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

Danyal Hussain - Morgan Stanley James Berkley - Barclays Jim Schneider - Goldman Sachs David Togut - Evercore ISI Bryan Keane - Deutsche Bank Gary Bisbee - RBC Capital Markets Kartik Mehta - Northcoast Research Ashwin Shirvaikar - Citi Rick Eskelsen - Wells Fargo Jason Kupferberg - Bank of America Merrill Lynch Tim McHugh - William Blair Company David Grossman - Stifel Financial Mark Marcon - Baird Henry Chien - BMO Tien-tsin Huang - JPMorgan

Welcome and thank you for standing by. At this time, all participants are 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. Now I'll open the meeting over to your host Mr. Martin Mucci, President and Chief Executive Officer. You may now begin.

Thank you, and thank you for joining us for our discussion of Paychex's Second 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 second quarter ended November 30, 2017. 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 the website for approximately one month. On today's call, I will review the business highlights for the second quarter and Efrain will review our second quarter financial results and discuss full-year guidance. And then we'll open it up to your questions. Well we're halfway through fiscal 2018 and we have continued to deliver solid results across all of our major human capital management product lines with growth of 7% in total service revenue for the second quarter. In particular our HR outsourcing services, retirement services and time and attendance solutions have continued to perform very well. On August 21, we announced our acquisition of HR Outsourcing Holdings Inc or HROI. HROI is a national PEO that serves small and mid-sized businesses in more than 35 states. The integration of HROI is progressed favorably. Combining the HROI team with our experienced PEO sales and service operations teams has further strengthened our presence in the PEO market. This is particularly relevant during a time of regulatory change like we're seeing now. This expansion along with our certification by the IRS under the Small Business Efficiency Act positions us for accelerated growth in our comprehensive HR outsourcing solutions. Small business job growth continue to moderate slightly during the second quarter after the sharper up tick experienced last year following the conclusion of the Presidential Election by contrast our early earnings have improved to an annual increase of nearly 3% based on our data. The combination of this level of wage growth and consistent moderate small business job growth are indicators of a healthy small business sector. We believe these promising indicators will continue to create opportunities for new sales in the small business market. At HR Tech in October, we introduced our new product bundles that are now in the market. These bundles include new simplified pricing and included in two of the mid level HCM bundles at no extra cost are Paychex Flex onboarding essentials providing a paperless employee onboarding experience and do-it-yourself handbooks. In addition, we introduced a retina scan InVision time clock. We are excited about these new offerings that respond to the evolving needs of our clients and we are pleased with the initial response from our clients and prospects. We are committed to delivering best-in-class technology solutions for our clients and business partners. We recently announced a release of Same Day ACH Debits functionality for our clients using direct deposit. With Same Day ACH, employers have the ability 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 enhances our position as a leader in this payments industry. We also announced real-time integration between Paychex General Ledger services and Sage Intacct. Paychex and Intacct are certainly two key service providers to the accounting industry and our CPA partners are important to our business and this integration provides better tools which allow them to gain inside into their data and their clients data in a real time basis. We also introduced Accountant HQ, a website for accounting professionals to help them service their Paychex clients even more effectively with a comprehensive online dashboard that provides a single source of immediate service access to authorized Paychex's client data robust reporting capabilities and variable accountant resources. We consistently evolve our service offerings to meet the needs the of clients base and example as we just had a recent announcement that Millennium Trust Company and Paychex have teamed up to offer a simple IRA to employers with a 100 or fewer employees with innovative features including auto enrollment and investment fiduciary services. This is becoming a popular offering, or be a popular requirement from some states across the U.S. We are proud of the recognition we have received regarding our solutions for our clients and our leading Hedge Technology Inc, recently recognized Paychex is the best HR outsourcing for small business overall. They noted that Paychex Flex our product offers a full range of services for HR outsourcing including payroll tax, payment benefits, recruiting and training and we do so without requiring a long-term contract. More uniquely Paychex also offers onsite assistance program that puts HR professionals, our HR generalist, our HR Gs in the office with customers when they need more help. We are proud that Paychex Flex was recently awarded a gold excellence in technology award for best advance in HR or workforce management technology for small and mid-sized businesses from Brandon Hall Group. In previous years we won the bronze award, this year moving up to the gold standard and we appreciate that this evidence is, this evidence is the strength of our technology as well as our service performance. As I noted last quarter, the seven, this is the 7th consecutive year, we were ranked the largest 401(k) recordkeeper by total number of defined contribution plans by PLANSPONSOR magazine and our Paychex Insurance Agency hit the rank of 21st, that to 21st largest agency from business insurance magazines. And we are very proud of all of this recognition because, it comes from and really it is deserved by the - deserved of the 14,000 employees who make it happen from sales to services to technology, innovation teams here at Paychex. We're very proud of them and the results that they have achieved. Providing excellent service to our clients remains a top priority of course and we've completed the realignment of our service organization at the end of last fiscal year and our investment in this service realignment was an important strategy to help support 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 seeing benefits from this change. One last comment before I turn the call over to Efrain, yesterday of course Congress voted in the favor of tax reform legislation. We are currently reviewing the terms of the bill and analyzing the impact that we could have at the Paychex, Efrain will talk more about this later on. Tax reform will provide a great benefit to us and a lower effective tax rate. We do expect that a portion of the potential benefit will be reinvested to drive future growth for the company and our shareholders. I will now turn the call over to Efrain Rivera to review our financial results in more detail. Efrain?

Thanks Marty, and good morning. I would like to remind everyone that today's conference call will contain forward-looking statements referred to the customary disclosures. I'll start by providing some of the key highlights for the quarter, provide greater detail in certain areas and then wrap up with a review of the 2018 outlook. Service revenue, as you saw, grew 7% for the quarter to $813 approximately 3% little lesser that growth was attributable to HROI. Interest on funds held for clients increased 23% for the second quarter to $14 million as a result of higher average interest rates earned, you're starting to see the benefits of all these cumulative increases in interest rates. Expenses increased 7% for the quarter HROI though contributed about 5% of this growth. So we have very good growth expense control in the quarter, comp-related cost were up modestly and continued investment in technology and growth in the PEO also contributed to the slight up tick in expenses. Our effective income tax rate was 35% for the second quarter compared to 35.2% for the prior year's second quarter, both periods reflected net discrete tax benefits related to employee stock-based compensation. This impact to the second quarter was $0.01 accounting $0.01 of EPS and must be material in the prior year quarter. Let's talk about payroll service revenue, increased 1% in the second quarter to $445 million, the growth was driven by an increase in revenue per check and then it was tempered by the impact of client size mix from the same quarter a year ago, recall it as we ended the year we had a slight drop in client size and that's reflected in the payroll service revenue growth. On the HRS side, we grew 15% to $368 million for the second quarter, it reflected strong growth in the client base across major HCM services including comprehensive HR outsourcing services, retirement, time and attendance and insurance all saw a good growth in the quarter. Within Paychex HR Services, we continue to see the strong demand which along with the acquisition of HROI reflected in continued solid growth in the number of client work side employee served. So we're seeing growth there and we are seeing growth in other areas of the PEO. Insurance services benefited from continued growth in the number of health and benefit applicants in higher average premiums within workers comp insurance offering. Retirement services revenue also benefited from an increase in asset fee revenue and earned on the value of purchase have been fund. So all of those are contributing to the positive results in HRS. Year-to-date let me just say that total service revenue growth was 5% of which about 1%, 1.5% approximately was attributable both to HROI recall that Q1 was a lower quarter end we built from there. Operating income growth was 7% with margins of 41.2% up approximately 50 basis points year-over-year. Net income diluted earnings per share grew 6% on a GAAP basis to $445 million in a $1.23 respectively. Adjusted net income and adjusted diluted EPS are both up 8%, and that just takes up the benefit of the discrete tax items that we recognized in both years. Investments and income, as you know we, our goal is to protect principle and optimized liquidity on the short-term side, primarily short-term investment vehicles are bank demand deposits and variable rate demand notes. In the longer term portfolio, we invest primarily in high credit quality municipal bonds, corporate bonds and U.S. government agency securities, the long-term portfolio as an average yield of 1.8%, an average duration currently at 3.3 years. The combined portfolio has earned an average rate of return of 1.5% for the second quarter up from 1.2% last year. We are starting to realize the benefit of gradually increasing interest rates as I mentioned earlier. Average balances for interest on funds held for clients was relatively flat for the second quarter primarily the impact of wage inflation was offset by client mix. Now let's look at our financial position remain strong. Cash and total corporate investments were $820 million as of November 30, 2017. Funds held for clients as of the same date were $4.9 billion compared to $4.3 billion; funds held for clients very widely as you know and averaged $3.7 billion for the quarter. Total available for sale investments, including corporate investments and funds held for clients reflected net unrealized losses of $14 million as of November 30, compared with net unrealized gains of $32 million as of May 31 and that's just a reflection of rising interest rates. Our longer term portfolio seen an increase in the unrealized losses for this reason. Total stockholders' equity was $2 billion as of November 30, 2017 reflecting $359 million in dividends paid and 94 million of shares repurchased during the first half of fiscal 2018, our return on equity for the past 12 months was a stellar 43%, now we just point out that was only a few years ago when return on equity is 34%. So, we have really worked hard on driving that number. Our cash flows from operations were $519 million for the first six months and I just also point out that we had a very strong cash flow quarter. The increase was 26%, although there is some timing in that also a function of our cash generating power. Let's look at the guidance for 2018. It's unchanged from what we've provided last quarter. This guidance doesn't reflect any impact from tax reform legislation. What we try to do in both the press release and you will hear in a second is supreme, what we think the ongoing benefit from tax reform will be for us. I would caveat heavily. That we don't know the exact details of the legislation and there will be regulations written that interpret the legislation that could have some impacts and changes to what we are discussing. We obviously were anxious to see the final bill just like everyone else, but we recognized that it will have an important impact to us. Payroll revenue was anticipated to grow in a range of 1% to 2%. Overall, we anticipate full year growth now will be at the lower end of the range with growth for the second half of 2018 comparable to the growth in the first half of the year. HRS revenue by contrast is anticipated to increase in the range of 12% to 14% for the full year incorporating HRI. We were below the low-end of the range for interest growth of first quarter at 7%. And we were above the range for the second quarter 15% now anticipate being above the range for the second half of the year. Total revenue is expected to grow approximately 6%. Interest on funds held for clients is expected to grow in the mid to upper teens which doesn't include the most recent increase in the fed funds rate that we made earlier this month and the reason for this is, it's comprehended within that range and we think by the time the increases roll through, the impact for this year will be modest obviously will be beneficial to next year, but impact at this point is going to be modest. Operating income margin is anticipated to be in the range of 39% to 40%, effective income tax rate excluding any potential impact from tax reform legislation is expected to be in the range of 35%, 35.5%. Let me just add a note of explanation here. If you recall our guidance when we started the year, our guidance was that our tax rate would be between 35.5% and 36% that's what we consider our normalized tax rate currently when we don't include discrete tax benefit. The discrete tax benefit that we recognized year-to-date relating to stock-comp expense drive that rate down. So, when we say 10% to 12% benefit, we are working of at a normalized rate between 35.5% and 36%. And at this point, I would anticipate that we will provide more guidance but it could be anywhere along that spectrum at this point, if I had to peg it, I would say it's at the low end of the range rather than higher. Investment income net anticipated to be in the range of $9 million to $11 million. Adjusted net income is expected to increase approximately 7%. Adjusted net income excludes the impact of a discrete tax benefit recognized in fiscal 2017, in the first half of fiscal 2018 relating to employee stock-based compensation payments. We currently don't plan any additional discrete tax benefits for the remainder of the year. We simply don't know whether we will realize any. Please refer to our non-GAAP financial measures, discussion in our press release and in our investor presentation for reconciliation of non-GAAP measured to the GAAP basis net income for the second quarter in six months of the year. GAAP basis net income is anticipated to increase approximately 5%. Adjusted diluted earnings per share is anticipated to increase in the range of 7% to 8% and again, we laid this out in the presentation that we've posted in Web site and this measure as I have mentioned now about 3x excludes the impact of a discrete tax benefits recognized. And then, finally, as I mentioned before we haven't recognized any benefit of tax reform in our guidance. We anticipated to be in the range of 10% to 12% on our annualized effective income tax rate I mentioned how we measure that that is before we include any discrete tax amounts related to employee stock-based compensation thing. And again, one more caveat, this is based on our current understanding of the legislation maybe subject to change upon further review of the final law and interpreted guidance that maybe issued. As discussed previously, we said this, Marty said, and we said in the press release, when you have an opportunity we expect that a portion of the benefits will be used to be reinvested in the business to drive future growth and we will provide additional guidance in upcoming quarters. One final comment on that and I suspect that this will be true for many companies, although that the statutory rate will drop to 21% that won't be the effective rate because there will be puts and takes in terms of benefits and deductions that no longer allowed under the law and that's the analysis that we are undergoing. Other thing that I would say is that we are undergoing an analysis for the opportunities that we have to reinvest, some of that benefit to drive growth and efficiency and enhance our customer experience and we are actively working on that as we speak. And with all of that, I will turn it back to Martin.

Great. Thank you, Efrain. And we will now open the call to questions. Operator?

Thank you. We will now being the question-and-answer session. [Operator Instructions] Our first question is from the line of Danyal Hussain from Morgan Stanley. You may now ask your question.

Hi. Good morning, Marty and Efrain. Thanks.

Good morning.

Just on the tax rate, I know Efrain you talked about this being very preliminary at this point, could you just walk us through where there are offset at this point, it's your understanding versus the federal rate decrease? So, like how you are losing for example the domestic production…

Yes. That's one. That's an important one. Danyal there is changes and deductibility of executive stock comp and then there is other deductions to which we avail ourselves. So, the combination of all of those will drive itself from the 21% range.

Got it. So, what is it that gets you, I guess from 10% to 12%, it's just an understanding of…

Yes. It's really is an understanding of the range. There is some complexity on a number of items in the bill that we are looking at. There also maybe some tax planning opportunities that we think we might be able to take advantage of and we are in that discussion.

Okay. And just to clarify, you said the low-end of the range, you are referring to that 10 to 12 -- build low end of the…

Yes. That's correct. Yes. I said if I had to peg it. I peg it at 10 around and 12.

Okay. And then, just a one follow-up, I know you offer caveat at this, but the reinvestment, could you just talk a bit about what mean to the sales product maybe incremental M&A and to the extent you can quantify this at all?

Yes, Danyal. It's Marty. I think it's all of those. We are taking a look at the opportunities once we have a sense of the size of this. I mean there is some technology, what we are feeling good about the technology investments that we are making in the level that we are making. There are some things that are always there that we would like to accelerate. We would rather not mention those yet because we are kind of going through those and we want to talk to the Board about them as well in an upcoming meeting this quarter. But, it's a number of technology investments that could accelerate and we just think that it's a great opportunity to focus, it obviously take some to the bottom line, but also to take the opportunity to invest and sustaining long-term growth both top line and profitability.

Okay. Thank you very much.

Okay. Thanks.

Thank you. And our next question is from the line of Mr. James Berkley of Barclays. You may now proceed.

Thanks. Good morning, Marty and Efrain. Just wanted to touch on -- did you see any potential impact from Hurricanes in the quarter, if you could size that potential -- size that if you could? And then, if you did see an impact, are you certain to see a rebound at all or somewhere to what you saw with Sandy?

You want to go ahead?

We have seen I think there has been some not as big of a rebound as Sandy. But, I don't think particularly when you look at Florida; it wasn't quite as while it was widespread it wasn't quite as catastrophic damage. We are definitely seeing some small business improvement there coming back as you will see particularly what you would expect, roofers and contractors and things like that. I wouldn't say it's been significant yet, but I think it will be a small increase, but a longer period of time because it appears that the work is kind of go on for a while for the repair. So they are not as catastrophic, so you don't see a big huge change, but you see an increased number of small businesses in those areas of improvement. And then, I think they will probably hang around a little bit longer. I wouldn't say a significant or any, certainly not making any significant change to the results. Is there something you to want add Efrain?

No. It's just that, modest.

Okay. Thanks. That's helpful. And then, just a quick follow-up. Any detail around the size or timing of some of the synergies you guys are expecting or seeing, starting to see with HROI acquisition on both revenue and cost side would be helpful.

Well, one thing we are seeing is, much faster than I think we have even expected by at least a quarter or so. The integration is going extremely well. The plan was to move -- to kind of combine -- a lot of the sales teams, not all of it, but a lot of the PEO sales teams across the country with HROI and we have got a very experienced sales and operations teams that we had in PEO and their leadership. And that seems to have really picked up the pace of the PEO at a great time for PEO sales anyway. And so, I wouldn't say we could quantify the benefit yet but it certainly right at the level that we expected and probably a little bit better from a sales and not a profit per se, but certainly integration of cost perspective both very positive in this first quarter with them.

Okay. Thanks a lot.

Okay.

Welcome. Thank you.

Thank you. Our next question is from the line of Mr. Jim Schneider of Goldman Sachs. You may now proceed.

Good morning, Martin and Efrain. It's good to hear to you and I guess I wanted to start out maybe talking about the -- what you are seeing in terms of mid-market sentiments, clearly with ACA, uncertainty in calendar 2017 there was a lot of questions about that was kind of stalled decision-making which we talked about many times. Can you maybe talk about looking forward now that there appears to be the kind of repeal the individual mandate, whether you have seen any kind of improvement in terms of clarity of decision-making or increase decision-making in the mid-market segment?

I think it's a little bit early, we are right in selling season now and while we feel there is some momentum out there. I think that mid-market is very competitive as it has been, no real change to that and the number of competitors or anything. I don't see at this stage a lot more decision-making. I think we are still kind of as we said we are kind of -- we had a lot of decisions made because of ACA and we certainly aren't seeing it back to that level and if anything, I think it's a little slower, because people made those decisions for a fully integrated HCM model that included payroll and insurances and everything else. So, we're feeling good about selling season for mid-market, but I wouldn't say it's any, nothing like a big pop in demand like we saw when there was ACA. And ACA I think still very confusing, while the individual mandate is lifted, there is still, it's not clear what the reporting requirements are going to be and in fact that they don't seem to be, they are not eliminated yet, a lot of reporting requirements that will have to be done. And so we're seeing good retention on our ACA products and some interest in new clients and still taking those products to be sure that they can monitor, record and track and report or we can report for them their insurance.

Okay. Fair enough. And then, I guess if you look forward, you talked about reinvestment, you talked about I believe potential M&A as one aspect of that reinvest of the benefits from the tax reform. So if you may be just kind of update or refresh your thoughts on overall M&A beyond the kind of tuck-in you've done before, are you considering potentially something of bigger scale that would be little bit more transformative to the business or not?

Well, I think that's always a possibility we're looking at a number of opportunities in M&A and there is a lot of opportunity out there. Valuations are still pretty high, so we're being very selective, I'm very proud of the fact that we've, while we've looked at 100s of opportunities over the years. We've picked very few and we've been very selective which have turned out to be very good like advance partners like HROI, just recently SurePayroll, et cetera. So, we're going to be very selective about what we pick, the good opportunities out there, I would say that, we look at this as an opportunity to possibly invest a little bit more. I would say transformational is always out there, but it has to be really something that we're comfortable with it, if that is to happen.

Okay. Thank you. And happy holidays.

Thank you. Same to you.

Thank you.

Thank you. And our next question is from the line of Mr. David Togut, Evercore ISI. You may now proceed.

Thank you, good morning.

Hi David.

Good morning.

You talked, Marty about the beginning of the critical year-end holiday selling seasons particularly the mid-market, but I'm wondering if you could broaden your comments to talk about the small business payroll outsourcing and HR services market. And in particular, does the passage of tax legislation particularly the reduction of the statutory tax rate impact the propensity of the small business owner to buy your services?

Yes, it's obviously very early just passed, but I certainly think there is increased opportunity with anything whenever there is more complication and change, there is more opportunity for them to outsource right and say to go to someone. Look this is going to be a huge compliance workload in the next month to 45 days that makes take all the changes, the IRS getting through all this, everyone are understanding and getting back into forms and explaining it to clients. I think that's good for us, obviously could be, because the more complexity from that standpoint is not necessarily and typically complexity can stop new businesses from forming, I don't see that happening here in case and in fact some maybe encouraged as I think you are saying given the tax changes. And I think existing clients will find that the value of Paychex is really, they can really see even increased value of Paychex going through all of this change. So, I think there is some real opportunity there. From a selling season perspective overall, it's pretty early and you know we saw some momentum in November on the small business side, that we're hopeful we'll continue and we'll see, a lot of things are shifting. So, the go-to-market strategy that we put into effect which put more on the web, new changes in our website, putting adding chat to our website, making it easier for clients to search. Paychex understand what Paychex is and then buy either online or really buy, through telesales, it looks like it's really starting to pick up, but its early Dave, we'll have to kind of see, we need to get to the end of January to really see what the big impact is on the small business. HR, by the way HR services as we've noted and you've seen, growing very strong, very strong market for PEO retirement services and time and attendance for example, all growing well.

Understood, and then, I'm curious if you saw anything during ADP is proxified with Pershing Square particularly their greater disclosure about their innovation strategy with their new ended back-end payroll engine and tax filing engine, whether any of that disclosure impacts the way you think about your own innovation tax, particularly given the excess cash you'll have under the new tax bill?

No I don't think so, I mean I think we've, they've ADP has always been a good competitor, I think we feel very comfortable with the technology investments that we've made in Flex and you know just introduced our new product bundles in October, our express product, payroll product on the low end. SurePayroll's investment, I think we feel good about the investments, but there is always some things that you'd like to do a little bit more in a quicker period of time and that's really from a technology side what we're reviewing is can we do that. It really hasn't, wouldn't haven't been influenced by ADP, they continue to be a good competitor and, and we feel very comfortable with competing against them.

Thanks and just a quick final one from me. As you contemplate use of proceeds from, the tax cut, you mentioned particularly higher R&D, but what about dividend payout. I mean you have a terrific payout ratio around 80%, should we expect accelerating dividend growth once the tax cuts come through and would the payout ratio stay at approximately the same level?

Well I think, obviously that's a board decision, and so as we approach the next board meeting in the next month, that will be a good decision to have, I think the board has been very consistent with paying out a generous dividend, from when you look at others. But I think this, how big of a change that this is, I think they will continue to evaluate whether that's the proper level. But I don't have any doubt that we'll continue to be a leader in the way we pay out and it will be somewhat consistent certainly with what we've done in the past.

Understood, thanks and happy holidays.

Thank you, same to you.

Thank you.

Thank you. And our next question is from the line of Mr. Bryan Keane of Deutsche Bank. You may now proceed

Hi guys, just want to ask about payroll services growth, I think Marty or Efrain you suggested that the growth would be towards the low end of the range. Just trying to think a little bit about maybe the causes of that, I think you did mention client mix, so I just want to make sure I understand it?

I think, Bryan the two biggest impacts of that and then there is one additional factor that could impact it in the back-half of the year. But if I go through the first six months of the year, what you're seeing are the impacts are going from an average client size in the upper 16s to about 16 and we disclosed that. So, we get that drag in the first half of the year and that's impacting us. On the pricing side, we, our pricing range is about 2 to 4 and we're netting around in that 2% range. So the combination of those two is driving us to where we are in the back-half of the year the wildcard will be how strong the selling season is, so we have a strong selling season we could start to build up from that number. And we are anticipating and hoping that we will.

So as client size gets smaller then you get the revenue yield is lower?

Yes, yes.

Okay, and then just my question on the tax reform, so it sounds like some of that benefit then you are suggesting, might have reinvested so it would potentially go into investments which would lower margins, therefore we wouldn't see the full 100% impact to the bottom-line of the, I just want to make sure I got that correct?

Yes, let me just add some new ones to that Bryan. So, the concept here is not that we simply reinvest and up the amount of expenses we have in the business. The idea is that we reinvest over a period of time over the next couple of years say, and that those investments pay out in future growth of the company in two forms. Number one, top-line growth, and number two could be earnings growth by becoming more effective and more efficient. So that's our thought process here, now that we think the current rate of spend needs to be upped and we have an opportunity, but instead that we have as Marty suggested earlier, the opportunity to take a look at a range of different projects both on the operation side and on the technology side to see if we can accelerate them. And if they were on a roadmap let's say it was three to four years could we do that into and can we start to pull some of those projects forward and we have a robust list of things that we are looking at.

Okay, very helpful. Happy holidays guys.

Same to you.

Thanks.

Thank you. And for the next question is from the line of Mr. Gary Bisbee of RBC Capital Markets. You may now proceed.

I'll start by following up on this client mix shift. So in your, your 10-K for fiscal 2017 you said total clients, payroll clients I guess that it was flatted 605,000, so if the mix is, does this mean the mid-market clients or larger clients actually declined, but it was offset by growth in small clients?

Well, I mean, no, Gary, I think that the growth that we saw was on the lower end of our client base. We didn't see declines in the mid-market in the terms of number of clients. But as a percentage of the client base, because the rest of the client base shifted down to lower size clients. We've been seeing over the less, I would say certainly last couple of years more growth on the low end of the client base than on the higher end of the client base.

And so, let me ask you about that metric, that 605,000 and I know that's rounded and everything else right, but the number u put in the 10-K every year is that just payroll and so is the number bigger if you have some segment that are doing HRS but not buying payroll or is that practice?

No that includes clients that run payroll. So, that would capture, so some of those clients have additional ancillaries, but we count them if they run payroll less payroll clients.

Yes, right, okay, all right. And so, I guess the next question then, continuing on the theme, so you've talked about the new bundles and the simpler pricing and adding some things there, I know its early, but what's the, how is that being received in the market as you people are out ahead of the key selling season, is that helping competitively or is that, are there any feedback you have at this point?

Yes, Gary. It's positive feedback from a couple of different standpoints one is the bundles being a little more competitive by adding things that others competitors don't have, like paperless onboarding, the two mid-level bundles have paperless onboarding and there is new do-it-yourself handbook, we've always had a handbook product, but we is very expensive and so we give information to the client that we work with them, kind of personally over the phone or in person to put that together. We found that the new do-it-yourself online handbook that is a little simpler and its more self-directed by the client is getting very good feedback in that bundle. So, and then express on the low end is getting good feedback. So far its good feedback, it's early in selling season you really can't see it until January, particularly in small business and it's harder to predict. But we're doing positive feedback on it from what's in the bundle we think we kind of hit it right. So, we'll see how the selling season comes out.

Okay, great. And then just the final one from me, each of you said in your remarks, alluded to PEO being poised for PEO and ASO maybe it was being poised for some acceleration over time and was that comment aimed at the comment you made about integrating the sales force HROI with your own and that going well or where there some other reason that you are optimistic about the positioning of the combined business there?

I think both, one the integration is going very well, so we added good leadership at HROI and there experienced with a very experienced team on the Paychex side across the country. So I think that's been very, that's been positive and I think is helping the growth in PEO. But overall I would say there right now PEO is, really is doing well, HR outsourcing in general, but PEO is doing well. I think it's just because of all the changing regulations, and it's been very positive from that standpoint. When you think about it, if you just take just think about minimum wage changes and how many are in different states, what we're finding and I have mentioned this before, what these businesses are going through now is even before tax reform changes was the fact that well federal regulations are trying to be reduced and are being reduced to some degree, state regulations are making it even more complex if you are multi-state employer. Different minimum wage changes, Paid Family Leave Act is different in New York than New Jersey different from other states. And now, lot of rules are even coming out and scheduling employees. And so, I think it's just that a shared employer is getting a lot of attention right now.

That makes sense. Thanks. Happy holidays and Merry Christmas.

Thank you, same to you.

Thank you.

Thank you. And our next question is from the line of Mr. Kartik Mehta of Northcoast Research. You may now proceed.

Hey, good morning, Marty and Efrain.

Hi, Kartik.

Marty as you looked at the selling season and you kind of compared to what you've seen in the last couple of years and the changes that are going on maybe more people going to the internet to look for payroll. Is that at all changed in how you are managing the sales process and what you are investing in and ultimately could some of the investments you are talking about as a result of tax reform would be related to that?

Well certainly and you know we've already started those investments, Kartik we talked about how we really up the investment in digital marketing and in getting more leads we've invested in the website. We've now rolled out chat different forms of live chat on the website, because definitely what you are saying, small business micro in particular let's say less than five employees, there is 60% of the way through the sales process just in the search online by themselves and they are ready to buy. So the change that we made beginning of this fiscal year, where we added more sales reps and the virtual teams or telesales, has really started to pay off. And we're learning and tweaking on the leads and how to get more leads and how to do that and how to do in the most efficient way. But that certainly could be part of the investment. Now if you go back to what Efrain said though on top there to be clear, this is not just about saying okay we're going to raise the level of ongoing expense, but we're looking for some, is there some technology investments that could be made over the next, this fiscal, next fiscal, that while you're getting the biggest benefit of tax reform that we could accelerate those investments to maybe speed that up. So, no more feeling pretty good, selling season again, I won't comment, because it's too early particularly for small business, but I were very bullish on how the virtual sales is going to take off. The field that also gets very focused on, kind of the five plus and larger clients and has more time for that in the, when clients want to call in and buy telesales is ready to do it.

And Marty, in the past I know you focus on acquiring companies there may be private and bolting on those companies, as you look at this tax reform do you think there is any change in evaluation, I know evaluations kind of kept you on the sidelines, but do you think there is any change in evaluation, because of the tax reform, could that have any impact on what you look at or what happens to evaluations?

I suppose it depends certainly on the company and their profitability, right if its, if many of these companies at least if they are depending on their size and profitability whether the tax reform will even impact them or not or whether they have carry losses and forwards and things like that. So, I think it could have some impact, I don't think we're seeing that right now, but that certainly would measure into things that we're looking at.

I think the other thing I would add Kartik, the inability to deduct interest expense above certain caps makes certain targets more attractive than they otherwise would be at the margin. Now I just want to caveat that I'm not saying that we have a target in mind, but that those opportunities will be there, it's not a great place to be if you have a significant amount of that in your capital structure and companies like Paychex that don't operate that way can bring value in those situation. So, I would say at the margin those opportunities will be more attractive.

And then Efrain just one last question, the interest on clients' funds does the rate change and/or the tax reform change at all, how you will invest these funds?

Yes it actually, it actually could have an impact. So, I was reticent or we were reticent, we had a discussion internally about attempting the modified guidance with all of these changes going on. But, it's certainly could impact the composition of the portfolio which in turn could impact the effective tax rate. And the point I'm making is that, you may end up in a world where corporates are more, corporate taxable bonds or more favorable investment vehicles which would drive your effective tax rate up, but won't have much with a change in the bottom-line and we're looking at the composition of the portfolio to understand if it makes sense over time to change the shift from almost all municipals and some corporates to more corporates and fewer municipals. So, that's all part of the raft of considerations that we need to think about.

All right, thank you, Marty and Efrain.

Thank you.

Thanks Kartik.

Thank you. And our next question is from the line of Mr. Ashwin Shirvaikar of Citi. You may now proceed.

Thank you.

Hi Ashwin.

Good morning, Martin. Good morning, Efrain. I wanted to go once more to sort of the derivative impact of tax reform, now you addressed the propensity to outsource might go up because these are complex. But what are your SME clients saying to you about potential higher employment and things like that. Can that down the road effect, that client makes metric that's hurting payroll process?

Frankly, Ashwin, at this point they are not saying anything, because I think they are still trying to figure it all out. But I think that, they will certainly, if to the degree that a small business, gains or benefit on tax reform, they some, many in small businesses aren't that profitable, so they might not, pick up that much gain. But they will certainly I think the overall feeling is, hey they will have an opportunity to invest in their business hire more people and they will do it that way. So that they can expand, so that's certainly should be another positive opportunity for us to, even existing clients be able to add more employees which will help us with more checks. And they may now say okay, I can spend on a 401(k) and make a contribution. So I'll take a 401(k) and we're looking at all of our marketing to our clients and prospects to say, you may, this may be the time that you want to invest in health insurance, invest in 401(k) retirement plans or IROA, or something else that Paychex can provide to you and make it easy form as they see their benefit.

And so the other thing Ashwin to build on what Marty says, our thinking as we go through, go forward is that, the tilt will be in the future towards comprehensive outsourcing solutions. So, bundling benefits, bundling other ancillaries that if there was a trend to do that in the past there is more and we think we have made, we have shown by our investment dollars that we think the PEOs going to be a beneficiary. But to Marty's point, we think there is going to be other areas of the business on the ancillary side that will benefit from more available cash in the hands of small business owner, small, medium size business owners.

Understood. And is it for the near-term possible to quantify or have you put in your forward expectations here. So the strength of any one-time reporting noted if there is complexity in the next one to two quarters?

I think it's early and I think where you would see and where it would be easier to do is really on the PEO side more than anything else. But, I think we're early in the process to see what's going on.

Got it. One more along those lines, lower withholding because of this less effective investment plan?

So, the impact we think will be between $200 million to $300 million on client funds, at the margin we think that's about a penny EPS going forward, I'm sorry on an annualized basis; I don't want to close an estimate revision at this point. This is yet another kind of guessed earlier about the portfolio, client funds will decline as a result of this, it's a modest impact given the portfolio, but it will have an impact on where we're rolling through all of those impacts to be able to speak with more certainty as we go forward.

Got it. And one question not related to any of these, cash flow for the last six months been quite good, how much of that is timing and what's sustainable for the course of the year and if you could kind of…

No, I think 26 was high, I don't have an exact percentage obviously 26 through the first half of the year, there were some unique items that occurred we had fourth quarter was artificially low and the per six months are probably a little artificially high. But we, I think double-digit certainly is where we're going, I think, I just add one other point on that, our cash generation has been tremendously strong. So, we continue to deliver high quality earnings.

Got it. Thanks. And happy holidays both of you.

Thank you. Same to you.

Thanks, Ashwin. You too.

Thank you. And our next question is from the line of Mr. Rick Eskelsen of Wells Fargo. You may now proceed.

Hi, good morning, Marty, how are you. Thank you for taking my question. Just the first one again following on the tax reform theme. You guys are talking about reinvesting, I assume some of your competitors would probably look at similar things, so in terms of overall market competition or in what you see, what impact do you think you could see from tax reform on the competitiveness of the market?

Well, I'd say this Rick, and then Marty can also build up on it. Hey if you got more in your award chest you are in a better position. So, I would say those who have in the award chest or in a better position to be able to compete in a landscape where resources matter. So, I would say we're that's one reason why as we looked at the opportunity we said there are, there are opportunities to accelerate some high value projects and opportunities and this is the time to start thinking about doing that over the next couple of years.

Yes, I think you know as Efrain said, it's an interesting point when you think about there is companies that are going to gain from this, in our competitive environment and there is others that won't because, they don't have the profitability and the tax reduction that we're going to have and we will be able to invest more where others aren't going to gain that much. So, I think it will continue to put companies who are already profitable and who have been paying a high tax and now will pay lower that should help us to be, if we plan this right and invest correctly, this will make us even more competitive than we are today with some others who can't do the same level of increased investment.

Thanks, that's helpful. And just sort of building on that a little bit, two questions on the CapEx, I know this is a little bit higher this quarter, I think based on your disclosure due to the campus build out. So I guess the question…

Yes, look on the presentation we posted on the website it's a, CapEx it can be, I think we said 180 to 190 for the year, I think it's going to be come in a little bit lower, you can see what we spent in the quarter on the campus, one thing I would, I think it's very important to emphasize, I keep saying this the build out on the campus permits us to consolidate leases and save expenses on an operating basis going forward. So that's why we did not, no reason other than that. It gets efficiencies, but I should say from a financial standpoint, it was a very attractive deal for us.

And is that primarily the campus build out, is that primarily going to happen this year and then thinking about CapEx and the investments you guys have talked about, how should we think about, some of those investments being, the technology and CapEx side moving forward?

Yes, so it's primarily this year Rick. So, we may have some spill over capital into next year, but most of it occurs this year.

And the longer term, I mean is there what you're accelerating from investments should we look for that CapEx number to maybe dripped up slightly in the next coming year?

It could, so if you look at what we've been standing we're in that, call it 3.5% of revenue range somewhere in that sometimes we bounce up a little bit higher to closer to 4%. You know that's sort of our normalized CapEx, I'm sorry, capital expense amount. We could bounce a little higher, if we saw projects that made sense. It's not going to - I wouldn't anticipate at this point that it would bounce up to the level that we're spending this year, because of the building.

Great. Thank you very much. Happy holidays.

Thanks. You too.

Thank you.

Thank you. And our next question is from the line of Mr. Jason Kupferberg of Bank of America Merrill Lynch. You may now proceed.

Great. How are you guys doing?

Good. Thanks.

Good, good. So, just one more on tax, I just wanted to push a little bit on the reinvestments, I know it's premature to have kind of precise numbers, and as far as how much you may reinvest. But can you just, maybe roughly dimension it for us, I mean we're talking about, 10% of the benefit 40%, just some rough order of magnitude to give investors a sense of how you guys are thinking about the reinvestment opportunities?

So here is our precise, about as precise that could be, I would say its half or less.

Okay. I'll take it. Thanks.

But the reason why, I don't mean to be flipping and that wasn't a flipped commented it actually is a serious comment. The process when you are doing this, is that you collect a lot of opportunities and Marty will sit down and management team will sit down and say what do we think are the things that really move the needle, as oppose to or just opportunities to spend and give us a bit of an incremental bump. And then we are going to go through a conversation at the board level to discuss what their comfort level is and then we're going to look at it all together and does it make sense, but from both and investor standpoint and from a business standpoint. And so, we're in any one and a half to two of that process it will accelerate certainly over the next month or so, but it is a little bit early. We know the opportunities there, we certainly would drop all of it into the opportunities, but we think we do have opportunities to spend and we're going to rank order them and then do that.

All right. So you think by the time to the next earnings call we'll have.

Oh, yes. Definitely, yes.

Yes, okay, okay great. I don't think I heard much just about kind of bookings and retention in the quarter, I mean these qualitatively and I know you don't give hard numbers, but you are facing some easier comparisons, I know you are targeting for bookings to be positive on a full year-over-year basis for 2018 that still on track and are you seeing further up ticks in retention post the implementation of a new client service model.

I think retention has been very consistent through the year, so I think that's been positive, it's near all time highs that we had and we are rebounding back from last year where we dropped of just a little bit. So, I think it's been pretty consistent, pretty positive there. And again, we will have a good -- the best sense after January and certainly the same for sales. We don't normally Jason talk about it, until after we get through the selling season. But, we had some momentum in November and so it's always hard to tell exactly but we are feeling pretty good about it. And we will see how we come out with the new bundles for the service model changed with the sales, go to market stuff that we have done with the virtual team inside and the increase in web investment. We are feeling good, it's just early in, little tough to talk about until we know.

Okay. And just a last one on core payroll, I guess we have a slight tweak here to the low-end of 1% to 2% for the year. So, I guess what around the edges kind of changed in your guys mind over the last three months. Because it doesn't sound like the hurricane impacts were any worse than you'd feared and I think we had talked about the smaller client sizes last quarter. But, just wanted to see if there was anything discernible that led you to the lower end?

Yes. Jason, I think the thing that beyond the things that I mentioned, the speed and the pace of ramp always impacts payroll revenue growth. And so, we tweaked it based on what we are seeing in terms of the pace of the ramp through the year. That I think it's our -- the reason we tweaked at this point.

Just a ramp of the metrics itself, you mean like in other words, now you are taking a truck point halfway through the year and just feel like the low end is more likely? Okay. Got it. All right. Have a great holiday. Thanks.

Thanks.

Thanks. You too.

Thank you. And our next question is from the line of Mr. Tim McHugh of William Blair Company. You may now proceed.

Yes. Thanks. Just a follow-up on the comments you referenced I guess once or twice on November, is that related to macro data or your -- I guess company's specific comment, and if it's company specific, can you elaborate on what the momentum was that you are referring to that that makes you feel better?

I mean just generally you are starting to head into that selling season. And it, we had some momentum there. That was specific to us, Tim. So, not in the macro sense but more specific to us. Just as you getting into this year end time, we felt pretty good about. The first part of the quarter was okay, it was kind of like, I'm sorry, first part of the second quarter, it was kind of like the first quarter. And then, November, seem to had a little bit of an up tick. But, it doesn't make the selling season. So, we hate the comment much more than that, just that if you are pretty good empirically, if you look at the HRS side of it, we certainly saw a nice up tick in the PEO side. So, I think we are feeling pretty -- I'm feeling pretty positive coming out of November. But, again, I could tell you a lot more after this next quarter.

Okay. One other question, just HROI, I guess when I do the math on the revenue and contribution and the expense impacted it, looks like it was breakeven even maybe slightly worse than that?

It was modestly negative Tim, but, really not a significant impact.

Can you -- why, was that integration expense or…

Deal, you always have integration cost. So there is the -- when we do a deal, we are assuming that we got to do a number of investments. And then, there is the amortization associated with the deal itself that had expense and that starts to lessen as the quarter grow -- as we go through the quarter.

Okay. Thanks.

Thank you. And our next question is from the line of Mr. David Grossman of Stifel Financial. You may now proceed.

Thank you. Good morning. I wonder, if I can just go back to the unit growth question that has been coming up in terms of and the impact of mix on that number. I mean, my recollection is that a typical economic cycle is that, is it mature as you have the tendency to be adding new business creations improves and our mix naturally skews to smaller companies or smaller clients than the average. And so that's a natural phenomenon, so in fact that pressuring perhaps payroll growth for the low? And are there other dynamics maybe that are really have work that really are driving that number down, because typically you will get volume in terms of total units that were offset that decline. And I'm just wondering is this cycle different or is it anything else going on in the business that maybe impacting the growth of that number?

Yes. I think it really boils down, you could kind of summarize it by saying last year we didn't have a fine growth. We talked a bit about why that was at the end of the year and a lot of that related to service disruptions and the spike and retention, I'm sorry, spike and attrition that we had, we dropped by a point. When you put that together with the result -- the sales results and the mix shift that we are seeing you are driving client -- I'm sorry, you are driving payroll service revenue to the rate that we are experiencing. So, I think was a little idiosyncratic now is that we are anniversarying some of that retention issue that we had last year and it's driving payroll service revenue down.

Right. So, I guess this question was asked in a different context, so then the difference if we knew about the retention and the headwind that we would have going into this year, is the difference primarily related to a pricing dynamic or what is it that specifically is…

It's not a pricing dynamic. I would say at the margin pricing is a little bit more competitive in small market payroll under 50 than it was last year. So, we are realizing about 2%. But, again, I'm comparing against growth against last year, where I experienced -- started to experience some of the defects in the back half of that year. So the front half is a little more challenge than the back half will be.

I got it. Okay. And then, the second question I had relates to the PEO, when you back out the distortion from HROI, can you give us a sense of at least organically what work side employees, how that growth is trending?

Yes. I don't know that I've got the exact number. We haven't disclosed it. But, I would say this David, it's pretty solid, it can certainly -- upper single digits, maybe double digits, I have to go back. But, I would say that's the range, I won't be more specific than that. But, I would say that's the range, I won't be more specific than that. But, I think the point if I can think about the point beyond your question, we have had obviously very good work side employee growth. But, its not all because of HROI, we think have work side employee growth on our PEO also.

Yes. It's been pretty consistent. We went over a million work side employees that we serve and that was -- that's without that was before HROI. So, I think that numbers are in that range. That's the range.

And any thoughts on just at a high level how [indiscernible] are impacting revenues this year, is there any noticeable difference in terms of insurance past service and how that maybe impacting revenue growth?

Not really David. I think there is a little bit more impact, by the way, I just looked it up, so the best that I will say, our organic work side play growth was double-digit. So we are seeing nice performance, Marty alluded to that. I didn't have the numbers in front of me, I looked it up. So, past service are not -- that past, I should say that, there is at the margin more pass through because of the addition of HROI. It's not significantly distorting the growth numbers. I would say as the percentage of business that we are deriving from PEO growth, you will see more. One of the thing I would say because -- advice as to whether we report it more regularly through that every single year, it's been 10k pass through. So, we look at whether we had that disclosure.

Right. And then, just one last thing on the PEO. You made this acquisition, I don't remember what your historical exposure was to blue-gray segment. So, yes, just curious, you made this acquisition, how do you see the market evolving over the next couple of years, vis-à-vis [indiscernible] historical perspective was, let's say two or three years prior to this.

You mean, in general for the PEO, I think we are stilling looking at it consistently as we've always had. That's one of the things we liked about HROI. They were very consistent from a way they went after clients selected clients. We had a very good way to compliance wave there to look at it in underwriting and I think they were very consistent with that as well. So, I don't think we are increasing risk as we take on these PEOs as we taken on a company like HROI, because they are very consistent with the way we looked at it. And I don't see us getting more risky we don't see it that way. We have always been pretty careful on that and actually had a very strong PEO because of that we have to grow without taking and really additional risk over the parameters that we have always had in the past.

We think that segment in the market David also continued to grow. And particularly growth in areas where HROI is strong and we are strong.

Right. Okay, guys. Thanks very much. Have a great holiday.

Thank you too.

Thank you. And our next question is from the line of Mr. Mark Marcon of Baird. You may now proceed sir.

Hey, Marty and Efrain.

Hey, Mark.

With regards to HROI, was the contribution in this past quarter, somewhere around $20 million?

I think you can derive that, Mark. It's in that range.

Okay. And then, with regards to the effective yield for the back off of this year, just given with the recent rate, increase, how should we think about that in terms of -- think about the flow balance coming down by 200 to 300….

All in the back half of the year, Mark. I just cautioned you to --

Yes. I know with the duration and everything. That's why I was asking the question.

So, I think we still feel comfortable with the guidance that we've given. So, that's where we peg it at. The reason why I'm not, I can't more specific in that that market, we are looking at the composition of portfolio and over the next three, four, five months it could change. So, but we are comfortable with where we are right.

Okay. And then, with regards to -- this small business formation, there has been a lot of discussion about just the way pass throughs are going to work, don't you think that there is going to ultimately end being a little bit more in terms of small business formations that could end up occurring because of this change in and this so, how would you take advantage of that?

Well, I think -- I do think that you would expect that given the reform that you are seeing in that would drive some of that. We obviously, haven't seen it yet. But, you certainly get that feeling that will happen. We would take advantage of it by being out there and marketing to the fact that, if you are going to incorporate it as a small business for the first time in particular, you would best have someone like Paychex there to support you. So, I would think we are already looking at how can marketing take advantage of anything that comes out of tax reform and that is certainly one of them.

Great. And then, just with regards to the capital expensing provisions and the ability to deduct all of that related to over the next five years. To what extent, would you end up really taking advantage of that, I mean could you -- do you have other ways to take advantage of it to a greater extent than just marginally increasing your CapEx?

There maybe Mark. And I would just say its early in the process, so we are going to take a look at that.

Okay. And then, in terms of just very short-term one-time impact, to what extent are you going to have to spend more in a very short-term just to get the systems into compliance. It sounds like the IRS is basically not going to give the new withholding tables until February, so you are going to have to -- it's going to be a bit of a scramble here in terms of calendar Q1?

No. I don't think, we are ready, we are dealing working with the IRS almost daily on what's happening in and how we will be able to support them and that's the strength of a company of our size and our compliance team and tax team that they are ready -- they know it's going to be a scramble, they are expecting it. And we work very closely with the IRS to help them and work with them, so that everything is up and running as quickly as possible. I don't think it's not going to cost us additional expense in the quarter or something like that. I mean, truly there is going to be a lot of extra work, but our teams will be ready to do it. I don't see a big -- any big investment or change because of it.

Okay, great. And anything to think about with regards to your deferred income tax liability?

Yes. There will be a reval, we will and it will produce a benefit, looking through that.

Yes. Okay. I mean obviously everybody will know to look through it but I just brought it up just…

No. I know. I appreciate it, Mark. But, yes, we are not ready to quantify it yet. But there will be some benefit one-time.

Okay, great. Happy, happy holidays.

Same to you Mark.

All right. Take care.

Bye-bye.

Thank you. And our next question is from the line of Jeff Silber of BMO. You may now proceed.

Hey, good morning, Marty and Efrain.

Hey, Jeff.

Hey, it is actually Henry Chien.

Oh, Henry, sorry.

Hey, guys. Thanks for speaking to me. Just I wanted to ask a more high level just competitive kind of positioning question. There does seem to be a ton of investment going into the HR services and HR bundles from both ADP and software providers. I was just wondering if you could share any updated thoughts on how Paychex is doing this season in terms of HR sales and where Paychex is doing better or just how you are thinking about positioning in general? Thanks.

I think -- Henry, I think the -- competitive environment is pretty much the same, everybody is investing, we feel very good about the investments we have made, in fact, we've really taken it to -- we have taken our entire development team really a year or more ago over to really agile teams. We develop and roll out changes much faster now. We rolled up to new bundles in October that include, so it's not just payroll bundles, they are bundles with HR components to them like paperless handboarding for our clients, so that you can basically recruit, post recruit, hire bring them on up in a paperless fashion in part of one of our bundles that they can buy or do it yourself handbook because we found instead of the more complicated handbook and more thorough handbook that needs personal interaction, more clients want to do it themselves and have a scale down, when they can complete at their own pace, and when they want to do it. And all that innovation has been quick and rolls and rolls out very successfully. And we haven't even talked on the call at all about mobile. Our mobile adoption and the use of our mobile app has picked up dramatically and it's been by -- more by the employees of the clients versus the employer. So, these innovations have been very good. We see tax reforms and opportunities, we have said a number of times to possibly accelerate a few things that are on the outskirts of what we wanted to do and bring them forward a little bit. But, we are very comfortable with our level of innovation and competitiveness in the market. And I don't -- I think it's been pretty consistent. We expect, you got to innovate, you got to have a great service, you got to deliver and I think Paychex and our folks are doing that.

Got it. Okay. That's great. And just in terms of the kind of macro environment, it sounded like that the smaller client sizes, it's a number of I guess business formations has been picking up from your view. Is that sort of a normal kind of pattern that you've seen from your experience over cycles and is there anything that we should watch out for, that you are watching for to just to be careful in terms of the macro environment?

I don't -- we haven't talked too much about formation itself. But, it's kind of flattened out, it's kind of back to the levels, pretty close to the levels that it was in the previous session. I think the big thing on this after this recession was how long it took. It didn't pop right back. It took a lot longer. But, it was sustained longer. The thing I mentioned earlier is, on our monthly employment report, what we are seeing is that job growth -- the small business job growth under 50 employees has moderated, but there is still job growth and consistent job growth. But, it moderated down as you would expect as we are around full employment. But, the wage increases are now picking up and part of that is scarcity of the resource because of full employment. So the wage increases are now getting up from that 2% and getting closer to 3% and running around 2.8% or so. And I think, so you are seeing pretty good wage increase, and then, you are seeing the moderate small business job growth that's all pretty positive. The thing to look out for maybe what was mentioned couple of questions ago, which is with the pass throughs and the tax reform, does that generate new business formation for someone who was not going to formulate a business before now it may make sense for them. We may see a pick-up in that just a little bit early to tell.

Okay. Thanks so much for the color.

Okay.

All right. Thank you.

Thank you. And our last question is from the line of Tien-tsin Huang of JPMorgan. You may now proceed. Tien-tsin Huang: Real quick. Just on the -- I wanted to clarify on the pricing side, just with all the bundling and pricing and simplification, any change in pricing in the quarter and sort of your outlook, I didn't think so, but just wanted to make sure.

No. Really the product, the bundles were more since you are combining the features, making the pricing simpler in a way that we present it to the client. We don't see that is changing the revenue per client or what we are getting from in price. We haven't seen it yet. It's early, but didn't expect it, and haven't seen it yet. Tien-tsin Huang: All right. That's great. Thank you. Have a safe holiday.

Great. Thanks. You too.

Bye-bye

Anymore calls operator?

I'm sorry, sir. At this time, there are no further questions on queue.

Great. At this point we will close the call. If you are interesting in replaying the webcast of this conference call, it will be archived for about 30 days. Thank you for taking the time to participate in the second quarter press release conference call and your interest in Paychex. We appreciate it. Please have a great holiday. Thank you.

Thank you. And that concludes today's conference. Thank you for participating. You may now disconnect.