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

Jason Kupferberg - Bank of America Merrill Lynch Ashwin Shirvaikar - Citigroup Danyal Hussain - Morgan Stanley Jim Schneider - Goldman Sachs Gary Bisbee - RBC Capital Markets Rick Eskelsen - Wells Fargo Securities Bryan Keane - Deutsche Bank David Grossman - Stifel, Nicolaus & Co., Inc. Tien-tsin Huang - JP Morgan Chase & Co. David Togut - Evercore ISI Mark Marcon - Robert W. Baird & Co. Lisa Ellis - Bernstein Stephen Sheldon - William Blair & Company LLC

Welcome and thank you for standing by. At this time, all participants will be in a listen-only mode until the question-and-answer session of today’s conference. [Operator Instructions]. This call is being recorded. If you have any objections, you may disconnect at this point. May I introduce your speaker for today, President, Martin Mucci, President and Chief Executive Officer. Please go ahead.

Thank you, Anna, and thank you for joining us for our discussion of the Paychex First Quarter Fiscal 2018 Earnings Release. Joining me today is Efrain Rivera, our Chief Financial Officer. This morning, before the market opened, we released our financial results for the first quarter ended August 31, 2017. Our Form 10-Q will be filed with the SEC within the next few days, and you can access our earnings release and the 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 about a month. On today’s call, I will review the business highlights for the first quarter and Efrain will review our first quarter financial results in more detail and discuss our full-year guidance. Then we will open it up for your questions. We started fiscal 2018 with solid growth across our major HCM, human capital management product line, excuse me, in particular, our HR outsourcing services and our time and attendance solutions have continued to perform well. Total service revenue grew by 4%. We anticipated some tempering of the growth rate as a result of challenging comparisons with the prior year first quarter, which benefited from tailwinds related to the Affordable Care Act sales. Providing excellent service to our clients remains a top priority. And we announced during last quarter’s call that we completed the realignment of our service organization, our investment in this service realignment was an important strategy to help support our long-term growth, as well as an example of our priority and commitment to providing the best service possible to our clients. With the realignment completed, we are beginning to see some benefits in the first quarter compared to the latter half of 2017. Excuse me, I’m also very proud of the work our employees did for the – to provide critical service to our clients impacted by Hurricanes Harvey and Irma that had major impacts on businesses in Houston and throughout Florida. The contingency planning and execution was excellent and an important reason why our clients count on Paychex and the strength of our people in numerous locations to support them in difficult times. We do expect that the hurricanes will have an impact on our sales and revenue in the next quarter, this current quarter that we’re in now. As businesses may be forced out of business, at least, temporarily, however, we also expect that over the next few quarters this may be somewhat offset with an increase in small businesses needed to help these areas recover. On August 21, we announced our acquisition of HR Outsourcing or HROI, and all of its operating subsidiaries, HROI is a national PEO that serves small and mid-sized businesses in more than 35 states. We are excited about this acquisition, as it further strengthens our presence in our existing experience and successful sales and service teams in the PEO industry. This is particularly relevant during a time of regulatory change, and together with HROI, we share a strong commitment to the PEO business. This expansion of our presence in the PEO industry along with our certification by the IRS under the Small Business Efficiency Act positions us to accelerate growth of our comprehensive HR solutions. Small business job growth has continued to moderate during the first quarter after the sharp uptick we experienced last year – the end of last year, following the conclusion of the presidential election. While small business job growth has slowed or moderated, hourly earnings continue to gain momentum. The combination of the steadily rising wages and consistent small business job growth are indicators of the healthy small business sector. We also announced plans in this quarter for a new building – multi-building Paychex campus based in Rochester, New York. This involves the purchase of five buildings in the renovation of over 300,000 square feet of existing space in Rochester for a total estimated cost of around $60 million. This campus will result in the consolidation of currently leased space in the Rochester area. Also, during the first quarter, we announced a partnership with the Latino Tax Professionals Association or LTPA. As a result of the affinity agreement, the LTPA has designated Paychex the preferred provider of payroll and HR services for the organization and its members. We’re proud to be a partner with the LTPA furthering our ongoing commitment to the Hispanic-owned business community with Spanish language tools and resources. We recently announced the release of Same Day ACH Debits functionality for clients using direct deposit. With Same Day ACH, employers now have the flexibility to reverse a payroll and have money debited from employee bank accounts on the same day, avoiding the costly time lag associated with payroll reversals. This continues to enhance our position as a leader in this payments industry. Next week at HR Tech, we will be introducing our new product bundles that are in the market. These bundles include new simplified pricing and options for paperless onboarding for our clients, employees and do-it-yourself online handbook. We will also be offering a retina scan time clock, and we are excited about these new offerings, as they respond to the evolving needs of our clients. We continued our history of dividend increases in this quarter and strong shareholder commitment with an announcement of a 9% increase in our quarterly dividend during the same this quarter – first quarter, and our quarterly dividend now stands at $0.50 a share. In addition, we repurchased 1.6 million shares of common stock or a total of $94.1 million to offset dilution. Lastly, let me take a few minutes now and highlight some of the notable recognition we received this past quarter. For the seventh consecutive year, we were again ranked as the largest record keeper for – by a total number of defined contribution plans by PLANSPONSOR magazine. In addition, this year, we also earned the ranking of largest 401(k) record keeper by total plans with less than $10 million in assets, as well as one of the leading providers of – by number of plans added in 2016. Our Paychex insurance agency team ranked number 21 on Business Insurance magazine’s 2017 list of the top 100 brokers of the U.S. business. This is our seventh appearance on the list, up two spots from number 23 on the 2016 list, once again we rank as one of the fastest-growing insurance agencies in the nation. We ranked number 5 on Selling Power magazine’s 2017 list of the 50 best companies to sell for. This is the fifth consecutive year Paychex has appeared on the list moving up from number seven spot last year. We’re proud to create and support a culture that is entrepreneurial, results oriented and employee and client-focused and attract some of the best sales teams in the country. With that brief overview of our first quarter, I’ll now turn the call over to Efrain to review our financial results in more detail. Efrain?

Thanks, Marty. 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 some risks, refer to the customary disclosures. I’ll start by providing some of the key highlights for the quarter. I’ll provide greater detail in certain areas and wrap up the review of our fiscal year 2018 outlook. Total service revenues grew 4% in the first quarter to $803 million. Interest on funds held for clients increased 14% for the first quarter to $14 million as a result of higher interest rates earned. Expenses increased a modest 2% for the first quarter, compensation-related costs were relatively flat. While investment in technology and growth in the PEO contributed to the slight uptick in expenses. Our effective income tax was 34.4% for the first quarter compared to 33% in the prior year’s first quarter. Both periods reflected net discrete tax benefits related to employee stock-based compensation payments. The discrete tax benefit for the first quarter was $5 million, or approximately $0.01 per share. For the prior year quarter, it was $13 million, or approximately $0.04 per share. Last year’s benefit was higher due to greater stock option exercise activity driven by stock price. Talk about payroll revenue, increased 2% for the first quarter to $458 million. The growth was driven by an increase in revenue per check due to price increases, net of discounting. On the HRS side, revenue increased 7% to $345 million for the first quarter. This reflects strong growth in client bases across all major HCM services, including: our comprehensive HR outsourcing services, retirement services, time and attendance, and insurance services. Within HR services, we continue to see strong demand, which along with the acquisition of HROI is reflected in continued solid growth in the number of client worksite employee served. We had a really good quarter from a WSE growth in the – particularly, in the PEO. Insurance services benefited from continued growth in the number of health and benefit applicants and higher average premiums within our workers’ compensation insurance offering. Retirement services revenue also benefited from an increase in asset fee revenue earned on the value of participant funds. As indicated in the June call, we anticipated the growth in HRS revenue would be below the low-end of our annual guidance range for the first quarter. The two biggest factors driving this were the first quarter, as Marty mentioned before, benefited from the tailwinds of ACA, both in terms of our ACA module, as well as overall demand for HR outsourcing solution. Increased regulations spurs more outsourcing of HR services. This growth was anticipated to abate as the year progresses. The first quarter last year benefited from the inclusion of advanced partners, which was not acquired until December of 2015, now that the quarter is a comparable and both included Advance, we’re not seeing that level of uplift, although Advance continues to do well. Advance, I’ll remind you contributed approximately 2% to HRS growth in the prior year. Look at investments and income. Our goal, as you know, is to protect principal and optimize liquidity. On the short-term side, primary short-term investment vehicles, our bank demand deposit accounts in variable rate demand notes. In our longer-term portfolio, we invest primarily in high credit quality municipal bonds, corporate bonds in U.S. government agency securities. The long-term portfolio has an average yield currently of 1.8% and an average duration of 3.3 years. Combined portfolios have earned an average rate of return of 1.4% for the first quarter, which is up from 1.2% last year. The average balances for interest on funds held for clients were relatively flat for this first quarter. And now I’ll walk you through the highlights of our financial position. It remains strong with cash and total corporate investments of $851 million, as of August 31, 2017. Funds held for clients as of August 31 were $5 billion compared to $4.3 billion as of May 31, 2017. Funds held for clients, as you know very widely on a day-to-day basis and averaged $3.8 billion for the quarter. Our total available for sale investments, including corporate investments and funds held for clients reflected net unrealized gains of $39 million as of August 31, compared with net unrealized gains of $32 million as of May 31, 2017. Total stockholders’ equity was 1.9 billion as of the end of August, reflecting a $179 million in dividends paid and $94 million of shares repurchased during the first quarter return our return on equity for the past 12 months was a stellar 42% Our cash flows from operations were $344 million for the first quarter, an increase of 17% over the prior year period, if you remember, fourth quarter called out some timing that we thought would reverse in the quarter. It did indeed do that in the first quarter, and this change was primarily a result of higher net income along with positive cash flow impacts from timing-related income taxes and PEO payroll, accruals and unbilled receivables, which can fluctuate based on the timing of period and compared to payroll check dates. We’re updating our guidance to reflect the recent acquisition of HROI, as well as the discrete tax benefit recognized in the first quarter. We would recommend that our – we remind you, sorry, that our outlook is based on the current view of economic and interest rate conditions continuing with no significant changes, the guidance for the full-year of fiscal 2018 that we just updated is as follows: HRS revenue growth is anticipated now to increase in the range of 12% to 14% for the full-year, raised to incorporate anticipated PEO revenues from HROI. To add color on gating, we were below the low-end of the range for HRS growth in the first quarter at 7% and we anticipate that HRS growth will be in the range of 13% to 16% for the second quarter and should help adjust your models. Total revenue, as you see in our announcement, is expected now to grow 6% this total company revenue. Our operating margin is anticipated to be in the range of 39% to 40%, said approximately 40% for the first time, modifying that very slightly. Our effective tax rate is anticipated to be in the range of 35% to 35.5%, again, a modest adjustment there and the remainder of the guidance remains unchanged. However, I will reiterate a few items for you. Payroll service revenue is anticipated to be in the range of 1% to 2%. While we expect full-year payroll revenue growth to remain in this range, we believe, as Marty mentioned, the impacts of Hurricane Harvey and Irma are anticipated to result in growth for the second quarter that will be at the low-end of this range, so modifying that slightly. Interest on funds held for clients is anticipated to grow in the mid to upper teens, reflecting the benefit of recent increases in short-term rates. We haven’t assumed anything yet with respect to a potential Fed rate rise in December. When that occurs, we will – if it occurs, we will update guidance. Investment income net expected to be in the range of $9 million to $11 million, and adjusted net income, non-GAAP expected to increase approximately 7%. Adjusted net income excludes the impact of the discrete tax benefit recognized in fiscal 2017 and the first quarter of fiscal 2018 relating to employee stock-based compensation payment. We currently have not planned any additional discrete tax benefit from employees stock-based comp payments for the remainder of the year due to the level of uncertainty involved. Please refer to the non-GAAP financial measures discussion in our press release and in our investor presentation for a reconciliation of this non-GAAP measure to GAAP basis net income for the first quarter of fiscal 2018, as well as further discussion regarding our use of this measure. GAAP basis net income is anticipated to increase approximately 5%. Finally, adjusted diluted earnings per share, non-GAAP, again is anticipated to increase in the range of 7% to 8%. Again, this measure also excludes the impact of the discrete tax benefits recognized in both years. I’ll turn it back to Marty.

Thanks, Efrain. We will now open the call to questions. Anna, please?

Thank you. We will now begin the question-and-answer session of today’s conference. [Operator Instructions] Our first question comes from Jason Kupferberg of Bank of Merrill Lynch America. Your line is now open.

Great. Thank you. Hey, guys, how are you?

Good Jason.

Good, good. I just wanted to start by asking about what you saw from a new sales and client retention perspective in Q1? Obviously, last year, you had the tough comp on new sales and you did see some of the headwinds on retention near the back-half of the fiscal year when you made some adjustments to the client service model. So through the first quarter of 2018, at least, directionally, can you tell us what you saw from those metrics, as well as how you see them evolving during the balance of fiscal 2018?

Yes, I think, from a retention standpoint, I think, what we feel, I mentioned a little bit in my comments. But I feel like after having got through the service kind of reorganization and settled back out and now the tenure of the payroll specialist in those different locations is increasing. We feel like we’ve seen that – we see – are seeing an improvement in the retention numbers. It’s early in the year, but in the first quarter, it seems like the mix is better and particularly larger clients, we’re seeing an improvement from the last-half of last year. From the sales perspective, I think, kind of a continuation of where we were in the second-half of last year. We feel very good about how we’re positioned for the rest of the year and particularly for selling season. We’re rolling out at HR Tech next week some new product bundles. We’re simplifying the pricing in many of the bundles. We’re adding some things that we feel will be very helpful in the kind of mid-bundle, bundles which is a paperless onboarding offering, so that clients can send an e-mail to a brand new employees, and they can complete everything paperlessly and then send it electronically to update the payroll system, and also an online do-it-yourself handbook. We’ve always had the full handbook service, where our folks are involved in a personal basis talking to the client. And we heard from more clients that many of them would just like a simple handbook that they could do it themselves online, and that’s also being introduced actually has been introduced right now, but it will be talked about at HR Tech. So I feel pretty well-positioned. I think, the competitive environment is about the same. It hasn’t gotten a lot more difficult, but it hasn’t gotten any easier, and we’re kind of plugging along and looking forward to selling season.

So do you still expect that for full-year fiscal 2018 new sales growth will turn positive. I know you were down modestly year-over-year in 2017, but do you still expect that to turn positive in fiscal 2018?

Yes, sure. We definitely do. We feel like we’ve got the right products. We’ve changed to – I think we’d talked about this that we’ve talked more now upfront to clients about the – it’s our, what we would call, go-to-market strategy. So we’re talking more about our full HR value and selling more products upfront. So that seems to be taking up pretty well, particularly in certain areas of the country. And we’ve shifted some of the smaller sales to an inside telesales team, because clients were reacting to web leads. We’ve increased our web. We do see more leads coming in. And we’re trying to -– we’re – we got to get that tenure built up of the new telesales team here from the first quarter. But we feel good that that’s going to close more sales on the under five inside, because they’re reacting to the client even faster without visiting them.

Okay. And just last quick one for me. I saw that the buybacks resume this quarter, which is good to see. Any read through from that as far as near-term potential on acquisitions?

You mean, are they linked.

Well, is there any diminished probability of near-term acquisition, just given the resumption of buyback activity or yes?

No, Jason, I wouldn’t. We – I’d mentioned, I think fourth quarter that we’d buyback shares with a modest bias downward. If you look at our share count, that’s exactly what happened.

Yes, perfect. Okay, thanks for the comments, guys.

You’re welcome, Jason.

Thank you. Our next question comes from Ashwin Shirvaikar of Citi. Your line is now open.

Thank you.

Hi, Ashwin.

Hey, guys, how are you doing? I guess, my first question is, just a clarification, is the entire change in the outlook explained by the acquisition and the tax rate change?

Yes, I would say that predominantly is the reason for the change, so updating it for the acquisition. And then the way the stock comp expense works is that – has an impact on tax rate. So at this point, that’s what’s driving it.

Right, right, okay. And how big is PEO now overall after the HROI acquisition?

We don’t separately – we don’t break it out yet and we’ll have to get through the end of the year, I can update it. It’s – I think, the last thing we said was that, ASO and PEO combined when we updated, it was about half of HRS that’s as far as we went. We’ll update it as we get to the end of the year.

Okay. And then I wanted to kind of get to sort of the impact of the hurricanes. Could you kind of break that down a little bit with regards to payroll client growth, PEO impact, particularly in Florida, because I believe you do Florida a little differently than the other states. Could you kind of go through that?

Go ahead.

Efrain, can get more into the numbers. I think, it’s early actually right now to really know, but we’re trying to track really all of – almost all of Florida was impacted and then that Houston area. And so what we’re trying to determine is, are they just kind of out for a week? Are they out for three weeks? Are they out permanently? And then, as I said, we also see that there’ll be some bounce back and, because I think, there’ll also more contractors and so forth coming into town to fix roofs, landscaping and some of the water issues, so the damage. So I don’t think we have it quantified at this point, but we will really get a better sense kind of probably in the next few weeks as to whether these clients are out permanently or not.

And if you could comment on the difference with regards to PEO in Florida, because that’s a different risk profile, right?

Yes, I mean, it’s – they tend to be, excuse me, a little bit larger clients. So I’m not sure that they’ll be out of businesses as much and the risk. I don’t know if we’ll see, how much we’ll see, because most of the damage – much of the damage, at least, Florida was a lot of landscape damage, not as much structural damage from what we’ve seen and clients are out, because they were out because of electricity or and some are water damage. So I don’t – we won’t see a big difference with the PEO, and I don’t think there will be a big insurance impact from a health perspective, or maybe from a business property, but not necessarily from a health perspective than what we could say.

Yes, the only thing I’d add to that Ashwin is, of course, we’d quantified it, which is why we expressed some caution on payroll service revenue. PEO benefits to some extent from the fact that we also have an acquisition there. So we’ve got a little bit more flexibility in terms of calling out at that range. But my caution is informed by the fact that I’ve beenthrough this once before with Sandy, and we thought that bounce back would be very quick. We saw some impacts at the end of this first quarter from the hurricane. We saw some going into the beginning of the quarter two. And so the challenge is going to be, does that persist? Does it bounce back quickly? And my experience from Sandy is that, whatever you think is going to happen, it probably is going to happen a little more slowly. So that that’s the thought process we have.

Got it. No, that’s fair. No, that’s good to understand. Thank you, guys.

Okay.

Thank you.

Thank you. Our next question comes from Danyal Hussain of Morgan Stanley. Your line is now open.

Good morning. Thanks for taking the question.

Hey, Danyal. How are you doing?

Hi, Efrain. Good. Just a couple of clarifying questions on the acquisition?

Okay.

So could you tell us – I didn’t see it, but can you tell us when it closed? And then it looks like, it’s somewhere in the vicinity of $65 million to $70 million in annualized revenue, is that right? And the way you had tweaked your outlook suggests maybe it’s mid somewhere in the teens from a margin perspective and I’m guessing a lot of that is – go ahead?

Yes. Those are all good guesstimates there, Danyal. So we closed it in mid-August, so it really had essentially no impact very, very modest impact this quarter one. The revenue is between 4% and 5% of the total HRS revenues, so that’s what our expectation is for the balance of the year. And then with respect to margins, it’s very modestly dilutive in the year. So, operating margins now are not what we expect they will be in a year or so from now, so and that’s our history of acquisitions.

Got it. And is there anything you could tell us about the purchase price? The [Multiple Speakers]

Yes, hey, we disclose it. I’ll tell you two things. One is, it’s going to be in the Q, so we’ll have a Q out in a couple of days. I think, refer to page six, a compensation – the consideration structure was a little bit different than some of the other deals we do, it was about 60% cash, 40% stock and there were some performance gates in there. So you won’t be able to get the complete amount that or how it’s structured, but that will give you a good idea of what we paid for it.

Okay. And maybe just a couple more questions on PEO more broadly. Is there – do you see a lot of opportunity for additional deals in this space? And how are valuations looking? And then separately, Efrain, you called out the WSE growth looking healthy in the quarter. Is there anything specific that you can think of that drove it, or anything maybe unique about where those clients were coming from? Thanks.

Danyal, I’ll start, it’s Marty. I think, yes, we still see a lot of opportunity. There’s a number, obviously, a large number of PEOs around the country, and we do think there’s some opportunity there. We were very careful about who we select and who we get involved with, given the risk, obviously? I think we’ve done very well with our own risk. And we certainly don’t want to mess that up, so we’re very careful about who we get involved with. We’re excited about the HROI team, because they add to the great experience that we already have in our PEO and both kind of committed to that full PEO HR outsourcing. So we think there is still opportunity there. We also – it is probably the fastest growing product line we have is HR outsourcing in total, that we service over a million worksite employees. And the growth there and worksite employees, I think, has been a combination of the businesses that we’ve selected have been good solid clients that are adding. If you look at our small business jobs index that just came out today as well, growth is moderated back to our base year, but that’s still a steady growth in jobs. And now you’re also seeing wage increases, at least, in small business under 50 approaching the 3% kind of across the board. So that’s a pretty healthy environment that even you’ve got the moderate job growth of the clients and you’ve got wages going up as well all good for us. And right now, the larger you get from a PEO standpoint sometimes the better relationships you have with the carriers and better opportunity there too.

Got it. Thank you very much.

Okay. You’re welcome.

Thank you. Our next question comes from Jim Schneider of Goldman Sachs. Your line is now open.

Good morning. Thanks for taking my question. I was wondering if you can maybe talk a little bit about the thing we’ve been talking about for a year now, which is the ACA. And whether you feel like clients in the mid-market are finally getting unstuck in terms of new bookings at this point. And what do you just hearing? Go-forward, do you feel like that mid-market demand environment is finally starting to kind of fully normalize? And related to that, is there any kind of hangover impact from the DOL rules?

I think, on the Affordable Care Act, what we’re seeing frankly is clients kind of holding in place. And so, we’re still continuing to sell a bit of the product, but we got well penetrated into the base with the product. And we’re not seeing many clients take the product out, they’re not dropping the product. I think, there is just such confusion as to what’s going to end up and many of the proposals still have kept some of the reporting requirements. So even if things change, the reporting requirements may still be in place, even though the mandatory – some of the mandatory rules might not be in place. So I think, there’s just so much confusion right now that what we’re seeing is clients basically holding on to the product and getting a benefit in a value out of it and being sure that they’re protected based on the amount of reporting that is required at the end of the year. So that’s kind of what we’re seeing there. On the – I think, you mentioned – where you’re mentioning the overtime rules as well?

Yes.

I think, that really is also – it’s been a good opportunity for us. I think, a lot of clients have because of that and now being, of course, delayed and probably not going into effect, but clients still have found the need for time and attendance. Time and attendance has grown very well for us. And to the degree that now, I may have mentioned this earlier, we’re introducing – in the next few months, we’re introducing a retina scan clock. What we found was a number of small manufacturing firms and so forth use biometric finger scan or hand scan, but it’s problematic in certain environments, dirt and your oily environments. So we found a retina scan clock and we’re introducing that, and I think, we’re the first of the – certainly, sizable payroll companies to offer that as part of our HCM solutions. So it looks, I mean, right now those changes – those regulatory confusion and issues have been positive for us.

That’s helpful, thanks. And maybe as a follow-up, on the guidance, I don’t want to get too nitpicky here. But if I just take the midpoint of both your payroll and HRS ranges and add the impact from float, I get a revenue total number that’s a little bit closer to 7% than it is to 6%. So is that just kind of some level of conservatism? Is there – is it just the impact of the hurricane to the current quarter, or is there anything else in the underlying business that we should be thinking about that might take payroll to the lower-end of the 1% to 2% range versus the higher?

Yes. So I think for the year, Jim, I said 1% to 2%. You – everyone’s model is a little bit different. I think, what you’re seeing there is that, there’s an element of conservatism in what we put out, and there’s a little bit of uncertainty in terms of where Q2 ends up. So I think, that’s the reason for that.

But is it fair to assume that we know there’s no reason ex-hurricane that you couldn’t do, at least, a midpoint on the payroll side.

Ex-hurricane, but you just, you said a mouthful there, so it’s true. I think, Jim, here is the issue and many people on the call know this. I was very confident when Sandy hit New Jersey about what the bounce back was, I happened to be wrong not the first time and probably not the last time. So, no, there’s some caution there that that’s the thought process.

Fair enough. Thank you very much.

Thank you. Our next question comes from Gary Bisbee of RBC Capital Markets. Your line is now open.

Hey, good morning, guys. Just wanted to ask one question on the cost. SG&A was a bit lower than we expected and the sequential decline in that appeared a bit larger than spend. Was there anything in particular you call out?

I think, it was some timing there, Gary. It was kind of broad base. We are – our expense – our expenses were planned to be year-over-year the growth to be more moderate. And we typically get a loop off to a little bit of a slower start in spending in a quarter and some really good – candidly some very good work on the op side in terms of cost containment and controls was helpful. And then sales, we really focused on sales efficiency and putting our plans together that gave us some benefits and then there was some timing, so it was pretty broad based.

Okay. But there’s – would it be reasonable to assume that it’s sort of normalized a bit over the next quarter or so?

Oh, yes, absolutely, yes, yes, that would be reasonable.

Okay. And then on the PEO acquisition, is there anything in the technology that that you’re going to maintain, or is this really about getting scale buying the customers and you’d planned to move them over to your technology in some interim period?

I think, we’re looking at that, Gary. We’re – I think, there on, obviously a lease platform, that’s pretty popular in the industry. And we’re reviewing that along with compared to ours, which we feel very good about and we’re going to see where that is. It does certainly build from a scale perspective. We also pick up a good strong management team that’s been around, and we feel good about that. And I also, as I mentioned earlier, as you get more scale, you build even stronger relationships with the carriers – the insurance carriers. So it’s a little bit about all of that.

Hey, one other thing I want to build on just because I’ve read some motes in the time period after the acquisition was done. One of the things that when we look at a PEO is, we do multiple, multiple levered – levels of actuarial review of what that book looks like. And I can tell you that, there has been a number of assets on the market that we have to the first time thought they were good and the second time we just passed. So you can, I think, the market should understand that when we look at a deal and we look at their book of business, if that is not where we think it should be and we don’t think the management team is going to manage it to the level that we want to manage. We just simply aren’t interested in it, because we’re not interested in netting that kind of incremental risk to our profile. So – and by the way, the other part to Marty’s earlier point, a management team that is able to manage to the level of risk that we want. So that’s very important to us. And you can assume, or you should assume that this acquisition and that management team pass that gate. So just wanted to add that to what Marty had said.

It’s great. And then just one quick follow-up, the $60 million you referenced for the new campus in Rochester, what’s the – I assume that’s capital expense and what’s the time period over which you’ll spend that? Thank you.

Probably over two to three years, it’s going to take to refurb some of the buildings and so forth and put the investment in it, it’s about a two to three-year project. Hopefully, shorter on more of the two-year timeframe.

And just to clarify to it, it replaces lease space, so it’s not an incremental slug of expense. It actually in some ways saves us…

Definitely.

…expense going forward. So I just want to make that clear.

Great. Thank you.

Yes.

Thank you. Our next question comes from Rick Eskelsen of Wells Fargo. Your line is now open.

Hi, good morning. Thank you for taking my question. I was hoping you could talk about the service realignment with it now being done. I know it’s early, but I’m just curious if you’ve noticed changes in client behavior, Marty, I think, you talked a little bit about seeing some better early signs on the retention. So what have you seen so far with that now being fully in place?

Yes. The one thing I think, if you take different extremes, so you have a dedicated service center. So a lot of our clients that were online, our traditional model which is still the vast majority of our clients, we have a dedicated payroll specialist that calls out to the client at a specified time and works with the client and that model has continued and done well and so forth. But we had a number of online clients that are growing and they call in when they need something, or e-mail when they need something, and we put those teams together and have, what we call, a dedicated service center for online. You still have a dedicated person that’s assigned to you, but you can – we have a lot better technology now, in fact, like e-mail technology, we track all e-mails, they can be moved all over the country to the various dedicated service center folks. And I think, our responsiveness on e-mail we’re measuring in is much better and we’re getting positive feedback on that from a promoter score and so forth. If you look at the multi-product, if you look at the mid-market, we’ve built up multi-product service center, so instead of handling the payroll in one place and then transferring the cost to time and attendance teams or our 401(k) teams or HR administration teams, we’ve now started putting these folks together in teams, and we’re seeing some positive feedback from the clients from a perspective of, hey, everybody is in the same team and I’m getting responsiveness. So the improvement that we’re seeing is, we’ve seen, at least, early in the year, we’re seeing retention improve a little bit and the mix of the mid-market, which probably had the biggest change is also improving. And that’s probably the biggest part. Of course, it’s 7/24 service as well, and all that is we can put teams together. It was – we’re able to use the experience, but have better service performance and responsiveness to our clients.

And have you seen a change on the – on your employees side of things? I mean, I got to think that with the – during the change, there was probably some churn of your people. Internally, has that sort of stabilized? What have you seen from your internal service workforce?

Yes, it has. Good question. We did see that spike up a little bit, because it’s changed and some – or more growth were in certain locations, and so we had to add some new people. We have seen that the tenure do very well. In fact, we track the new hires and our performance on keeping new hires and building up their tenure has been – has improved dramatically here in the last six months. So, because we’ve made an extra effort to be sure that once you onboard with us that we’re getting trained and you’re staying with us, so we have seen that. So that the turnover rate of the payroll specialist is down in this, what we call, senior rate, which is an experienced certified payroll specialist as you move up through our training modules during the first 12 to 18 months has gone up as well and it’s getting back into the range that we like to see it from a seniority perspective.

Thank you. Last question, Efrain, just clarifying. Did I hear correctly that the HROI acquisition closed mid-quarter, so to reflect that, at least, the cash portion is reflected on the current balance sheet?

Yes, that would be correct. So it closed in Mid….

August.

…not mid-quarter, sorry, Rick.

Okay, perfect. Thank you.

Thank you. Our next question comes from Bryan Keane of Deutsche Bank. Your line is now open.

HI, just a couple of clarifications. On the HRS, Efrain, you talked about it spiking up a little bit of 13% to 16%. I’d be curious just to make sure I understand the puts and takes here that drive that higher. Obviously, there’s an acquisition there, there’s easier comps. Just want to make sure I understand it? And then what it also means for the back-half for 3Q and 4Q, should be around those same growth levels?

Yes. On the second one, maybe a tad higher, but I think the comparable range is for the back-half, Bryan, and then you’re right about Q2 tailwinds from ACA abate – I’m sorry, headwinds from ACA abate a bit in second quarter and the comps get a little bit easier and then you have the acquisition on and that’s basically what driving that growth rate Q2.

Okay, helpful. And then you talked a little bit about rolling out some new products for simplifying pricing and going to pricing bundling, I think, you launched that at HR Tech, What is the overall impact to pricing in general then for something like this? And I guess, maybe you could just give us overall comments on how pricing is looking? And is there ways to increase price that can push pricing higher, or are you seeing any pricing pressure that would push it down? Thanks.

Well, I think, we felt from, Bryan, we felt from the price increase in the spring, that we did okay. And it looks like and through the summer anyway that it’s holding this pricing simplification is just we used to break out pricing. It was a little bit more confusing to clients and to new prospects and for the sales reps to present based on kind of some many checks and so forth, and we’ve gone more to a subscription or more to a simplified pricing of, here’s a base price and a price per check. And so it’s a little simpler to present to the client. We’ve heard that for some time and wanted to get that change. And then the product bundles, we’ve had bundles for some time, but we revamped them and added some more features and functionality to the product bundles, including this in the second bundle in the range to start adding things like a do-it-yourself handbook online, as I mentioned, and in paperless a simple paperless onboarding, which we hear very strongly has been very positive on the mid-market side and now we’re bringing it down to kind of the under 50, and then we’ll be adjusting for background checks as well. We’ve had that in the bundles in different ways. We’re going to try to simplify that. And then also and not from the bundle standpoint, but also releasing the new clocks as well that we feel will be very popular in a fast-growing business segment for us.

Okay. But the net impact of some of these pricing changes probably don’t – it doesn’t move the needle, or does it move…?

I don’t think so by itself. No, we weren’t looking necessarily, it’s more of a simplification of it and a better presentation, which we think will increase sales and be easier for us to sell for the clients and easier for the clients to consume. But we don’t expect that just changing the bundles to drive much change in the revenue. But we still feel like we have pricing power, at least, based on what we saw in the last price increase.

Okay, helpful. Thanks so much.

Yes.

Thank you. Our next question comes from David Grossman of Stifel. Your line is now open.

Thank you.

Hey, David.

Good morning. I’m not sure if I missed this earlier. But did you talk at all about the strategic kind of rationale behind the HROI deal? What you saw in that company that was compelling, given that obviously you already have huge scale in the PEO business?

Yes, I think, David, Efrain kind of touched on it a little bit. But I think, when you – when we look at PEO, so we think, we see HR outsourcing growing very quickly for us at kind of all sizes of clients. And it’s really come down in size and we’ve mentioned that probably many times before. We have both the PEO and the ASO model. We’ve also been able to take a process of where if you’re in the PEO and from an underwriting perspective, the risk isn’t right for health insurance. We also move you – we can take you through the agency – the insurance agency now the 21st largest in the country. And so we’re seeing positive from that standpoint too. And as we look at PEO, as we look at a lot of opportunities and we’re very careful about a PEO that has good risk based on all the work that we do and pretty a few levels down that has a management team that we feel can scale. And that by adding even more scale to our business, there’s still some pretty large PEOs out there. You gain some credibility and some leverage with the carriers – with the major carriers in the country, and that’s a positive for us. So we look at a lot of opportunities and we select very few to go after and complete.

But did HROI have any unique presences mostly a blue-gray business? And is that kind of a – impacts your presence in – with the workers’ comp carriers, or is there something different about their model?

No, I wouldn’t say. So I would say that they – I would say just that they’ve handled the risk extremely well that they’re an experienced team and from a sales and operations perspective and – but they’re pretty much across the country. And I think 35 states last we looked, and so we felt they added scale and not necessarily didn’t certainly change our risk profile at all, but kept it very positive. So it wasn’t any specific thing that they did. It was they were adding scale, which gives us more clout with carriers, for the pricing and gives us just that much more experience in sales and operations support.

All right, great. Got it. And then just one other question unrelated. As you know, there has been a lot of recent debate about the margins related to the different segments of this industry, the small versus the mid-market, and I really don’t want to drag you into that debate. But can you help us, at least, better understand in the context of your own business how the margins differ, if at all, between your small business and mid-market segments and what may drive that, in fact, if there is a difference?

Well, I think, David, I talked to a number of you. I think the at its most basic, pricing power changes as clients get larger and not surprising smaller clients are asking you do a lot more for them. And as a consequence of that, they’re willing if you provide great service to pay for it. As you grow larger and you certainly are in the mid-market, now you have – typically have more back office support and help. That value of service is important, but it’s different than when you’re a 5% shop than when you’re 60%. So pricing flexibility is a little bit more constrained and I mentioned that. So Marty said, pricing in general has been good, it’s held, but we’ve been cautious about how much price we’ve increased in the mid-market, and I think that that continues to be an issue as you go up. The second thing I would say is that, increasingly, in order to service mid-market clients who have integrated product bundles, you need teams of service providers. And so the ratios are a bit different than small market clients. And that’s why you’ve seen in the industry not just us, but in the industry people go to multi-product products service centers. And you’ve got, while you still can get efficiencies, the efficiencies are very different than when you’ve got a small client. So combination of those tends to have an impact on pricing and margins and then throw in competition. So now you get the trifecta of more constraints there in the mid-market. So I think that many of those factors just are not as present until you get into the very, very low-end of the small market, there it’s a little different discussion, because now you’re talking about DIY providers and that’s a different segment in the market. So I think, it is fair to say that the margin profiles are different.

Yes, and I think, I just – the only thing I’d add to that, I think, Efrain said it before too. We’ve always been very mindful of keeping cost out of the business. It’s hard once they’re in to take them out, but we’ve always been pretty careful about having a high margin business and not being largely in that small market, we’ve been able to not to have to customize a lot of process and procedures, but keep our costs very low be able to set up a client very quickly even if they go out of business in six to nine months, which many do. We’re able to set them up quickly and keep the costs out. We don’t have a lot of layers of management. I mean, you know the business well. I mean, we’ve been very careful about that. So I do think there’s some differences in the businesses from that standpoint, but certainly everything Efrain said as well.

All right. Great. Thank you. That’s very helpful.

Okay. Thanks

Thank you. Our next question comes from Tien-tsin Huang of JPMC. Your line is now open. Tien-tsin Huang: Hi, thanks. Good morning. Just I think you answered with David Grossman. Just want to follow-up on the risk model for HROI. Is it a fully insured plan, or is it a minimum premium plan, sounds like it’s more minimum premium just want to make sure?

They tend to be more minimum premium, Tien-tsin. Tien-tsin Huang: Okay. But – and then I guess, for you, you were previously just out in Florida. So are they a little bit more geographically diversified?

They’re more Southeast-based, I’d say, so a lot of it has an overlap. There’s a little bit more in other states, but there’s some overlap with what we already do. Tien-tsin Huang: Okay. No just want to make sure we caught the….

No, thanks. Tien-tsin Huang: …the difference there. Then the just a quick follow-up. Just the balance growth here going forward, it’s been sort of 5% to down for a while, you guys mentioned age inflation and whatnot. So what’s the outlook for balance growth?

I think, we’ll see modest client balance growth in the balance of the year. I can’t call it precisely, but that’s our expectation. Tien-tsin Huang: Got it. That’s all I got. Thanks.

Okay. Thanks, Tien-tsin.

Thank you. Our next question comes from David Togut of Evercore ISI. Your line is now open.

Thank you. Good morning.

Good morning.

Good morning.

Your major national competitor has recently talked about accelerating innovation, particularly introducing a new payroll engine, a new tax filing engine under pressure from an activist campaign. I’m just curious how you respond to that and whether you think you need to accelerate your own innovation strategy over the next couple of years in response?

I think, I definitely do. I think, we already have kind of it that innovation mindset. We’ve been moving everything to and have moved everything in our development to mobile first and, for example. And so basically, everything is designed for a mobile phone use and then expands to the desktop if you’re using the desktop. And so all of our development went agile from a development standpoint years ago to be able to crank things out faster and be able to carve pieces of the project up and get product out quicker. We went to mobile first from a design perspective. And we’ve certainly are moving to always try to be and have our UI, our user interface always on the front of kind of the development that’s out there as much as possible. So I think, I mean, I do think that’s very important. I think, we feel good from the front end of these products, but always can do better and we’re always pushing to say, hey, what are our competitors doing and what do we have to look like a year or two or three from now to start building that out? As a large company, you always got to do that in particular, I think. And then the back end, we feel very good about that keeping up as well. So whether it’s our tax pay engine or anything, no one for other than one other company probably move – certainly move any money and more money than we do. And we’re very proud of the fact that that goes extremely well, and we’ve been doing it for many, many years. So, yes, I think, you always have to have that innovation mindset and we feel like we’re always moving to keep up with it and be sure we’re ahead of the competitors.

One of the thing, David, I’d add is, if you look at what we did – Marty did five years or so ago, when we saw that we had a need for a DIY SaaS platform in the micro enterprise space, we went out and bought it. So one of the other things that we are not averse to is, if we see technology we like, we buy it, and then we integrate it. You have to be disciplined about doing that. I think, we’ve done that very well with things like myStaffingPro, which is a talent onboarding and Marty just mentioned net time, which is our time and attendance product. We’re constantly looking for that. And our mentality is, we’re going to look for good technology and if it makes sense using our IT resources identify it and bring it into the fold. So it’s not a solely our internal development. It also is part of our business development focus.

Yes, a lot of things have changed. I mean, it’s a really interesting question when you even think from how you interconnect with other – others through an API interface and we’ve been active with that. And as Efrain said, we buy some technology sometimes to give us a fast start and then build it into our products. And like time and attendance and myStaffingPro for the HR onboarding and paperless onboarding. So we try to speed up the cycle as much as possible.

Understood. Just a quick follow-up question, have you seen any distraction impact on your principal competitor sales force during this proxy fight?

I don’t think so. I think the competitive environment seems to be about the same. It doesn’t appear that, at least, from our standpoint that that has changed much at all.

Thanks so much for taking my question.

All right, David.

Thank you.

Thank you. Our next question comes from Mark Marcon of Baird. Your line is now open.

Good morning, Marty and Efrain.

Hey, Mark.

Hey, Mark.

A couple of quick questions. One, just topic in the news Equifax. To the extent that you believe that the data is now out there. Do you have to do anything incrementally in order to secure the data or to make sure that the right people are being paid or anything along those lines?

I think, we’ve always had very much a mindset of the security of our data. And in fact, we don’t do anything with Equifax other than kind of some of our own employee kind of work that some large companies do. We don’t pass client employee information to them. And we’re always – and 21 of the fastest-growing areas over the years has been our IT security team. I remember, years ago when I started, it was probably six people, and it’s much more like 10 times that, at least. And so we’re very careful about what we’re doing. I think multi-factor authentication coming out with MFA years ago and we’re seeing – we’re really pleased with the fact that when multi-factor authentication first came out, clients were taking the easiest way to do that. And now the majority has swung to what we call level two, which is what you see with most banks and so forth, which is getting a text if your call – if you’re coming in to do your payroll from a PC, a laptop, or something a device that weren’t – we don’t recognize, you have to – you have signed up to get a text from us to verify who you are. We have seen incidents where our clients – for our clients go down dramatically. We never had a lot, but we had enough that we really pushed that and we’ve seen that go down. And so we see the clients paying a lot more attention to taking the precautions necessary, because small businesses in particular not always careful about sometimes about the laptop, but they’re on the road, they’re trying to do things, and we’re trying to protect them. So we’re very careful, very diligent about it. We know how sensitive our data is and we do our best to protect it.

Okay, great. And then a couple of numbers questions. Just CapEx for the year now with the campus acquisition?

Yes, Mark, I think, we’ve disclosed that, I think, we’re at around $180 million is what we set out with the campus included.

Okay.

I think we’ve put a – noted it, don’t hold me to that number, look in the Q, we set it out.

All right. Great. And then with regards to HROI, the margins are guided down for Q2 through Q4?

Right.

If the deal is modestly dilutive….

Yes.

We did better in the first quarter, is that all explained by HROI, or is there maybe some conservatism in there?

I think it’s primarily HROI, Mark. So – well, I mean, first of all, if you just take Q1 and then project forward and then say what the margin would be, I think, you end up getting a little bit of a incorrect view of the rest of the year. Just remember that some of that was timing. And as we get into other quarters in recent years, our margins in Q1 have been the highest of the year, so…

Oh, yes. I get that. I know the normal seasonal pattern, but it seems like it’s a little – just a tad more than I would have expected?

Yes. No, we’re not trying to be overly conservative, we’re trying to be as realistic as we can. I will say this, that in most instances, this is my seventh year here doing it, we’re pretty much on what we say. So I think that that’s our expectation at t his point.

Okay. And then the EPS doesn’t go up much for the deal?

For EPS going up for the deal, Mark?

Yes.

No, because it’s actually modestly dilutive.

Just to the margins, but….

Yes. No, no, but it doesn’t. No, it’s not going to help EPS this year.

Okay, great. But then you did say that the margins will go up in the following year. Can you just give us a little more color on that?

No, no, Mark, I’m not going to go there. So I have no idea at this point in time.

You do.

[Multiple Speakers] By the way, I applaud you on your skillfulness asking, he declined to answer the question.

I know declined, but not I have no idea.

You got it, yes.

All right.

You have the modest idea, I won’t talk about it though.

Okay. Is it 50% is it roughly 50% Florida in terms of the worksite employee?

On the PEO?

Yes. HROI?

I haven’t disclosed that. We’ll give more color on it.

I know, but when we look at the offices and then think about the penetration in the markets?

I think, if you want to make a reasoned guesstimate there, I’m not going to disagree with that.

Okay, great. And then – and this with regards to the commentary on the price increase for this year that you’ve always pass along at the usual fashion, usual date. Did that – was that on the lower-end of that traditional range?

Yes, it was, yes, it’s on the lower-end of that range. Yes.

Okay, great. And then as we think about just the new sales and all initiatives that you’ve got in place, should we think about the growth in this upcoming sales season being more skewed towards the mid, or the lower-end of your client range?

I don’t think, it’s skewed either way, Mark. I think, we’ve got initiatives going across the board, so I don’t see it skewed either way. We certainly got a number of initiatives like the inside sales and the additional web investment for the leads,. probably attacking more of the small end, but we’ve also got a number of things with the bundles and other products that are attacking that mid-market. So I wouldn’t say, it’s going to be skewed any different.

Okay. And just the same-day reversals that you’re capable of doing now, how big of a deal is that going to be in terms of being able to get new sales?

I think, it’s going to take a little bit to catch on. I think the clients – this is one of those things, where clients don’t realize what a benefit that is unique to us until they need it. So I think, it could help probably more on the retention than it may on the front end and on the sales side. When you have a – especially as online clients, if you make a mistake and I overpay Efrain and it takes me a week to undo it as opposed to I can undo it that same day without even a real impact to him, that’s a huge benefit to the client. But I think it’s going to be more of a retention benefit than it is probably a new sale benefit.

I would use it as a sales as well?

No, no, I would use it. I’m just saying most clients see those things as, well, that’s never going to happen to me. So I’m not going to make a mistake, I’m not worried about it. But you see that more and more as clients are doing more online, they’re making those errors. And then if you can’t reverse it that quickly and that employee quits or doesn’t can’t afford to pay you back, it’s a real issue. So it – I’m just saying, it tends to be, they believe it more once they see it and need it.

Great. Thank you.

Thank you.

Thank you. Our next question comes from Lisa Ellis of Bernstein. Your line is now open.

Hi, good morning, guys. Can you talk a little bit about how a client growth and checks per payroll are trending as you start into the new fiscal year?

We don’t talk too much about either until we’re through the year. So I would just say, Lisa, it’s early to make a call on all that.

Okay. And then second one is just anything you would call out, sort of state level changes from a regulatory environment perspective? Like in the past, we’ve seen things like overtime rule changes, et cetera. Is there anything like that on the horizon as we look out to the next few quarters?

Yes, I’d say, one of the things we’ve seen quite a bit now are these state changes. I think the two biggest ones that are causing issues would be the overtime regulation – there’s three, overtime regulation, family leave and minimum wage rules, because they’re all very much – as the Fed has tried to reduce regulations, the states have picked them up and increased them and it’s causing a lot of confusion for clients. So if I’m a multi-state business and I’m in two or three states, it’s very difficult for me right now to track all the minimum wage changes that are happening by state and sometimes city. Family Leave now going to impact, and they’re are all different. So what do I have to do from a family leave? What taxes am I – should I be deducting for family leave, like New York State they already kicked in before the actually the family leave, our benefit is even available January 1. So we’re seeing family leave, overtime regulations and minimum wage are the three biggest changes happening kind of state by state.

Terrific. Thank you.

Okay.

Thank you.

Thank you. Our last question comes from Tim McHugh of William Blair. Your line is now open.

Hi, it’s Stephen Sheldon for Tim this morning. Yes, most of my questions have been answered. But you talked about seeing strong WSE growth for the PEO business. So can you maybe quantify what kind of growth you’re seeing there organically? And how that compares with what you’ve seen over the past few years?

Yes. So we don’t update those numbers until the end of the year. But we – when I call out that number, I’m calling out organic growth, not acquisition, obviously when we discuss that as we get to the end of the year. But I can’t quantify it, but it’s stronger – it was strong growth in the quarter in the double-digit range.

All right. Thanks.

Okay.

Anymore questions, Anna?

We don’t show any question on queue.

All right. At this point, we will close the call. If you’re interested in replaying the webcast of this conference call, it will be archived for about 30 days. Our Annual Meeting of Stockholders will be held on Wednesday, October 11th at 10 AM in Rochester. That meeting will also be broadcast simultaneously over the Internet. Thank you for taking the time to participate in our first quarter press release conference call and for your interest in Paychex. Have a great day.

And that concludes today’s conference. Thank you for your participation. You may disconnect at this time.