -- in contrast to what you're experiencing and what may or may not be happening industry wide?

--------------------------------------------------------------------------------

Martin Mucci, Paychex, Inc. - President, CEO & Director [92]

--------------------------------------------------------------------------------

Yes. I guess I'd say, I don't think -- when we look at it, if you looked at retention in particular, and now we're through a couple of renewals, I would say it was a pretty fair -- I think there's always a combination of underwriting and tightening up where we want our performance to be from a medical loss ratio, and we're pretty conservative and careful on that and what we're -- and our underwriting standards. And so I think that had some impact on retention. But I don't think we had any necessarily abnormal impact on the rates that we got themselves. I think we got pretty fair renewals overall from the carriers, and then we have our own self-insured plan. I think we're performing pretty well there, and I don't think the carriers gave us anything that was that difficult. I think we just -- we have a little bit tighter underwriting standard that we wanted to put in place or, I guess, tighter than what -- at least what it was, and that had some impact on some clients. On the other hand, David, the nice thing about us is we can take some of them over then to the insurance agency and write them through the carriers as opposed to taking the underwrite -- or the -- some of the risk on ourselves. So I don't think -- I think in contrast, I don't think we saw anything. I don't feel like we saw really anything that abnormal from the carriers in the renewals themselves, which bodes -- to me and for us, I think bodes well for the future. There was no abnormality there that should continue or anything.

--------------------------------------------------------------------------------

David Michael Grossman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [93]

--------------------------------------------------------------------------------

Got it. And then just going over into the mid-market, and I know that has come up several times. But if you just had to isolate one thing that's changed most that may have impacted the momentum in that business, what do you think that is? And do you think you're gaining share? Or you just think you're doing a better job of retaining your clients as they migrate into that kind of mid-market category?

--------------------------------------------------------------------------------

Martin Mucci, Paychex, Inc. - President, CEO & Director [94]

--------------------------------------------------------------------------------

Yes. I think the one thing is definitely the technology investment. I mean look, we had a solid sales force and great sales leadership there and operational and service performance. And -- but I think the biggest change has been the technology investment over many years now, but it's really come to fruition the last few years, in particular, as everything has come together, the mobile app, the HR administration, the data analytics, the artificial intelligence work, everything that has come together now. We have a fully integrated solution for a mid-market that is very simple to use. And we're -- I think that has really shown in the sales performance, particularly this year, but we could start it the last half of last year and then the first half of this year, the sales performance is better and the retention as well. But I really think it's the technology on top of good sales and operations leadership and performance. And by -- and just to tell you, I think we are taking some share. But I -- you do know -- as you know, that is a growing market for all players, and we just haven't gotten as much of our fair share in the last few years, in my opinion, as we should have, and we had to get the technology really to all pull together. We kept introducing good products, but now we pulled it together. And we also now have moved to say, hey, if you want a product integration, if you want something, if you have the best HR, time and attendance that you think is better than ours, we'll build the product integration for you as well, or we have the product integration already through APIs. And so I think all of that has really helped, but I think the technology would be the #1 biggest thing.

--------------------------------------------------------------------------------

David Michael Grossman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [95]

--------------------------------------------------------------------------------

Right. And just can you help size it for us? Or just give us some context so that we can think about how impactful it can be to the overall growth rate?

--------------------------------------------------------------------------------

Efrain Rivera, Paychex, Inc. - Senior VP, CFO & Treasurer [96]

--------------------------------------------------------------------------------

What do you mean, in terms of revenue, David?

--------------------------------------------------------------------------------

David Michael Grossman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [97]

--------------------------------------------------------------------------------

Yes. Yes.

--------------------------------------------------------------------------------

Efrain Rivera, Paychex, Inc. - Senior VP, CFO & Treasurer [98]

--------------------------------------------------------------------------------

Yes. So mid-market revenue, if you look at it in terms of total payroll revenue. And we give you payroll, so I'm not giving you a number you can't figure out. It's been running about 25% or so of our overall payroll revenue. So you can figure out management solutions, you know what percentage is management solutions. You can get a sense of that bucket within management solutions. So if it accelerates, it's helpful. And I think that where it is helpful, and I think there was a discussion earlier about this. If you see continued trends, then over time, you see average client size go up, and that's positive. But also you have more opportunity to attach ancillaries when you get those clients.

--------------------------------------------------------------------------------

Operator [99]

--------------------------------------------------------------------------------

Your next question comes from the line of Mark Marcon with Baird.

--------------------------------------------------------------------------------

Mark Steven Marcon, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [100]

--------------------------------------------------------------------------------

Just a few follow-ups. First, just on the PEO side. When you talked about the carriers and what you're doing in terms of your own self-insurance on the health care cost, what rate of increase are you typically seeing as you go into next year for a like-for-like type plan?

--------------------------------------------------------------------------------

Efrain Rivera, Paychex, Inc. - Senior VP, CFO & Treasurer [101]

--------------------------------------------------------------------------------

Yes. I think, Mark, I would say, no one's giving you the exact increase. I would say it's pretty competitive with the market, in some cases, a little bit below. So part of -- following up on what Marty was saying, because we try to manage the book very conservatively, we ensure that we manage those losses tightly so that we can go out to market with rates that are competitive in the market.

--------------------------------------------------------------------------------

Mark Steven Marcon, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [102]

--------------------------------------------------------------------------------

Right. I appreciate that. And then with (inaudible) I'm not sure if you're hearing that.

--------------------------------------------------------------------------------

Efrain Rivera, Paychex, Inc. - Senior VP, CFO & Treasurer [103]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Martin Mucci, Paychex, Inc. - President, CEO & Director [104]

--------------------------------------------------------------------------------

Yes. You cut out a little bit there, Mark. Go ahead.

--------------------------------------------------------------------------------

Mark Steven Marcon, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [105]

--------------------------------------------------------------------------------

With regards to the percentage of the clients that you're -- what percentage of your PEO clients actually are taking your insurance where you're self-insured for it?

--------------------------------------------------------------------------------

Efrain Rivera, Paychex, Inc. - Senior VP, CFO & Treasurer [106]

--------------------------------------------------------------------------------

Yes. So I'll flip it around. We don't give the exact clients. But if you look at PEO revenue, PEO revenue includes at-risk revenue of 35% to 40% of that revenue, and you can get to that because we give you a breakout [front row] as with any cost. So that gives you a sense. We don't break it out by specific client.

--------------------------------------------------------------------------------

Mark Steven Marcon, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [107]

--------------------------------------------------------------------------------

Got it. And then with regards to the mid-market, you're obviously doing really well there. Can -- in terms of the new sales, is there any change, Marty, in terms of the composition of who you're getting those new clients from? Or how we should think about that with regards to -- there's still some -- a surprising number of companies out there with really old legacy systems versus some that have transitioned to newer systems. What's the composition look like in terms of the new sales that you're getting?

--------------------------------------------------------------------------------

Martin Mucci, Paychex, Inc. - President, CEO & Director [108]

--------------------------------------------------------------------------------

Yes. I think it's been a combination of taking some from competitors. And I would say I think it's probably this year, I would guess, it's run 50-50 on old legacy systems going to -- moving into a new platform, a software-as-a-service platform of ours and really moving up the technology, and then probably the other half is more something they didn't like from a competitive standpoint. So I think we're taking some from market share and then some from -- as the market expands itself, and it's probably roughly around half and half, I'd say, at least this year-to-date kind of thing. Because you know, that market, it does continue to expand and it's growing across -- it's -- the market itself is growing of those who just see the need, particularly in this tight labor market to have something that's going to help them hire and onboard with all of that, doing it paperlessly, then retaining them with integrated benefits and a mobile app and retirement plans, and so they're seeing a need that they have to go up that it's -- it definitely is more critical to them in a tight labor market to move onto a more modern system. And I think ours is appealing to a number of those prospects.

--------------------------------------------------------------------------------

Mark Steven Marcon, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [109]

--------------------------------------------------------------------------------

Okay, fully appreciate that. And then 2 longer-term questions. One would basically be, you started off the whole presentation basically by talking about some of the effectiveness that you're seeing in terms of your sales and marketing efforts coming through and sales, SG&A actually ended up declining as a percentage of revenue despite the strong sales growth. So I'm wondering if you can talk a little bit about the longer-term implications for the increased efficacy with regards to your sales efforts and what you're seeing there. That's the first question. And then the second question is basically, how we should think about the effective yield for next year through the float balance and the duration?

--------------------------------------------------------------------------------

Martin Mucci, Paychex, Inc. - President, CEO & Director [110]

--------------------------------------------------------------------------------

Okay. Let me take the first one and then Efrain will take the next one.

--------------------------------------------------------------------------------

Efrain Rivera, Paychex, Inc. - Senior VP, CFO & Treasurer [111]

--------------------------------------------------------------------------------

Yes. Yes. That's fine.

--------------------------------------------------------------------------------

Martin Mucci, Paychex, Inc. - President, CEO & Director [112]

--------------------------------------------------------------------------------

I think, Mark, the interesting thing is, it's a sales and marketing kind of combined look and you're seeing, as we've talked about, I think before, a shift more toward marketing. Many times today, most people are buying or making their decision, they're 70% or 75% of the way through the decision before they ever talk to anyone, and they're looking for much more online approach. They're being marketed to online, the way you market to them, the way you get leads the way you nurture leads and then the way you sell. And we're trialing a number of things that will make us even more efficient from that standpoint, where you're spending marketing dollars because a lot of the marketing is really the sales now. We certainly still have a lot of field reps that we count on that are building relationships and getting referrals in the field and talking to clients, but particularly the smallest clients who are starting up businesses are going online and looking to look, buy -- demo and buy -- and even buy online, and we're preparing for all of that. So I think we're looking for efficiency, but even more so, what's the best way to market and sell to a prospect or an existing client that's in business and try to be as efficient as we can. But it's really looking at how is that shifting from web to -- from live person to web, telephonic to e-commerce and positioning ourselves well for the future on that. And I think I think we have a pretty good handle on it, and we're trialing a number of things now that seem to be successful.

--------------------------------------------------------------------------------

Efrain Rivera, Paychex, Inc. - Senior VP, CFO & Treasurer [113]

--------------------------------------------------------------------------------

Great. Mark, on the yield question, I'd say that the yield, we go out this year, this meaning the fiscal year is probably the yield that we have -- we will plan for next year, given that, apparently, the Fed has decided that it wants to hold. We do have a little bit of play there in terms of float balances, which have been increasing slowly. And we do have a little bit of play with duration. So but for planning assumptions, that's what I would assume.

--------------------------------------------------------------------------------

Mark Steven Marcon, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [114]

--------------------------------------------------------------------------------

Just to be clear, the yield year on is basically the year -- is basically what we should plan on for next year, not the average for this year?

--------------------------------------------------------------------------------

Efrain Rivera, Paychex, Inc. - Senior VP, CFO & Treasurer [115]

--------------------------------------------------------------------------------

Yes. I think it's going to be slightly lower. But I'm just saying the back -- the yield we have in the back half of the year is probably -- is the yield we go into next year with. So I can't -- and we have a little bit of play with duration. You saw this year -- this quarter duration was 3.1. We can extend it further, but it'll depend a little bit on the -- or it'll depend on the shape of the yield curve, how far we want to go out.

--------------------------------------------------------------------------------

Operator [116]

--------------------------------------------------------------------------------

We have time for one final question, and that question comes from the line of Matt O'Neill with Autonomous Research.

--------------------------------------------------------------------------------

Matthew Casey O'Neill, Autonomous Research LLP - Partner of Payments and Financial Technology [117]

--------------------------------------------------------------------------------

I know it's a long call. Most of the things have been asked and answered. I was just curious, has there been any noticeable evolution in the kind of lead-gen sources, maybe moving a little bit all away from the CPA channels and more towards the online channels? And sort of as a follow-up, if that's true, is that something that drives kind of more price-sensitive customers or not really any change on that side of it?

--------------------------------------------------------------------------------

Martin Mucci, Paychex, Inc. - President, CEO & Director [118]

--------------------------------------------------------------------------------

No. I think, Matt, it definitely has moved some. I mean we still rely a lot on being out in the field and building those CPA relationships. They're good partners with us as well as current clients, but definitely, as I said, a lot of -- today, everybody is doing their research online. Even if you're giving a referral, in the old days, you'd just call us. And today, you're going online, you're searching our website. Our investments have been in the website and in being able to demo the product, whether it's -- you can demo it right on your mobile app, if you download the mobile app. And so it has been about how do you get those leads, and we put a lot of investment in that from a marketing standpoint as well as how do you then nurture those leads, if they're not ready. That's different than it used to be. That's a whole nurturing piece that we have put in place for the last few years now about how to get information to clients and make sure when they're ready, they come to us. And then we're moving to more of an -- even in e-commerce, where you can buy online, particularly with SurePayroll or other options you can buy online. That also lowers some costs, it increases marketing costs, but sales costs come down and balance a lot of that out as you're selling either online or through telephonic means, you're giving them more tools telephonically to help demo a product to a client and then sell it to them. So we're definitely seeing that change, and I think that will shift cost from marketing -- or from sales to marketing, they become all kind of one pot of cost that you look at to be the most efficient. But it really is about how do you best sell to clients, and they are definitely searching, demoing and even thinking about or buying online, and we're into that already, and we're looking -- we might -- we'll find ways to expand that as well.

Operator, so I think that's the last question, correct?

--------------------------------------------------------------------------------

Operator [119]

--------------------------------------------------------------------------------

Yes. That's correct.

--------------------------------------------------------------------------------

Martin Mucci, Paychex, Inc. - President, CEO & Director [120]

--------------------------------------------------------------------------------

At this point, we will close the call. If you're interested in replaying the webcast of this conference call, it'll be archived for approximately 30 days. Thank you for taking the time to participate in our second quarter press release conference call and for your interest in Paychex. We appreciate it. We wish you all a happy holiday season. Thank you.

--------------------------------------------------------------------------------

Operator [121]

--------------------------------------------------------------------------------

This does conclude today's conference call. You may now disconnect your lines.