Martin Mucci - President and Chief Executive Officer Efrain Rivera - Senior Vice President, Chief Financial Officer, and Treasurer

Jason Kupferberg - Jefferies James Berkley - Barclays Capital Rayna Kumar - Evercore ISI Jim Schneider - Goldman Sachs Gary Bisbee - RBC Capital Markets Bryan Keane - Deutsche Bank Kartik Mehta - Northcoast Research Tim McHugh - William Blair & Company Jeff Silber - BMO Capital Markets Glenn Greene - Oppenheimer Rick Eskelsen - Wells Fargo Securities David Ridley-Lane - Bank of America Merrill Lynch Mark Marcon - Robert W. Baird & Company, Inc. Ashwin Shirvaikar - Citigroup

Welcome, and thank you for standing by. At this time, participants are in a listen-only mode until the question-and-answer session of today’s call. [Operator Instructions] Today’s conference is being recorded. If you have any objections, you may disconnect at this point. And now I will turn the meeting over to your host Mr. Martin Mucci, President and Chief Executive Officer. Sir, you may begin.

All right. Thank you and thank you for joining us on our discussion of Paychex’s Second Quarter Fiscal 2017 Earnings Release. Joining me 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, 2016. Our Form 10-Q will be filed with the SEC within the next few days. You can access our earnings release and Form 10-Q on our Investor Relations webpage. This teleconference is being broadcast over the Internet and will be archived and available on our website for approximately one month. On today’s call, I will update you on the results of our business in the second quarter and Efrain will review our financial results in more detail and discuss our full-year guidance. After that, we’ll open it up for your questions. Our results for the second quarter reflected good progress. We continue to see positive results across our major product lines and service revenue for the second quarter grew by 7% year-over-year. We achieved a new milestone this quarter as we obtained 1 million client worksite employees, served by our Paychex HR Services. Paychex HR Services is our comprehensive outsourcing services product line and that includes our ASO or Administrative Services Organization and our PEO, our Professional Employer Organization as well. Our cloud-based HCM services, in particular, time and attendance continue to show strong growth in the quarter. Tomorrow is the one year anniversary of the acquisition of Advance Partners. Advance has been an excellent addition to the Paychex family. We’re very pleased with the leadership and the team’s contribution to our financial results and the future opportunities for growth we see in that business particularly timely as the staffing business is picking up some expanded growth today. With the success of our of HCM solutions, we have continued to invest in operations personnel as we’ve expanded our multiproduct service centers, including our time and attendance support and our ACA product compliance and service teams. Client retention remains at consistent high levels. We have also invested in our service – in our sales organization over the last year adding headcount across all sales teams and we are well-positioned going into our third quarter. We will have a better idea of overall sales performance and the impact of the fiscal year next quarter after the end of our peak sales season. We continue to make it a priority to provide robust HCM solutions that may be – the evolving needs of our client base. At the recent HR Technology Conference and Exposition in October, we showcased enhancements to Paychex Flex that addressed two of the biggest trends in the HR industry; mobile user experience and HR analytics. Attendees at the conference were able to view a demo of Paychex Flex, which included these enhancements. We also announced that we shifted to a mobile-first design of our HCM suite. This approach allows Paychex Flex users to have full functionality of all application components regardless of device or screen size. The growing trend for both HR leaders and employees is the use of a mobile device. Shifting to a mobile-first design demonstrates our commitment to putting the needs of our clients and their employees first, so that they can accomplish their HR test, where they want, when they want, and on whatever device they want. We continue to receive positive recognition of our Flex platform in November. We were honored to be recognized as a leader in the 2016 NelsonHall Payroll Outsourcing NEAT, a component of the firm’s speed-to-source initiative. NEAT stands for NelsonHall’s evaluation and assessment tool and is a vendor evaluation report tool that can be utilized by managers to evaluate outsourcing vendors. This was the first time we had participated in this initiative and we were placed in the leader quadrant for three areas; technology and user experience, analytics and reporting, and HR cloud integration. The client feedback that goes into this ranking makes a center even more important to us and reinforces our commitment to delivering the best and most robust solutions in the market today with our Paychex Flex platform. This has been a transition period in the U.S. with the presidential election and the move to the Trump administration. We have been asked a few times how we anticipate the new administration will impact the economy overall and more specifically the payroll and human capital management outsourcing industry? In this transition time, many business owners could be hesitant to make longer-term decisions. We see this as being more likely to impact the mid to large-sized businesses rather than small businesses. President-elect Trump is indicated that he intends to lower taxes and create less regulation. This would be a positive for small businesses. It would lower the cost and allow them to invest and higher more. Paychex would benefit as our clients expand and add employees and potentially see value in our HCM services. While complex regulations tend to drive companies to an outsourcing solution, we believe any change in regulation is good for Paychex. We remained informed about what is happening in the regulatory environment and are well-positioned to continue to educate our clients and assist them with their compliance needs through our technology and service support. Over the last year, the Affordable Care Act has been a tailwind for payroll outsourcing companies, including ourselves. Any rollback of Obamacare or Affordable Care Act or a reduction in compliance and administration requirements will impact the HCM outsourcing industry. Given our target market of small to medium-sized businesses, a large portion of our client base is not – has not been impacted by ACA. In November, a federal court issued a preliminary injunction to temporarily block the Department of Labor’s final overtime rule that would have become effect of December 1. This rule would expand overtime for millions of workers. As a result of this injunction, employers did not have to be in compliance with the new rules as of December 1. The ruling is temporary, but creates substantial uncertainty for businesses. The proposed rules created an enhanced awareness for the need for time and attendance solutions, particularly to those integrated within their – with the clients HCM product suite. This brought an increased demand for our products that we don’t see diminishing with the delay in the rules. We will continue to monitor the status of these regulations and ensure our clients remain informed as to how any changes may affect them. Shifting the discussion from clients to shareholders, we continued with shareholder-friendly actions. During the second quarter, we repurchased 2.9 million shares for a total of $166 million, and we will continue to maintain an industry leading dividend yield of over 3% with a quarterly dividend up $0.46 per share. In summary, we have made solid progress in growth in our financial performance during the past quarter, and I appreciate the great work of our Paychex’s employees and management team. And I will now turn the call over to Efrain to review our financial results in more detail. Efrain?

Good morning. I’d like to remind everyone that today’s conference call will contain forward-looking statements that refer to future events and as such involve risks, refer to the customary disclosures. As Marty indicated, second quarter financial results fiscal 2017 showed continued progress and growth. I’ll cover some of the key highlights for the second quarter and the six months, provide greater detail in certain areas, and warp with a review of the 2017 outlook. Total service revenue grew 7% for the second quarter to $760 million, and 8% for the six months to $1.5 billion. Interest on funds held for clients increased 2% for the second quarter and 6% for the six months to a $11 million and $23 million, respectively. These changes were primarily driven by slightly higher average interest rates earned. The growth was tempered by a slight decrease in the average investment balances by approximately 1% for both periods. This is really a timing issue that we call out in the press release. Expenses increased to 8% for both the second quarter and six months, with Advance Partners contributing approximately 1.5% to this growth for both periods. Expense growth was impacted by higher wages and related expenses due to growth in headcount in our operations area. Selling expenses have shown modest growth, reflecting strong sales performance in the year-ago quarter. Our operating margin was approximately 40.3% for the second quarter and 40.7% year-to-date comparable with the prior-year periods. We continue to maintain industry-leading margins, while investing in our operations. Our effective income tax rate was 35.2% for the second quarter and 34.1% for the six months, compared to 36% and 32.9% for the respective periods last year. As we discussed on our last quarterly call, we had several discrete items – tax items in the first quarter both years that have impacted the year-to-date effective income tax rates. In fiscal 2017, we implemented new accounting guidance related to employee stock-based compensation, which has resulted in discrete tax benefits now being recognized upon exercise or lapse of stock-based awards. The impact of this in the second quarter was immaterial, but had a larger impact in the first quarter. Last year in the first quarter of fiscal 2016, we recognized a net tax benefit on income from prior tax years related to customer-facing software we produced, because there have been ins and outs refer to the press release and you’ll see we provide a non-GAAP EBITDA comparison, I should say, non-GAAP EPS comparison with and without these items. Net income increased 7% to $202 million for the second quarter and 5% to $420 million for the six months. Diluted earnings per share increased 8% to $0.56 per share for the second quarter and 5% to $1.16 per share for the six months. On a non-GAAP basis, as I mentioned, just a second ago, adjusted net income increased 6% to $201 million for the second quarter and 7% to $405 million for the six months. Adjusted diluted earnings per share increased 8% to $0.56 per share for the second quarter and 8% to $1.12 per share for the six months. Note that these two non-GAAP measures, exclude certain discrete tax items previously discussed, refer to the tables if you have any questions about that. Payroll service revenue increased 3% for the second quarter to $441 million and 4% to $892 million for the six months. Advance Partners contributed 1% to the growth in payroll service revenue for both the quarter and year-to-date periods. We benefited from increases in client base and revenue per check, revenue per check grew as a result of price increases net of discounting. Payroll client size impacted revenue, as average client size trended modestly lower. We discussed that in the first quarter. We saw a continuation of that trend in the second quarter. While we continue to present payroll service revenue and HRS revenue, I want to emphasize one important point. With the evolving nature of our businesses to an HCM provider, we now offer more product bundles that are bundled with payroll revenue from these bundles as allocated among payroll and HRS. The payroll growth remained steady, but HRS growth reflects the sale of more services to clients in greater revenue per client. And I call out specifically that we have another strong quarter in time and attendance sales. HRS revenue increased 12% to $319 million for the second quarter, 14% to $642 million for the six months. This increase reflects continued growth across our client base and all HCM services, including our comprehensive HR outsourcing services, retirement services, time and attendance, and HR administration. Within Paychex HR Services, we continue to see strong demand, which is reflected in the double-digit year-over-year growth in the number of client worksite employees served. Insurance services benefited from continued growth in revenue from our SR services, as well as growth in the number of health and benefit applicants. Our workers comp insurance product benefited from higher average premiums and client base growth. Retirement services revenue reflected an increase in asset fee revenue earned on the value of participant funds, as well as an increase in the number of plans served. Last, Advance Partners contributed a little bit less than 2% to the growth in HRS revenue for both the second quarter and the six months. Investments in income. Turning to our portfolio, our goal is, as you know, to protect principal and optimize liquidity. On the short-term side, primary short-term vehicles remain bank demand deposit accounts and variable rate demand notes. In our longer-term portfolio, we invest primarily in high credit quality municipal bonds, some corporate bonds and U.S. government securities long-term portfolio has now as an average yield of 1.7%, and an average duration of 3.3 years. Our combined portfolios have earned an average rate of return of 1.2% for the second quarter and six months, up from 1.1% last year. Average investment balances for funds held for clients decreased by approximately 1% year-over-year. As the impact from growth in client base was offset by timing of certain remittances to taxing authorities, we expect that in the second-half of the year that will change and we’ll – we expect client base, client growth – clients funds growth, I should say, sorry, to grow about 1%. I’ll now walk you through highlights of our financial position. It remains strong with cash and total corporate investments of $725 million as of the end of the quarter. Funds held for clients as of November 30 were $3.2 billion compared to $4 billion as of May 31. Funds held for clients very widely, as you know, and they average $3.7 billion for both the quarter and the six months. Total available-for-sale investments, including corporate investments in funds held for clients reflected net unrealized losses of $16 million as of November 30, compared with a net unrealized gain of $48 million as of May 31. Recently interest rates for intermediate term investors, investments, I should say, have rallied resulting in a decrease in the market value of our portfolio. Total stockholders’ equity was $1.8 billion as of November 30, 2016, reflecting $331 million in dividends and $166 million of repurchases of Paychex common stock, a return on equity for the past 12 months was 40%. Cash flows from operations were $413 million for the first six months, a decrease of 2% from the prior year. This decrease was a result of fluctuations in working capital offset by higher net income and non-cash adjustments. Now, let me turn to guidance. We remind you that the outlook is based on our current view of economic and interest rate conditions. And what I mean by that is, we do factor in the recent Fed rate raise, but we don’t factor in any continuing raises beyond that. We’ll update as we see those. We obviously expect that there will be some, but they’re not baked into this guidance. Payroll service revenue growth is anticipated to be in the range of 3% to 4%. We anticipate payroll revenue growth in the third quarter will be below the range of full-year guidance as we discussed on last quarter’s call. We now expect that it will be approximately 2%. Remember that the third quarter is impacted by one less processing day. HRS revenue growth is anticipated to remain in the range of 12% to 14%. Total service revenue is anticipated to remain in the range of 7% to 8%. Interest on funds held for clients is anticipated to grow in the upper single digits. The impact of the recent increase in short-term rates will be modest, but we be more accretive as we enter into 2018. Operating margins are anticipated to be consistent with the guidance previously provided. The effective tax rate for the year is expected to be approximately 35%. GAAP basis net income growth is expected to be approximately 7%. We said that last quarter, adjusted net income, which is a non-GAAP measure that exclude certain discrete tax items is anticipated to grow approximately 8% consistent with the guidance that we gave in June. I turn it back to Marty.

Thank you, Efrain. We will now open the call to questions. Operator?

Yes, sir. We will now have the question-and-answer session. [Operator Instructions] The first one is from Mr. Jason Kupferberg with Jefferies. Sir, your line is open.

Thanks. Good morning, guys. happy holidays to you.

Same to you.

Thanks. I just want to start with a question on the Core Payroll segment, just trying to do the math in the back of the more precise outlook on Q3 at the 2% level. I mean, I guess, to get to the midpoint of the full-year 3% to 4% range, it seems lick you’d have to be about 4.5% growth in Q4. So just so we’ve got our models aligned properly, I mean, should we be thinking about the lower-end 3% to 4% [more effectively,] [ph] or are there some real accelerators in Q4, I know you’re not going to have the benefit of Advance anymore, but I don’t think you’re disadvantaged in terms of processing days either there?

Yes, Jason, I think to call it precisely, it’s a little bit tough, because we need to get through selling. But I think at this point, we’d anticipate we’re towards the lower-end of that range.

Okay, all right, understood. And then just wanted to check on pricing as well, that’s an area to continue to always get questions on. I know you talked about there being some lift from pricing. If it is still in that historical 2% to 4% range, I guess, that would imply that on an organic basis that volumes in core payroll were kind of flat to down, are we thinking about that right? Is 2% to 4% still the right range that you’re seeing on price?

Yes. So let me talk about that. So, yes, it is 2% to 4%. This year, it’s probably closer to the lower-end. We’ve been trending somewhere between the low and the mid part of that range. So we still are getting price. We still are getting volume. So our client base is up over last year. And we’ve said, we would be between 1% to 3%, last year we were 2%, we’re in that range. So what accounts for the difference, it is accounted for by the fact that our client – average client size is a little bit smaller, so to put this in context. If you go back 10 years, go back to 2007, our average client size is 17. But some years, it’s 17.1. Last year we ended at 16.73. And at this point, we are trending slightly down from that number. And so that the effect of that mix is basically taking payroll service revenues down. This happens from time to time. It happens more when two things are present. The first is that, we start to see a flattening in checks for payroll, which is what we’ve been seeing over the last three to four quarters. Actually this quarter, our checks for payroll went negative. So what that means is that and by the way that’s on a same-store basis, I want to clarify that. What that means is that, particularly, our clients in the under 50 space simply aren’t adding a lot of employees at this stage. Will that continue? We’ll see. It’s been bouncing around quarter-to-quarter, and if you look at our index that we publish each month, you’ll see that reflected in the numbers. But that’s part A. And then part B is that, as we sell clients that are a little bit lower than those that we lose, we have this drag effect. In most years that basically is offset by some client checks for payroll growth. This is a year where we’re not seeing that. So we’re monitoring that and saw some of it in Q1 and we’ll see if it continues into Q2 It can bounce around, I would just caution not to assume that that’s exactly what you’re going to see through the balance of the year. But we’re assuming at this point some drag in checks for payroll as we go through the year.

We’re not – just to add to that a little bit. We’re not – when you look at last year’s second quarter, there was kind of a push because of the Affordable Care Act, particularly in the mid-market clients. And to get in and buy those services and therefore it got you in the door a lot more sales, and that kind of ticked up the size of the average client, because we sold a little bit more in the mid-market. So it’s an interesting time with the election to see how much the Affordable Care Act last year versus this year had an impact. And because we sold those clients pretty much who needed it. Now, the retention has been very strong on that product even with the uncertainty. But that was higher last year. It got you in the door a lot more in the mid-market, because they were interested in not only the Affordable Care Act, but how you integrated with the payroll services. And so that may have been an impact. And then as Efrain mentioned on our small business index, we’ve seen a flattening out of hiring in the small business sector, the under 50 employees sector, and for a couple of months now, and that could be around the election or not. So it’s kind of an interesting quarter because of the election and the possible changes coming up as well.

Okay, that’s helpful. Just one last one for me. I think in the quarter, you bought back more than twice as many shares as you had bought all of last fiscal year. So wanted to get a sense of whether that’s indicative of any change in the M&A pipeline in terms of the prospects there, either in terms of size of the prospects or potential timing on the prospects?

Yes. So the short answer is no. The share repurchase itself was really simply an attempt to get back down to average share count. And if you look at it, we actually were still a little bit high compared to where we were last year. So we’ll do a little bit of – on an year-to-date basis, we’ll do a little bit more buying just to get back to flat. Now actually, Marty can talk a little bit more about the M&A pipeline, but it’s pretty robust.

Yes, still pretty active, not always finding exactly what we want, but it’s – I don’t think it’s ever been probably more active from a pipeline standpoint. It’s just whether you get to the final deal or not based on the value and what we find in diligence, but been very active on that front and it hasn’t slowed down at all.

Okay. Thanks, again, guys.

All right. Thanks, Jason.

Thank you. The next question is from James Berkley with Barclays. Your line is open.

Hi, guys. Hi, guys, thanks a lot for taking my questions here. Just want to get a better handle on how to think about new revenue growth for 2017. I know you touched on a little bit on the payroll side just now. But through the first-half of the year, you’re near the high-end of your guided ranges on payroll and HRS growth. But this quarter did see the low-end of those ranges, you’ve got Advance Partners lapping one less day in fiscal third quarter questions around the Affordable Care Act and time and attendance, given the delay with the Department of Labor. How do we think about all those moving parts in the back-half of the year, in particular, and what do you think about the ACA and time and attendance, the aspect – that aspect post-Trump versus previously?

Okay, wow, that’s a compound question. So, I’d say, let me just say broadly and then I’ll come back to ACA and other regulatory changes, Marty obviously will have some thoughts on that. But our guidance contemplates all of those issues. Obviously, we just answered a question on payroll services, revenue growth, HRS has remained unchanged. So from that standpoint, we feel comfortable with where we are for the remainder of the year and for the full-year. We don’t focus necessarily on quarters unless there’s some – something unusual in the quarter that we want to call out like Q3, which has one less day. I feel comfortable about where we are in terms of margins and expenses. So that outlook that we’re providing basically encompasses what we understand the environment to be, don’t anticipate it will change significantly. Now, with respect to ACA and with respect to other changes in regulation, it’s a little bit early to call those. The overtime rules change, at this point don’t see a lot of impact on the balance of the year. It could impact next year and then on what exactly happens with ACA, that’s a question to be answered at this point. What I would say is, if we were to see some sort of a significant movement to repeal starting sometime in late Spring, our anticipation of is that were to rollout over a, let’s say, call it a two to three-year period is that we would see about an impact of 1% on EPS per year. If it was more accelerated, it might be more, but we’re still waiting, that that by the way is more of a worse case scenario, 1% to 1.5% EPS. We think we have other options to replace that revenue. But at this point, we would frame sort of the risk if the ACA got repealed in an orderly fashion. If it got replaced and repealed immediately, that would be a different conversation, we’ll have to wait and see where we end up.

Yes, I think the expectation, at least, at this point would be, it’s going to take sometime, it’s pretty complicated, as you know, and to change it. So and we’re seeing very solid retention. Of course, clients are looking for us to file in March now for them, and I don’t think you’re going to see much movement, at least, through that filing period. And I think it’s going to be a longer thing, which as Efrain mentioned, we’re looking at depending on what happens a number of products. My guess is, clients are still going to have to do something and they’re going to need some support for that. So we feel pretty good that we will be able to adapt to that, might not make up all of the revenue, but it certainly has some opportunity there. From a time and attendance, it’s been interesting that we’ve had very strong sales of our time and attendance solutions. And we’ve introduced the new one that is Flex Essentials, that is a no clock, all web, or mobile punch, much simpler to set up, and we’ve seen an acceleration there. So I think the whole overtime rule issue even though it’s now been delayed and may end up never being enacted who knows has driven a lot of interest in time and attendance. And so that’s driven sales that I don’t think somebody is going to necessarily get rid of that product, and in fact, it may keep kind of a heightened demand now. So I think that’s how we feel about it is pretty good at this point and see what happens next.

That makes a lot of sense and thanks for the color on the ACA there. Those numbers are really helpful. Just one more quick follow-up here, more of a high-level question. Just correct me if I’m wrong. I believe about 10% of your company’s revenue is driven by the PEO business, another 10% from the ASO side. I think you got PEO growing more quickly over the last few years. Just curious if you could talk about how fast each is growing the trends that you’ve seen, whether there has been an acceleration recently versus past quarters or past years and just going into more detail on each of those and what’s driving the gap between the two growth rates?

Yes. So what we’ve said about the HR outsourcing business is that, it’s about half of HRS revenue and within that half about half is PEO and half is ASO. So that’s what we said and we update that year. our PEO has been growing more quickly than ASO, but both have been growing double-digits. I guess, that’s what we’d say. The only other thing I would add to that is that, because of the PEO, we report healthcare attachment as part of the revenues of the PEO when we get better healthcare attachment in the quarter than you have better PEO growth that really doesn’t have much of an impact on margins. In this quarter, we did not have as significant healthcare attachments we had in the quarter before, but that bounces around every single quarter. So in Q3, we’ll see where we end up.

Yes, I think we feel pretty good, obviously, reaching the new, the milestone of over a million worksite employees that we’re servicing between our service – between the ASO and PEO. We feel good. We’re very well-positioned. There’s a lot of demand for the HR support. And I think PEO, while it’s been strong in certain states and we sell it across the pretty much all states, it is starting to continue – it’s continuing to pick up more demand and we feel good about the future of it. As Efrain said, the attachment of the help can swing from kind of quarter-to-quarter or even month-to-month. But and again, I think, it’s going to be interesting to see kind of what comes out of. Now, you had a quarter, where a lot of discussion about healthcare and you may have a number of clients deciding to kind of hold, wait and see what’s going to happen, but we see good growth. We’ve been doing well in both PEO and ASO, well-positioned to have both products. So if you want co-employment, you have it. If you don’t, we have the insurance agency that’s a top agency and plenty of plans to offer. So feel good about both products right now.

Thanks a lot for your color and your time, and happy holidays.

Thanks. Same to you.

Thank you.

Thank you. The next question is from David Togut with Evercore ISI. Sir, your line is open.

Good morning. This is Rayna Kumar for David Togut. In the first quarter, you really highlighted the strength in the mid-market and that seems to have slowed down a bit in the second quarter. I guess, what’s changed there? And maybe if you can just highlight your expectations for the remainder of the year in the mid-market?

Yes, I think in the second quarter, we had a very, very strong quarter a year ago and compares were tougher. We expect that – we’re expecting a good quarter in the third quarter. And I think, Marty pointed out something that’s important. Last year, there was a drive by many mid-market companies to find integrated solutions that included an ACA compliance solution. A lot of those clients have now selected their solution and the game now is a bit more of competitive takeaway as opposed to selling them on a new solution. There obviously was some of that going on. So we go into third quarter then assuming that we’ll pick up from where we were in Q2.

Yes, certainly feel great about the product and ever expanding functionality of the product. And I think, as Efrain said, last year was kind of a heightened second quarter with the Affordable Care Act sales, and this year, it’s almost a little bit of the reverse. I think people are being a little careful to make any changes until they see what the rules come out, how it changes, and they’re probably concerned about their filing and making a change and not getting everything filed. So we saw a little bit probably unexpected a little bit slower there, and we expect though once we get past the filing date. So expect a good selling season here, but it may still continue to be a little bit slow through the third quarter until we get past the filing date. We’ll have to see kind of how that shakes out. But we feel certainly good about the product, the competitiveness and going head-to-head with any of the competitors in the market.

I guess, besides client behavior, are you seeing any change in the competitive landscape at all?

No, not really. No, there’s no real new competitors there. We haven’t seen a lot of change in their approach or product. And I think we’ve, as I mentioned, we’ve continued to add new options to our product and more self-service, more analytics that we’ve talked about HR analytics and providing more there mobile-first design, so an increased use of mobile. So we’re feeling very good, very competitive. We have not really seen any change from a competitive marketplace.

Great. Thank you. That’s very helpful, happy holidays.

Thank you. Same to you.

Same to you.

Thank you. The next question is from Jim Schneider with Goldman Sachs. Sir, your line is open.

Hi, Jim.

Good morning. Thanks. Hey. Good morning. Thanks for taking my question. As many – as I’m sure, you saw the FIB put up some small business confidence indicators for the month of November, which were essentially stronger after the election than before. I guess, it sounds like from your overall kind of qualitative client commentary that people are still cautious pending any changes in the regulation. Can you give us any kind of additional color on what you’ve been hearing from clients over the last month or month-and-a-half in terms of their optimism on overall business levels and how that kind of matches with your commentary on the rest of the business?

Yes, I think it’s exactly, I think it’s optimism, pending action. So I think it’s a lot of optimism on lower corporate tax rates could drive a lot of less expense and more to what they could invest and more employees and so forth. Affordable Care Act looks like those costs could come down for a lot of companies and not forcing them to have the product, but we’ll see. Time and attendance rules, although, it’s a little bit separate, but less regulation, I think overall it’s a very optimistic attitude from the clients, but not necessarily turning that into action yet, because they got to see it. So they’re feeling good about the fact that it looks like there’s going to be a better business environment, consumer confidence is also up and FIB was one of the biggest increases we’ve seen in over the 42-year average for one of the three times, I think, in the last to almost 10 years. So there’s a lot of optimism. But I don’t think, again, they’re turning that into action hiring and so forth, at least, yet until they see kind of what the first few months of the new administration brings. That’s what we’re kind of getting great optimism, but the small business index, at least, for November our last one would show still not a big uptick in hiring kind of at the same growth rate it was last year for, at least, small business. So very positive, but kind of waiting to see what happens.

That’s helpful. And then maybe as a follow-up, I think last quarter you cited the traction you’re seeing in the 100 to 200 plus kind of segment and the new incremental sales spend you’ve been putting against that. Can you talk about first of all whether there’s any change or in that traction whether you’re seeing continued momentum there? And whether you think the incremental sales spend you put against that is actually adequate at this point, such that, you don’t have to increase it more in the coming quarters?

Yes, I don’t think, I think we’re adequate. We’re fully staffed and feel very good about being fully staffed and out there. I think the only surprise in the quarter we’ve kind of already mentioned, which is a little bit more in activity to make a change than we saw last year at this time. And I think that would be the only difference, and I think that’s kind of more of a macro kind of issue. And so I think that would be the only change. Certainly feel good about, as I mentioned, the competitiveness. No change really in the competitive environment, and we’re fully staffed and gaining more and more experience on the newer reps that we added at the beginning of the fiscal year. So we’ll be able to talk more about it after the selling season. The only real difference from first quarter, I would say is, with the election, which really change quite rapidly, at least, the view of the election and who won, I think that just put people in a little bit more cautious period for switching anything or making buying decisions in the second quarter.

That’s fair. And just a quick clarification, if I could. In the quarter itself relative to the plan you had heading into the quarter, would you say that the DOL lack of bookings or the ACA shortfall was kind of the bigger contributor there?

Well, I don’t – I think the ACA, I think just the election, if I’m getting your question right, Jim, I think the question or the what happened was with the changes in ACA, with the President, with Trump getting in and probably a little bit more unexpected until second quarter as it got closer to the election, I think people know changes are going to happen. And so they’re a little bit less, they’re a little bit more reluctant to make a change until they see kind of what happens. They’re optimistic, but they’re not sure what’s going to happen yet. And so if that answers your question of the deal. If you’re talking about the overtime rules, I think that was very helpful from an over – from a selling of our Flex Time and Flex Essentials and our Time clocks, and I think that’s sticking. So the good thing there is, it brought a lot of attention to, you’re to be tracking time, look at the options that are out there now from a technology standpoint, punching in and out on a mobile phone, things that have not been available generally until the last year or so. And I think that’s going to stick, so that actually helped drive some sales that are recorded in our HRS services revenue. And I think that’s going to continue and it’s going to stick no matter what happens with overtime rules.

Great. Thank you.

Okay.

You’re welcome.

Thank you. The next question is from Mr. Gary Bisbee with RBC Capital Markets. Sir, your line is open.

Hey, guys, good morning.

Good morning, Gary.

There’s quite a bit of demand about, how much you’ll actually benefit in the short-term float? So I wanted to ask a two-part question to help frame that. The first one, as you think about the float, how you manage the float, is it still right, I know there’s some seasonality, but to think that roughly half of the float balance is short-term stuff, whether it’s money-markets, the variable demand rate notes et cetera, and you target about half in intermediate term bonds? And the second question, if we look at that bond portfolio, I think, you said 3.3-year duration…

Yep.

Is the stuff that’s maturing in the next 12 months, are the interest rates that you would likely reinvest that in today above the rates of the stuff that’s maturing, or is that still a negative at this point? Thank you.

Okay. Hey, good question. So, yes, you’re right. It’s – short-term is about 45%, can be sometimes 50, but we keep it between 45 and 50. So that reprices immediately or very quickly, I shouldn’t say – should say. Let me just be careful, that’s an overstatement. It doesn’t reprice immediately. It typically reprices somewhere between 45 to 60 days. So the answer to the first question portfolio composition is yes. That’s correct. And then the second is yes, also. Yes, the bonds that we would invest in going forward currently have yields that are significantly higher than the ones that are rolling off. So if I were to call it today and I’m not doing that, but if I were to call it today, and I assume no more Fed increases other than what we have gotten to this point, the portfolio would be about $8 million higher in value than it is today. I just caution anyone from taking that to the bank, because we’ll have much more granular information once we get through the next couple of quarters and see what the Fed actually does. And the reason why I say that is, we look at and we could give you a big forecast based on yield curves. I distrust that approach. I’d rather tell you what we think our portfolios will do based on what I know at the time I’m saying it, but you can do some math. And the numbers start to get pretty significant, if the Fed does what it says it’s going to do and the final qualification, I’d add to that is the steepness of the yield curve also impacts how we invest. So right now, they do nothing. I’d call it at about $8 million next year, that’s annualized, and we’ll see where we go through the remainder of the year.

And just to clarify that that’s very helpful by the way. So the $8 million, that is annualizing and getting the full benefit from the Fed funds rate increase recently and also the benefit from reinvesting bonds at what the current yield curve is, is that correct?

Yes, correct.

Okay. And then just one other question. The – and maybe this is just getting too nitpicking on my end, but the buyback was pretty significant no increase in the guidance for earnings, it feels like there’s a couple of pennies there, is that just conservatism or is there some other thing we should think about with that? Thank you.

Yes, I guess, I’d say this, Gary. There’s always pluses and minuses, so you have to look at what you think are potential upsides but potential downsides. And I think it’s realistic, I wouldn’t call it aggressive and I wouldn’t call it conservative.

Okay. And then just actually one other one. Have you done the analysis and maybe it’s just, we don’t know enough, but about what kind of risk you might face in terms of potential declines in the float portfolio balance is based on some of the personnel income tax changes that Trump and the Republican Congress have been floating? Should we think of that as a potential offset to some of this is the withholding might be less for a significant portion your customers? Thank you.

Yes. We haven’t started doing modeling at this point, because at that point the benefit, okay. So that’s coupled with a more bigger a discussion about whether corporate tax rates go down. If that happens then even if we face some drag from personnel income taxes. The corporate tax impact simply dwarfs everything else. So that that we’d look at both. So if tax reform occurs, it’s pretty obvious that we would be a pretty significant beneficiary by significant, I mean, very significant. So we’re waiting to hear like everyone else is waiting to hear. So that’s a partial answer to your question.

Yes, great, that’s helpful. Thank you. Merry Christmas. Happy Holidays.

Thanks, Gary.

Thanks, Gary.

Thank you. The next question is from Mr. Bryan Keane with Deutsche Bank. Sir, your line is open.

Hi, guys. Just wanted – a couple clarifications just on HR Services. I think the street was looking for more like 14% revenue growth. I know the guide is 12% to 14% and it came in a little bit towards the lower-end, was there just want to make sure the puts and takes there is what I’m thinking about obviously as Advance Partners acquisition is anniversarying and that contributed two points to growth. So then I’m thinking about the back-half of the year with that coming off, do we have enough in the pipe and in sales to actually increase that growth rate for the back-half?

Yes, so Bryan, our guidance obviously included Advance. We came out of the first quarter, I think, we’re at 15% growth. I think I called out attach rates on healthcare in the PEO were a little bit lower than we had projected. That can reverse very, very quickly quarter-to-quarter, so we’ll see where we are in Q3. But in terms of where we expect the year to be, we are not really far off from what we expected. So I see where people might get to 14%. I don’t think our internal plans suggest we be at 14%. And so we should be solidly in the year in the range of the guidance that we provided. And obviously, as you pointed out, the selling season will have an impact on where HRS growth ends up for the year, but we feel comfortable with the range as we’ve given.

Okay. And then in the back-half since Advance will be now in the numbers that won’t probably push that growth rate, should we think about more towards the lower-end then in that range of 12% to 14% for the back-half as a result of Advance anniversary?

I would say, yes, subject to whatever we see in terms of sales in Q – I’m sorry, in the third quarter, which is where the bulk of the selling season comes in. I would say that, although, I didn’t call out where we end up in Q4, our guidance is for the year as a whole and we feel comfortable for the year as a whole that may not be that or that may be that some quarters aren’t exactly in the range of the guidance. So if it’s significant, we’ll call it out.

Okay, helpful. And then just time and attendance, how big is that and how fast has that been growing? I know it’s been a – one of the catalyst that you guys have called out just how big is that as a percentage of revenue and maybe the growth rates you guys have been seeing there?

So last time we updated it, it’s about – it was about last year about 10%, I should say, online services, which includes HR Administration, which is also part of the equation back up a second. So it’s clear the fundamental parts of the HCM platform include an HR Administration module with time and attendance module and obviously a payroll engine module. So about 10% of HRS revenue growth – revenue is online services. We don’t break it out more than that. That’s been growing at multiples with what payroll has been growing at.

Okay. Thanks so much and happy holidays, guys.

Thanks, Bryan.

Thanks, Bryan.

Thank you. Our next question is from Mr. Kartik Mehta with Northcoast Research. Sir, your line is open.

Hey, good morning, Marty. Good morning, Efrain. Yes, Efrain, I just want to make sure I understood something you said about the float portfolio. I think you said, obviously, if the rates kin of – the Fed did nothing, it would be about $8 million. I seem to remember, I thought in the queue you said a 25 basis points would mean after-tax net income of $3.5 million to $4 million.

Yes.

And so that $8 million, is there some tax impact to that, that would be different, or did I – am I missing something that you might have said or misinterpreting?

No, no, you’re just missing some information, so which I didn’t provide in my estimate. So our disclosure is that a 25 basis point rise impacts the portfolio immediately on an annualized basis to the tune of about $3.5 million, $3.7 million, I believe it is. But that doesn’t end the conversation, because then the question you have to ask yourself is, what does it do to long-term rates? If in the end, your reinvestment for long-term rates stays the same, it’s done nothing. You’ve gotten a benefit on the short-term portion of the portfolio, but very little else. The benefit we’re getting right now and I – the reason why I caution about including any interest rate benefit in models yet is that the securities that we invest in intermediate term municipals have gone up pretty significantly since the election, so our reinvestment rate is higher than it is right now. So if all we got was a 3.5 basis point, I’m sorry, a 25 basis point increase in the Fed funds rate. You could expect that we would get roughly what we say we would get. But we’re also getting a bit of a benefit on the long-term portion of the portfolio. And what I don’t know now and I’ll have a better sense is that, the Fed keeps raising interest rates. What’s happening to the shape of that yield curve as I go out over the maturities that we have to reinvest. So right now, if everything held, I’d be about – on an annualized basis about $8 million higher. What it will end up being, I don’t know until I get to the spring and I can digest the other Fed rate increases.

Okay. That makes sense. So, I guess, Efrain, will you invest a little bit differently considering the Fed might do a couple of more rate increases, so will the philosophy change at all, or will you still continue to manage the portfolio like you have?

That is a discussion that we’re going to have as we get into the spring, because if the shape of the yield curve is steep around the long end, then maybe I have a less short-term cash, and I have more long. I haven’t made that decision and we haven’t had that discussion yet. We’ve had some preliminary conversations about how we would do that, but obviously that would be one way to get higher yield even than what I’m talking about on the portfolio, those are decisions that we need to look at when we get into the spring. Obviously, competitors leverage 100%. We’d never – we’ve chosen not to do that. But between where we are and where other people in the market are, there is room to move if we chose to do so.

And, Marty, as you’re going into the selling season, how many payroll salespeople do you have compared to last year, is it same, less or more than you’ve had last year at this time?

Yes, up 2% or 3% from a headcount perspective and fully staffed. And I think just getting those reps up to speed, but we’re up about 2% or 3%, which is fairly normal for us and it’s kind of across both small and mid-market.

And where do you stand in terms of salespeople attrition today compared to what it has been in the past?

Yes, a very consistent, as some are better than others. Actually some of the mid-market, I think, tends to be a little bit better than it has been historically even, and core payroll tend to be very consistent with or it’s been, no big uptick in turnover anything.

And just one last question, Marty, you moved over to Flex, obviously, the transition seems to be going well. Have you seen an impact on cross sales because of customers moving to Flex either more or less in terms of product sales?

Yes. Well, obviously, from a Flex standpoint, you’ve got a better integration there and we’ve built everything to integrate into that and then continue to roll things out with Flex, so we’re certainly seeing better pick up from a penetration. I wouldn’t say it’s huge, but it certainly is a bigger pick up in penetration when you’re selling the Flex platform, because everything is built around that, so and we still have a lot of room to grow there. So when you think of the HR analytics that we just rolled out kind of at HR Tech and some of the other products like just rolling out Flex Essentials, which is that kind of lower-end time and attendance solution without clocks, all of that is around Flex. So we expect to have better penetration growth because of the Flex platform and the more we roll it out to clients.

Okay. Hey, thank you very much Efrain and Marty.

Okay, thanks.

Yes, happy holidays.

Same to you.

Thank you. The next question is from Mr. Tim McHugh with William Blair. Sir, your line is open.

Thanks. Hi, guys. Just want to ask digging back on to the comment about seeing, I guess, a trend towards a smaller average client size. You’ve talked a little bit about various parts of this, but just to be clear, are you seeing, I guess, slower growth in the middle market and that’s why the average is skewing down or faster growth in small, or I guess, peel back for us why the average is trending smaller than it was in the past?

I’d say this, Tim, that right now the relative growth between small is tilting a little bit more towards small versus mid and last year, it was tending a little bit more – trending a little bit more mid than small. So I think that’s what it is. Look, I could also talk about losses and sales, but when you net it all out, that’s basically what you’re seeing. And by the way, I just want to make it clear, our average client size has been 17 for the last 10 years, it’s not a dramatic difference, but a 10 or 15 basis points there does make a difference.

Yes, not a huge change, but as Efrain said, it makes a difference. But I think the point we made earlier both Efrain and I think, last quarter, Tim, what we saw was, there was more movement in the mid-market because of Affordable Care Act and the need. That got people to change and sell more. This one has been compared to last quarter that need has kind of been satisfied by those who have it. And while we’re holding certainly the clients we have with Affordable Care Act products, we’re not seeing the interest in saying, okay, I want to change, because I have to have something in place. So we saw a little bit of a shift second quarter over second quarter and again, it’s not a huge number, but it did drop the average size a little bit.

Okay. So it’s fair. It seems like middle market because of that comp issue isn’t – probably isn’t growing as fast, is small necessarily growing faster, or is it just it’s growing at the same rate and you’re not seeing quite as much growth in middle market and feel that average is, that brings the average down?

Small is growing faster.

Faster than it was before?

It’s growing faster

Okay. Just when you say faster, sorry, just faster than middle market, or are you saying faster than in the past?

It’s growing faster than middle market. I would say, it’s pretty comparable to where we were a year or so ago.

Okay. And that’s helpful. What was the – last, can you give us – give remind us of the split between middle market and small, I guess, in that payroll part of it?

Yes, we don’t give the actual payroll dollars associated with it. It’s complicated and the reason we all do that is a lot of ancillaries are primarily mid-market clients. Our client base in the mid-market is about a little bit over 6% of our total clients. And you can assume that the from a revenue standpoint, that’s three to four times what our client base is, if that helps.

Okay. Thank you.

Okay, thanks.

Thank you. Our next question is from Mr. Jeff Silber with BMO Capital Markets. Sir, your line is open.

Thanks so much. I know it’s late, I just have a quick one. Efrain, you mentioned that if corporate tax rates go down, you think you’d be, I think you used the word significant beneficiary. Can you just remind us right now roughly what your federal tax rate is?

Yes. Our federal tax is about 33% and we obviously pay pretty close to the statutory rate. It depends on whose estimate you’re looking at. And if you’re down in 20% corporate tax rate, we are a significant beneficiary but even 5 to 10 point decrease would create significant benefits for us.

Great. That’s very helpful. Thank you so much.

You’re welcome.

Thank you. Our next question is from Mr. Glenn Greene with Oppenheimer. Your line is open.

Thank you. Good morning. Just a few clarifications on previous commentary but maybe Marty going back to the sales activity, horning in on your comment little bit more inactivity or less slower mix, your buying decisions and switching, is that how you’re contemplating the upcoming obviously key selling season, meaning the factor is that the new administration we are not going to know the new rules or and whatever they may do is not going to known really until the end of the selling season. So are you sort of preparing for a difficult sales season?

Well, I wouldn’t say it’s difficult. I just say – this was compared really to last year, so we saw more activity. So we’re – I mean, we’re expecting a pretty good selling season, but it was certainly a little bit slower in Q2 than it was last year. Even though things are known, I think it’s just – last year we had a lot of sales, we had more mid market sales in the second quarter because they had to get, they had to make some change to get the Affordable Care Act product. By this point, most of those had bought it by November when you think about last year because they had to get in and actually many of us stopped selling it after November because we had to get them taking care for the calendar year. So I wouldn’t say we are expecting a difficult sales season but they may be a little bit more inactivity than we saw last year. But I would expect most of that was in Q2 last year.

Okay. Efrain, on the buyback, I think it’s pretty clear but the uptick in the buyback the 2.9 million shares this quarter, we shouldn’t be thinking any change in your buyback mentality rest assure more just to get the share count closer to where it was a year ago is what I was hearing.

Yes. That’s right Glenn. That’s where we are in.

And then just to clarify on the ACA obviously a risk and you sort of identified what the risk could be, but what’s the order of magnitude? What percentage of revenue ACA is right now?

I think I was asked this last year so I’m going to call it direct ACA revenue is in a little bit above between 1% and 1.5% of revenue.

Okay, great. Thanks a lot.

Thank you. Our next question is from Mr. Rick Eskelsen with Wells Fargo. Sir, your line is open.

Good morning. Thank you for taking my question. Just a quick one clarify from the release and your comments, I noticed you didn’t mention anything about the operating income excluding float, have you changed how you’re thinking about operating margin and operating income here?

Not really. I think you can basically do much of the math yourselves and because float is no longer a drag. It’s probably more useful to just look at it in totality.

Thanks. And then just the next one, Marty, you did mention about regulatory changes, do you see it as a benefit for the business overall? I guess if you could just talk about the components of your business and where you saw the most, from client perspective, where they did more on the regulatory driven work? Did it drive more people to do PEO or ASO? Did it drive more bundles? Was there any split within the business on the regulatory pressure and what it drove clients to do? Thank you.

Sure. I think first, I think I would say overtime – the overtime rules they have now of course been postponed at least temporarily. That drove certainly a lot more interest from clients in time and attendance solution. So that’s been helpful to get in front of clients and offer them a great timing for us in the product suite that we have. So that drove a lot of interest and frankly still I think it geared up a lot of interest that whether the overtime rules going to affect or not I think it’s going to be a plus for us. When you start talking about overtime rules that also drags in HR, so whether it was ASO or PEO, that brought a lot of interest in HR support. So companies that would have said, hey, I’m going to continue to try to deal with the HR myself internally, now said jeez I think with all these overtime rules who is exempted, who isn’t a lot more discussion about moving people to exempt doing that based on the overtime rules brought in some HR sales as well both on the ASO and PEO platform. And then I think a little bit probably of a drag might have been the fact that okay, now the Affordable Care Act as we’ve said is up in the air, but what’s going to happen? Maybe I don’t rush to buy as much from an insurance or a PEO side do I need it or not. So I think those were the major changes. I think right now what we expect is less regulation based on the platforms of the Trump administration but I think there still going to be an enough change that those things will still help us. And in fact just the level of change makes people worry about can they keep up with everything. If the tax rates change, if the rules change and maybe when to file, if overtime is in or out, that all drives people to say, okay, I can’t keep up with that, I’m going to turn it over to an outsourcer like Paychex who has over 200 people who just track compliance and realize what has to happen and so forth. So I think those have been the pluses and minuses.

Thank you very much.

Okay.

You’re welcome.

Thank you. Our next question is from Mr. David Ridley-Lane with Bank of America Merrill Lynch. Sir, your line is open. David Ridley-Lane: Good morning. In the discussion around average client size, I didn’t hear you mention should payroll, is that a piece that’s also having a potential drag on the average client size?

So payroll is part of the equation. It’s been part of the equation in the last five years. They continue to do well. So that’s part of the mix of what we sell. So we sell through payroll, we sell obviously through our Paychex’s outsource service and we also sell midmarket, so that’s part of the mix. David Ridley-Lane: Understood. And then if you’ve – it sounds like you’ve fully staffed up on sales headcount. I assume you preset an operation, should we be expecting a bit stronger margin expansion in the second half of this fiscal year?

No because the first part of the statement David is correct. So we are fully staffed and operations expenses year-over-year were up pretty significantly in the quarter, we called out some reasons for that, that compare gets a little bit easier as we go through the remainder of the year. But remember that expenses in Q3 and in Q4 but Q3 particularly increased because of the volume of operations activity that we have and also the volume of sales activity that we have. So no in the back half of the year, you see our financials the margin actually goes down and that’s typical of our pattern. David Ridley-Lane: I guess I was thinking more of an margins on a year-over-year basis?

On a year-over-year basis. David Ridley-Lane: Yes, sorry.

We feel comfortable with the guidance and obviously we’re running actually little bit ahead of it in the first half but comfortable where we are in terms of margins at this point. David Ridley-Lane: Understood. Thank you very much.

Thanks.

Thank you. Our next question is from Mr. Mark Marcon with R.W. Baird. Sir, your line is open.

Happy holidays, Efrain and Marty.

Thanks, Mark.

Thanks, Mark. Same to you.

Couple of quick questions. First one, with regards to the general environment that you’re seeing in the small business arena, what do you see in terms of new business start-ups in terms of trickling up from the field source of new clients? And then what are you seeing in terms of bankruptcies and how that seems to be trending?

On new business start-ups, I think they’ve reached back to that level and that they were pre-recession. We’ve seen that now for probably a year and I think they’ve held everything that we’ve seen would say, they’re not growing tremendously more than that but they’re right in that place where they were. Bankruptcies generally pretty consistent where they have been, maybe up a little at least what we’ve seen. What we see is from our losses to bankruptcies and out of business, and that picked up slightly but again our overall retention is very consistent with where it’s been, at pretty record high levels pretty consistent in that range. So no big change there but a little bit tick up in the bankruptcies, which is interesting. It doesn’t seem like that should happen but we’ve seen a few more losses because of that, nothing that would change our overall number.

Okay. And then with regards to you had great improvement with regards to Flex as it relates to the smaller end of the market, from a technology perspective, can you lay out any additional improvements that we should expect out of the 50 to 1,000 range in terms of what you are offering there?

Okay. I think you will continue to see that level of integration and you’ll see a big continued push on few things. One is the analytics piece that we just talked about at HR Tech much more on the analytics both in the way we report the data and in the flexibility the client has. The other will be continue to be a mobile first design and we are seeing a good uptick in mobile usage, as I’ve mentioned before not only the client but from the employee standpoint. So we are spending a lot of time adjusting our language and our display much more now – pretty much over 99% of the display is HTML5 so it’s a much cleaner and easier use for the client, much more flexible for the client and the employees on mobile use but we’ve stuck our long ways to go on mobile adoption so getting the client and their employees to download the app and use it. It’s growing fast but we still got a long way to go and I think that’s going to be big part of assisting in the value of our products and services. A full suite is there and we are constantly adding to it like the new Flex Time Essentials and you’ll see a lot more paperless. So everything pretty much can be paperless today right even PEO on boarding now is all paperless function. So I think you will continue to see us add to the functionality and even in time and attendance we are adding new modules all the time. So a budgeting module we just added where you will be able to track your time to your budget and so forth. So you’re going to continue to see not only the products expand but the modules within each distinct product.

That’s great. And I mean is there going to be a step function Marty in terms of by the end of calendar 2017 we should see, we did have step functions on the smaller side that were some real benchmarks that we ended up fitting. Do we see something similar to that coming up?

You mean a benchmark from a penetration standpoint or?

Right.

Yes, I think so. Although it’s much more gradual now like – the number of the clients are on Flex. I think we certainly have internal goals as to where we want that penetration to be including mobile adoption. So you will see more marketing push mobile adoption. You’ll see more direct – I think trying to get the employees of the clients and more marketing from that standpoint. So we don’t really disclose it but we certainly internally have our steps that we want to get to our different goals by year for penetration of those products. And I think right now we are on track I think even a little ahead on time and attendance because of the overtime rules.

Great. And then on the PEO, you basically mentioned that that’s going a little bit faster than ASO and it sounds like the momentum continue to be very good and at that same time we have a bit of a pause with regards to the regulatory uncertainty because of the administration change. But it didn’t sound like your commentary would suggest that you would expect any sort of slow down on the just the core PEO, did I interpret that correctly?

I think so. Yes, we’ve seen that pretty consistent growth from the PEO standpoint and I think we feel very good about the career plans we’re offering now and the work with the careers. And so, yes, I don’t think that will necessarily slow down. We’ve just seen that inactivity, a little bit of slowness in making a change in some clients who already have it but I think you’ll see and even with more certification and things that are going on in that industry I think you could see a pick up there and there is no real change in competition. We haven’t seen any real change from any of the competitors from the PEO standpoint. So if you have good plans, great HR service and support and good career plans, insurance plans, we should continue to see good double digit growth there.

Great. And then with regards to your sales people and particularly some of your eliminate who may have left, are you seeing some come back?

Yes, I guess some. I wouldn’t say any major thing. We certainly have seen where people might jump to a competitor. We’ve seen a few of those come back. I wouldn’t say anything in large number but really with the attrition as I mentioned earlier, the turnover has been pretty consistent so we haven’t seen any uptick in turnover and I think – there isn’t many major exodus for anybody to come back. Yes, some come back but not too many.

Okay, great. Thanks a lot. Happy holidays.

Thanks, Mark. Same to you.

Hey, could I ask one more, Marty? I forgot.

Sure.

Just on the tax filing float, to what percentage of the tax filing float is actually due to the tax withholdings for federal and state income taxes relative to things like SUTA and things of that nature?

Well, Mark, that’s a good question. It’s primarily federal and state, SUTA does have an impact, but the bigger impact is federal and state.

Okay, great. Thank you very much.

Okay, thanks.

Thank you. Our last question is from Mr. Ashwin Shirvaikar with Citi. Sir, your line is open.

Thank you. Hi, Mark and Efrain, happy holidays from me as well.

Thank you.

Considering I’m standing between you guys and the holiday party, let me hurry up with the questions. So M&A pipeline, you mentioned healthy M&A pipeline, is it possible to potentially qualify that? Is it going to be more what I’d consider distribution, things like advance partners, staffing, outsourcing or more product?

I would say little bit of both, but probably less product these days and more expansion of what we have. So certainly payroll PEO, other off suites of what – we like the Advance Partners, obviously that’s been very good acquisition for us, good team there and there is some opportunities there as well in that industry. And so I would say across the board probably a little bit less product, but there is some product things we still want to do but we’ve pretty much build those – the majority of those tuck in type opportunities, mostly what we are looking for now and different geographies obviously as well. We are always looking particularly in Western Europe for opportunities as well and so I’d say it’s a little bit across the board.

Got it. And then if taxes go down as they’re expected to, would you expect to look for investment alternative other than you do a lot of treasury in muni, so the muni part…

Right, Ashwin. Good point. Yes, so open the universe up to other class of assets that we wouldn’t think about as much today.

Any initial thoughts on how you’re thinking about that?

Yes, obviously you look at taxables a lot more than we do today. So we begun to have some of those conversations without getting too presumptuous about what’s going to happen with respect to taxes?

Okay, got it. And some helpful clients have typically grown in the mid 20-ish type of range sequentially into the Feb quarter with bonuses and so on. Would you expect that to be fairly consistent this year?

I think the pattern should be fairly consistent with what we’ve seen in prior years.

Okay. Last quick question, the DOL rule timing, what was the specific assumption you are already making in the outlook for this or whether it’s not in the outlook so it doesn’t matter?

There is no real specific assumption there. While it’s been significant sales and time and attendance, it is enough to move the needle that much or it doesn’t change our guidance or anything, we wouldn’t. If that never went into effect, we wouldn’t change guidance or adjust guidance or anything.

Understood. That’s all from me. Happy holidays.

Thank you, Ashwin. Take care.

And we don’t have any more questions on queue, sir. Speakers, you may proceed.

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

And that conclude today’s call. Thank you all for your participation. You may now disconnect.