Paychex, Inc. (PAYX) Q3 2012 Earnings Report, Transcript and Summary

Welcome, and thank you for standing by. [Operator Instructions] Today's conference is being recorded. [Operator Instructions] Now I would like to turn the call over to your speaker, to President and CEO, Martin Mucci. Sir, you may begin.

Thank you, Tanya. Good morning, and thank you for joining us for our Third Quarter Fiscal 2012 Earnings Release Call. Joining me today is Efrain Rivera, our Chief Financial Officer. Efrain will review the financial results for the quarter and our guidance for the full year after my opening comments, and then we'll open it up for any of your questions. Paychex has made good progress in many areas during the third quarter. We continue to focus on our strategy as the leading provider of payroll human resource and benefit outsourcing to America's businesses. We are driving growth in revenue and profits while providing industry-leading service and products to our clients and their employees. We were pleased with many of the key business indicators in Q3. Our checks per payroll has improved for 8 consecutive quarters. Growth in checks per payroll continue to be positive, with the third quarter comparable to the second quarter. Client satisfaction results continue to be at strong high levels, indicating excellent operational execution. And I find this particularly rewarding and telling of our employees the great work they're doing with increased complexity of regulations at the federal, state and local level. And our client retention continues to improve, with payroll client losses down another 5% from the third quarter of last year. Our third quarter encompasses an important selling period, as you know. Sales of new payroll clients, excluding share payroll during the third quarter, increased moderately compared to the same period last year. While we continue to experience the impact of a challenging environment for new business formation, we find that in the third quarter period in the last 2 years we have seen, this is the first third quarter period in the last 2 years where we have seen an increase in sales compared to the prior year same quarter. We are experiencing favorable results, I think, from our focus on CPA referrals channels and search engine marketing, and we also did well against all of our competitors. SurePayroll sales have also performed well. Our results reflect the sales force that is doing a great job communicating the strength of the Paychex brand and our product and service quality. With a solid sales leadership team, this year's new compensation plans and sales support tools in place, we have continued to also experience a decline in the payroll sales representative turnover, a statistic that had increased the same period a year ago. Investing in our business remains a priority. We are excited about our achievements during the third quarter, which include the following: We launched additional enhancements to our software-as-a-service product offerings with our Paychex Online Mobile applications for tablet devices with our Paychex Android app. This will permit clients and their employees to have full access to products and do anything they do now over the web or on a PC or laptop. This is a continuation of our aggressive technology introduction this fiscal year that started with our single sign-on and landing page in October, our iPad app in November, this Android app just released in February and our smartphone app anticipated in June. We also unveiled 2 new products. First, our Business Insurance Payment Service relieves business owners of the administrative burdens associated with paying their insurance premiums. Second, our Paychex Advisor Select 401(k) is a new offering that is specifically designed for the fee-based financial advisors. We acquired Icon Time Systems, a provider of time and attendance solutions for small and medium-sized businesses. We have had a successful relationship with Icon being sold through our core sales force and related to our time and attendance offerings, a clock really for the under-20 employee group. And there was an opportunity to incorporate them into our company, which we seized upon. We continue to invest in our Paychex next-generation and its suite of innovative products. We believe this is the key building block to our future success, and we're excited about it. Our 2 acquisitions from 2011 are creating excellent opportunities in both their markets. SurePayroll continues on track in the do-it-yourself SaaS market. And we continue to make in-roads into the financial advisor marketplace with ePlan services, which further expands our successful 401(k) services, where we continue to sell and service more plans than anyone else in the industry. Both SurePayroll and ePlan offer quality service and from a client standpoint, allow Paychex to offer a full range of payroll and 401(k) outsourcing alternatives. We have reaffirmed our expectations on full year guidance provided last June. We expect that increases in checks per client will continue to moderate, and we also expect to continue our planned investments in our business, which will impact our operating income margin. As we move toward the end of this fiscal year, I am proud of the efforts of our employees in all areas of the company. And on behalf of our clients and shareholders, I'm excited about our progress. I will now turn the call over to Efrain Rivera to review the financials in more detail. Efrain?

Yesterday afternoon after the market closed, we released financial results for the third quarter and 9 months ending February 29, 2012. We also filed our Form 10-Q. It provides additional discussion and analysis of the results for the year. These are available by accessing the IR page at paychex.com. This teleconference is being broadcast over the Internet, and it will be archived and available on our website for about one month. As Marty indicated, Paychex continued to deliver positive results during the third quarter of fiscal 2012. Some of the key highlights are as follows: Checks per payroll increased 1.8% for the third quarter, which was consistent with the second quarter. This has moderated slightly from the 2.0% for the first 9 months. This moderation is anticipated to continue and will eventually impact quarterly comparisons in both payroll and HRS revenue. Checks pay per payroll -- and let me just clarify that checks per payroll are exactly the same calculation we did and referred to as checks per client. We simply think it's a bit more accurate to refer to it as checks per payroll. It's an estimate of the average number of checks issued per client payroll run. During the third quarter, the estimation process was refined. Previously disclosed growth percentages are moderately higher, 2/10, 3/10 higher. But directionally, they were unchanged. Also at this point, we don't include SurePayroll in our checks per payroll statistic. Sales of new payroll clients, excluding SurePayroll for the third quarter, moderately increased over the prior year third quarter. We saw mid-single-digit growth. Total service revenue grew 8%, both for the third quarter and the 9 months. If we exclude SurePayroll and ePlan, the growth would have been 5% for the quarter and 6% year-to-date. Operating margin, which is operating income net of certain items as a percent of total service revenue, came in at 35.7% for the third quarter. Our year-to-date margin is 38% -- or was 38%. And we'll talk more about this in a little bit. The interest rate environment remains at low levels. Our combined portfolios have earned an average rate of return of 1.1% for the third quarter and 1.2% for the 9 months, down from 1.2% and 1.4% last year, respectively. Now, I'll walk you through our results as presented in the consolidated income statement, with some additional highlights for the third quarter and first 9 months. First, payroll revenue. It increased 5% for both the third quarter and 9 months. Organic growth in payroll service revenue, excluding SurePayroll, was 4% for the respective periods. We benefited from increases in checks per payroll and modest increases in revenue per check. Revenue per check was impacted by price increases, offset by discounting. We often get questions during the call regarding pricing in the market. We believe we have a reasonable level of pricing flexibility and some discounting on new sales occurs and is to be expected. We saw nothing out of the ordinary. Now turning to HRS revenue. It increased 12% for the quarter and 14% year-to-date. Excluding ePlan, HRS revenue growth would have been 10% and 11%, respectively. This growth in HRS revenue reflects the growth in clients and price increases. In addition, our insurance services continue to benefit from growth in health and benefits revenue, which was up 25% for both the quarter and the 9 months, as the number of applicants continues to increase. Our HR Solutions revenue growth rate is impacted by the mix in our clients. Our HR Essentials produced a lower revenue per employee than our traditional ASO clients. Our PEO business tends to fluctuate with changes in health care rates and workers' compensation plans experience. We've experienced increases in health care insurance rates that have impacted the business over the past 2 years. We've also made significant improvements in our PEO offering and expect that it will get back on track. Meanwhile, our ASO product is posting strong growth compared to a year ago. Combined interest on funds held for clients and investment income increased 5% for the third quarter and 7% for the 9 months. Yields available on high-quality securities continue to remain low but are being somewhat offset by increases in average investment balances. Expenses increased 8% for the quarter and 7% for the 9 months, partially due to expenses from SurePayroll and ePlan. Excluding SurePayroll and ePlan, total expenses would have grown 5% and 3% for the respective periods. We continue to invest in product development and technology innovation. Operating income, net of certain items, which excludes interest on funds held for clients, increased 7% for the third quarter and 10% for the 9 months. As discussed previously, operating margins were a shade under 36% at 35.7% for the third quarter and 38% for the 9 months. As we've indicated in prior quarters, we typically anticipate that our operating margin drops in the second half of the year. Expenses tend to be higher in the third quarter due to cost to support our calendar year and operations and heightened sale season activities. Also, we planned spending in our technology and products that somewhat negatively impacted the margins. We do anticipate that expenses in the last quarter fiscal 2012 be slightly higher from the same period a year ago, and our operating margin will be impacted. We, nevertheless, continue to expect that operating margins will be in the range of 36% to 37% for the full year. A brief discussion on our liquidity position. Financial position remains strong. Cash and total corporate investments are at $799 million as of February 29, 2012, and we have no debt. That compares to $652 million for the same period last year. Our cash flow from operations were $563 million for the 9-month period, a 2% increase compared to the prior year. The results from higher net income and noncash adjustments to net income, partially offset by fluctuations in operating assets and liabilities due to timing, drive that result. Working capital fluctuated with the timing of collections from clients and payments for compensation, PEO payroll, income tax and other liabilities. Noncash items increased due to additional depreciation and amortization from our business acquisitions. And as we discussed on the last quarter call, the timing of when a quarter close can impact sometimes the quarter view on cash flow. You can see through 9 months that we're on track. With respect to investments, funds held for clients as of February 29, 2012, were $4.2 billion compared to $3.6 billion as of May 31, 2011. Funds held for clients vary widely day to day and averaged $3.9 billion for the third quarter and $3.4 billion for the 9 months. This amount represents a year-over-year increase of 7% and 8%, respectively. It's due to a variety of factors including SurePayroll client funds; wage inflation; increases in state unemployment insurance rates, about 2.5 basis point impact, by the way, for the 2012 calendar year; and also increases in checks per payroll. Total available for sale investments, including corporate investments and funds held for clients, reflected net unrealized gains of $68 million as of February 29, 2012. The same amount for the comparable period was $59 million. Our investment strategy is conservative. We have not recognized or realized any impairment losses on our investments. A substantial portion of the investments are high credit quality rated AA or better or A-1/P-1. Our priority has been and will continue to be to ensure we can meet of our cash commitments to our clients. With respect to equity, total stockholder's equity was $1.6 billion as of February 29, 2012, up from $1.5 billion as of May 31, 2011, resulting from earnings and reflecting $344 million in dividends paid during the first 9 months. As you recall, in October, we increased our quarterly shareholder dividend 3% to $0.32 per share. Our return on equity for the past 12 months was 35%. I'd like to remind you about a couple of our policies regarding guidance. Our outlook is based on current economic and interest rate conditions continuing with no significant changes. Projections don't anticipate or speculate on future changes to interest rates. We expect fiscal 2012 results to be consistent with outlook we've provided back in June and subsequently reaffirmed. We expect checks per payroll will moderate through the remainder of fiscal 2012, and that will impact comparisons in both payroll and HRS revenue. I won't go through the entire guidance, which we repeated at -- both in the press release and in the Q. It's unchanged. The only thing I would point to is the slight change in the effective tax rate approximating the rate impact for the first 9 months of the year. With that, we'll go into the Q&A. Before that, I need to make 2 comments, one is the general disclaimer, that you should be aware that certain written and oral statements made by management constitute forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements should be evaluated in light of certain risk factors, which could cause actual results to differ materially from anticipated results. Please review the Safe Harbor Statement in the press release for a discussion of forward-looking statements and the related risk factors. Before I turn it over to Marty, Marty and I have been speaking with several of you, with many of you and mentioning that we'd like to have an Investor Day. We're going to be holding that in mid-July. Registration information for the Investor Day will be posted on the website after this call. Please take the opportunity to register on the website. That should be up today, and we hope to see many of you this summer. I'll turn it over to Marty.

Great. Thanks, Efrain. Yes, as we've talked about that Investor Day, we think it's a great opportunity. This will be the first one that Paychex has had, certainly, in many, many years, and we look forward to elaborating on our story and our future. So with that, Tanya, I'll open it up to any questions.

[Operator Instructions] Our first question comes from Jason Kupferberg from Jefferies. Jason Kupferberg - Jefferies & Company, Inc., Research Division: Just wanted to start with a question on the expenses side of things. You've been very consistent telling us that the expenses are going to elevate in the second half, the products, the technology, et cetera. I wanted to get a sense of whether or not you see that elevated level of investment bleeding into fiscal '13 or do you feel like you're going to capture most of the incremental spend that you need to make in fiscal '12?

Jason, we haven't obviously completed our plans for 2013, but I think that what we recognize is that we need to continue to invest in technology. I think we've done a good job over the past, certainly, 3 to 4 years of offsetting that with other efficiency increases. So our intention going into the planned period is that we'll continue to spend at a reasonably high level and look for offsets in other parts of the P&L. Jason Kupferberg - Jefferies & Company, Inc., Research Division: Okay, understood. And just to switch over to the sales front for a second. I think you said mid-single-digit new sales growth here for the February quarter, is that right?

Yes, right. Jason Kupferberg - Jefferies & Company, Inc., Research Division: When was the last time it was that high in any quarter, I mean let alone key selling season quarter?

It's been a couple of years since we've seen that kind of increase. Jason Kupferberg - Jefferies & Company, Inc., Research Division: Yes, okay. Do you feel like that's sustainable? I mean, is this is a little bit of an inflection point or should we not make too much of it because it is the key selling season and things can bounce around?

Well, I think anytime you see it for the first time, you want to be a little bit careful. And -- but we're certainly pleased with it because it has turned in this important selling season. I think the sales folks did a great job. And -- but I guess I'd say, we're kind of being conservative in waiting and seeing how the next 2 quarters come out. But we certainly were feeling good about the increase since it's the first time in a couple years. Jason Kupferberg - Jefferies & Company, Inc., Research Division: Yes, yes. And just last one for me. I was hoping we could get maybe a little bit more of a detailed update on the CPA referral channel. How many CPAs are part of it these days? Is that network growing? Any latest data on the percent of your new sales that come from the CPA network, as well as anything you can tell us about what percent of those CPAs are exclusive to Paychex for payroll referrals and what the competitive environment looks like in terms of going after the CPAs?

Yes, I think, we don't give -- Jason, we don't give that much out. But I will give you the sense that we feel we've -- it's always been a strong channel for us. We've seen this one come back stronger so where you see new business starts. When you look at the sales increase and you see new business starts still fairly flat year-over-year, sales from new business starts, so we know that's still a challenging environment. So we stepped up the communications with the CPAs, which are a very important channel to us, and the value that we add. I would say, that the number of CPAs that are referring are probably up a little bit. But I would say, that generally what we're seeing is more referrals from the CPAs that we've been in contact with and have relationships with.

Our next question comes from David Togut from Evercore Partners.

Can you quantify your preliminary views of your fiscal '13 price increase?

We're still in the planning process. It will be in the low single digits.

I see. And could you also update us on initiatives implemented by your new head of sales, Mark Bottini, since he took over in October of last year?

Sure. I think Mark has been spending a lot of time in the field. And he has been out talking to all of the sales reps and the different divisions, the leadership. He has spent a lot of time making sure that the changes we made last year -- beginning of the fiscal year, including the new compensation plan for the core payroll sales reps, have been working well. He has been making sure that we're executing on the training initiatives, as well as all of the support tools that we have given the sales force. We gave them higher-speed tablets over a year ago and have put sales force and so forth on those. He has also brought back to the marketing and support teams in sales the additional things that are needed, so we're doing some new things on sales demos and some other support tools. I think he is extremely active, fitting in extremely well and really getting a great handle on it. I think the biggest thing is just making sure that the focus is on execution, not only in units, but on revenue per client and that we're continuing to grow in all markets that we can.

Do you think that you are seeing a significant increase in revenue per client, I mean, outside of existing price increases?

No, I wouldn't say that. I think what we're doing is focusing on maintaining that. You always have the competition out there. And we thought we did well in the third quarter against our competition, frankly, all competitors, and that you're always balancing pricing and discounting. And he's keeping a focus on -- the focus is on executing both unit sales and that you keep the revenue per client that we're expecting.

And just finally, can you quantify sales force turnover in the third quarter?

We don't give the number specifically, but I'll tell you that it's in the low 30%, 30% to 33%, and that's back to historic levels. So we're pleased that, as I said earlier, that all of the actions that have been taking place and then Mark coming in and the leadership team that is out there is really driving this retention back to the historical levels. We'd like to see it get even better, but it certainly is back down significantly from last year.

Our next question comes from Julio Quinteros from Goldman Sachs.

Just to go back to Jason's earlier questions about expenses and any spillover into fiscal 2013. Just some commentary, is there anything unusual that you guys would expect to preclude you guys from being able to show continued margin expansion as we move into fiscal 2013?

Julio, this is Efrain. Without going through a plan -- but the reason why I hesitate is we're not -- we're in the middle of a plan process. So the answer to your question is sure, there's one thing that could. We could have initiatives that we decide we want to fund that could cause us in a given year to say, we're not going to create margin expansion. And also, it depends on the mix of sales we're delivering. So we're still -- it's still early to be able to make that call. But in a normalized year, we would be able to leverage. It depends on what initiatives we decide will be part of this year's planning cycle.

Okay. And you guys have done a really nice job of bringing in new assets, acquiring some higher growth pieces. As you guys look across the landscape, and we think about the longer-term opportunities for continuing to drive the total reported revenue growth with M&A, any particular pieces to the offerings that you guys are kind of looking at more broadly, maybe trading off the health -- sorry, the HRS side versus the payroll side? What would the priorities be more from an M&A perspective at this point?

Well, the focus -- I guess, I'll just start and then let Efrain jump in. I think the focus certainly is on growth. The challenge for us always is the growth. Finding the high growers is good, but the margin -- that have margins like us are not. They're tougher to find, but we're looking across the entire landscape. Anything that can assist and drive value to our small- and medium-sized business clients, I think, is important to us. And we've really kind of searched the gamut anywhere from the PEO business to payroll companies to product add-ons. And that's what's -- and I think, as you can see, we've been much more aggressive the last 1.5 years on that between SurePayroll and ePlan and now Icon for the clock for us and the time clock. So we'll continue to look. And anything that's a good deal, we'll certainly go after.

Yes, and I agree. The HRS space, obviously, is very active at the moment. Valuations are very high. But we look in both core payroll and also on the HRS side for products that are interesting and would be good add-ons, both from a standpoint of being easy to sell through our sales force and value to clients.

Okay. And just lastly, the answer probably is no change, but I'm just curious on the commitment to the dividend and the payout ratio going forward.

No change.

Yes, no change.

Our next question comes from Joe Foresi with Janney Montgomery Scott.

I wonder if you could talk -- if we could just go back to the demand environment. It's obviously picked up a little bit here on the new sales front. Could you tell us if that's more macro driven or do you feel like maybe it's just kind of falling through because you got the sales force more organized? I know it's just one quarter, but I'm wondering if you could characterize it for us.

Yes, it's a good question. I think it's a mix of both. I think, when you look at the macro environment, we don't see new business formations picking up much. They're still pretty flat. And in the sales from those new business formations have pretty flat. Where we're seeing an increase is coming from search engine marketing, where I think we're doing a much better job marketing the company and attracting those leads, as well as the CPA channel. So I think that there's a macro piece that's picking up slightly in certain areas of the country. It seems to be getting a little better but not a lot. And then I think there's just better execution and better focus on the CPA channel and some of the things that we've been doing with the sales force and that the leadership has been driving there is starting to pay off, so I think it's a balance.

Okay. And then secondly, just kind of looking at your technology rollout. It seems like you've hit some of your goals here at some of the mobile launches, et cetera. Maybe you could talk about what your plans are going forward and maybe what inning you are in the process of sort of updating the technology side of things.

Yes, I think we've been very pleased with the plans that we've put in place and been able to hit the targets for us. Definitely, it's a SaaS-based focus. It is making sure that our clients have the ability to do what they want to do when they want to do it and where. We've been very pleased with the feedback on our single sign-on page, where we've integrated. So you're going to see more online, more SaaS, more integration of data in products. There are single sign-on and landing page we did back in the fall. We got very good feedback from clients, where they can see all their services online and maneuver around those services much easier. They have -- the iPad app has been very popular. And the Android app just released, I think, will go over well. We built those also very carefully to optimize whatever piece of equipment that the client is using. That's a little bit different than some of our competitors, and we feel that the smartphone app that we'll come out with in June will be superior. And again, it's that ease-of-use. So as we focus out beyond that, we continue to work on what we call Paychex next-generation, and that's the technology that will continue to more integrate our services and just make it easier and bring more value to our clients. That's really the simple answer.

Okay. And then just lastly, maybe you could talk about SurePayroll and how that SaaS offering is going. Any numbers that you could share with us would be great and how you're integrating that into your sales process if there's any cross-selling.

Yes, we've actually -- they're doing fine. They have continued to do well on the sales side, and they are focused really on their market. We've left them somewhat separate on purpose because they are a SaaS offering and they appeal to the do-it-yourself market. The whole reason that we acquired and brought them into the Paychex family was to be part of this growing manual market that now this do-it-yourself that's doing it manually will now come over to a SaaS-based model. And so while our sales forces can and do trade leads and so forth but that's really at a minimal level, and it's more that our sales force is focused on that one that wants to outsource, that client that wants to outsource. And the SurePayroll SaaS model is really more driven by Internet lead search, and they go directly to them and they're sold over the phone. But they're on target. They're growing well, and we're pleased with the performance that, that group is doing.

Okay. I mean, if could show us, is that accretive to margins at this point?

No, it's not. And we've said, Joe, that this year would be slightly dilutive. It will start to get better in the outer years, mostly because with the roll-off with the amortization of intangibles.

Our next question comes from Kartik Mehta with Northcoast Research.

Marty, I wanted to just ask you about SurePayroll and how you're pricing the product. Have you changed the pricing of the product since it's gotten into the Paychex family [ph]?

Kartik, it's hard to hear you. You're breaking up quite a bit.

I'm sorry, Marty, maybe this will -- I apologize. I wanted to ask you about the pricing for SurePayroll and the pricing of that product now that it's in the Paychex family versus when it was in another company. Have you changed that at all? And if so, is that having an impact?

No, we haven't. We saw that as -- they were pretty well set up in the pricing plans that they had in the model and in the way that they're competitive there, so we have not changed their pricing. We're always looking at it for fiscal '13, but I don't see any major changes to their pricing model or their approach in fiscal '13.

And Efrain, I think you said, expect low single digit for pricing. And I'm wondering, do you anticipate discounting? I know a couple years ago, discounting became a big issue because the environment wasn't very good and because new business formations are still weak. Would you anticipate discounting for new businesses to be a little bit more so than it has in the last year?

You know what, Kartik, I don't have a good read on that. I think for planning purposes, we may make that assumption as we go through the year, still kind of deciding what we think we'll get out of any price increase we take. So I think it's fair to say that we're looking at that closely.

Yes, it's kind of all in the mix of -- as Efrain said, we're in the middle of our plan for next year, so it's all in the middle of the pricing and the discounting. All are intertwined, so we're not at a point yet where I think we'd say how we see that coming out in '13.

And then just one last question. I think, Efrain, you said you have about $800 million on the balance sheet. Obviously, there will be more by the end of this year and by next -- end of next fiscal year. You might even be close to $1 billion. And last time you got to that point, you did a pretty massive share buyback. And I'm wondering maybe what the philosophy will be this time around. It seems like acquisitions, if you do, do them, they're very small. So I'm just wondering maybe what your thoughts are as the balance sheet continues to get stronger and stronger.

Yes, Kartik, this is sort of an answer to your question and also a partial answer to Julio's question. Marty has made the point in the past that we do think in this environment, it's important to keep powder dry. There are opportunities out there that we are looking at, and that's not to flag any individual opportunity but the pipeline, there are -- has provided us with some opportunity. Now we are pretty selective as to what we go for and probably turn down many more than most companies. So we are attempting to balance one, leaving ourselves with enough ready cash to move quickly because that's an advantage we perceive in the market, with returning -- not leaving too much cash on the balance sheet because the asset returns, obviously, are not great. We have -- I would say, we have a very robust dialogue with the board on that issue. They are the ultimate arbiters as to how cash will be deployed. But as you -- as we've said, as we get closer to $1 billion and we don't have a ready use for the cash, then we have to entertain a number of ways to return cash back to shareholders. And I think our history has indicated we'll do that.

Our next question comes from Glenn Greene with Oppenheimer. Glenn Greene - Oppenheimer & Co. Inc., Research Division: Just the first question. I want to go back to sort of the sales growth, the mid-single digits. Just to sort of clarify, I want to make sure that's sort of a growth sales figure. And if that's the right assumption, I just want to get -- just want to think about that sort of in the context of sort of net customer growth. I know you sort of talked about client losses improving 5%. But maybe it would be helpful to sort of understand where attrition still falls with this still sort of low 20%. And with that mid-single-digit sort of growth sales number, are you contemplating net customer growth for the year at this point?

Yes, let me just aggregate that, Glenn, because there's a number of pieces there. So when I say mid-single digits, I'm talking about revenue growth. I want to make that clear, sales growth, and I'm focusing particularly on the core payroll portion of the business. Obviously, other parts of the business have been growing very nicely. We had a particular focus this quarter on core payroll results. So that's part -- what Marty alluded to was a continuation in the trend of fewer client losses. We also saw that in the quarter. So in order to get to a revenue number, obviously, you have to take the sales units that you have less the losses. I think what we've been saying through the year is that after 3 years, where we were down both 3%, 3% and 1%, down in the last 3 years. We think that this year is going to be flattish in terms of client base.

So the increase that we're talking mid-single digits is gross sales kind of third quarter over third quarter, and then the losses are about 5% better third quarter over third quarter. And as Efrain said, as we've been saying pretty much all year, we feel good that we're turning on the client growth. We're going to get back around flat pretty close and -- but it -- which is much better than where we've been in the last 3 years. Glenn Greene - Oppenheimer & Co. Inc., Research Division: Okay. And so the attrition likely with that 5% improvement in losses, you're probably hovering around 20%. Is that fair?

On losses, yes.

Yes. Glenn Greene - Oppenheimer & Co. Inc., Research Division: Okay. And then just to clarify on the revenue per check comment and maybe just going back to the discounting, you were sort of asked the question on '13. But what are you sort of seeing in terms of the discounting going through the sort of this sales cycle this period relative to a year ago?

We saw moderate discounting. Glenn Greene - Oppenheimer & Co. Inc., Research Division: But was it sort of better than a year ago or pretty comparable?

I think it was probably comparable to last year. Glenn Greene - Oppenheimer & Co. Inc., Research Division: Okay. And then just finally, the decelerating checks per payroll expectation. Is it more just tougher comps? And what I'm kind of thinking is, does it get counter-balanced by the improved employment trends or shouldn't that be offsetting? Because really, that's kind of my question.

Glenn, as you know, we've had this question now for probably 3 quarters. We know if we step back and look over several quarters, the trend has been down. We, frankly, thought that the checks per client -- the checks per payroll, I should say, would be down a little bit more than it was in the quarter. So it's decelerating more slowly than we thought. So we just -- we think that a combination of comps and the fact that at our average payroll size, you can't keep adding clients forever, that at some point that trend runs its course.

Our next question comes from Ashwin Shirvaikar with Citibank.

So I guess my first question is, as you look at the need for investing in product, investing in growth, could you comment on what your longer-term margin expansion target is, sort of try to break that down for us, maybe?

Yes, look, we traditionally go into every planning cycle looking for a leverage of about 100 basis points at least and some years higher than that. In years where we did even higher than that, we had the tailwind of higher interest expense which -- I should say, interest income, which we don't have. So it will be more year-by-year in terms of what we target, and it will be balanced out by a need to continue to invest in technology and any other initiatives that we think will foster growth.

But in terms of a specific target that you might want to get to, is that something -- are you comfortable discussing that or is that something you'd rather leave for the Analyst Day, which, by the way, I think, is a great idea.

Yes, I think we'll talk more about it then, Ashwin. But I would say this, locking yourself into one margin target, we'll talk about it, what we think it will be on a more normalized basis. Locking in here before we've gone through a planning cycle is a little bit difficult. And longer term, we prefer to lay that out in the context of what we think makes sense in terms of investment for growth in the future.

Understood. And then given what the yield curve is indicating about interest rates for the next couple of years, any comments on what your go-forward approach is? Would it be different than the traditional treasury muni approach? I saw you're yielding a little bit more variable rate than this year.

Yes, well my view is the following, that our approach has always been to preserve liquidity and safety first. So we have a challenge in terms of doing that and increasing the yield on the portfolio. Having said all of that, we will look at any opportunities that we think improve that yield commensurate with very high levels of safety and liquidity.

Okay. Last question, you commented a lot on the price discounting here. But is there anything different about the source of the price discounting? Is it your large national competitor? Is it Intuit? Is it more of local peers? Anything different there?

No. I think the environment is pretty much the same. I think most of that comes from the largest -- the national competitor but not always. Sometimes there's regional players as well. But I think the environment has not changed much at all.

Our next question comes from Gary Bisbee with Barclays Capital.

I guess the first question, the better new sales is obviously a positive number. But given that you tend to have pretty high client retention, how should we think about that? And even if you get into a trend of that continuing to happen here, the timing it takes to flow through into your total revenue growth, is this the kind of thing we should notice some benefit pretty quickly or should we think of this being a couple year process to flow in better sales growth?

Gary, that's a good question. Look, Paychex is a battleship and not a speedboat. And so the turn occurs very, very slowly. And the ramp occurs slowly, both on the upside and frankly, on the downside. It takes a while for those revenue numbers to make it through the client base. You have to increase the client base, increase the client revenue and then hold it over a period of time for it to start to see -- make its way into revenue. And so it's slower rather than faster.

Okay. And you did specifically say earlier in the call that there would be some impact on growth from your expectation for some moderation in checks per clients or checks per payroll. How should be think about the interplay between the 2? Is the stronger sales enough to offset that or would it be positive or would it be more likely to be slightly negative or maybe just not -- they offset each other?

Well, that's an interesting modeling exercise. I think we're going through that in our planning process now, and there will be some level of offset. How much, I can't say at this point.

Okay. And then just one last one, on the checks per client -- I'm sorry, I'll get used to this, checks per payroll decelerating. Can you give us a sense of the historical relationship between that number and the growth in either nonfarm payroll there or maybe private payroll is better? It's just I'm still -- I asked the question last quarter, and I'm still having a hard time understanding how we're seeing moderate acceleration in the growth of jobs or in the growth of the small business segment of jobs at the same time this is decelerating. I realize you were growing this metric much faster than payrolls were growing over the last year, so maybe that's part of it but...

Well, Gary, we haven't done the correlation. We know from some modeling work that we've done that, that metric tracks to some extent what's going on in the broader economy. The problem is it's just a slice, not the entirety of it. And I can't cite a correlation number. We haven't done that level of modeling.

It depends on the mix of clients as well that are coming in and out of the base. So if you start selling smaller clients, not that we've changed really our selling. But sometimes as jobs come back, sometimes they come back in the smaller clients, sometimes they come back in the larger clients. So depending on who you're selling in your mix of your base, that can adjust that as well. But there's some correlation, but it also has to do with mix year-over-year.

Our next question comes from Tim McHugh with William Blair & Company. Timothy McHugh - William Blair & Company L.L.C., Research Division: Most of my questions have been answered. But I just wanted to ask you about your comments you made about the PEO business. Is that business still growing? And I guess maybe just elaborate a little bit more on how much of a headwind those health care costs have been for PEO.

Yes, if we go back to Q3 of last year, you'll remember we mentioned that high health care costs within our PEO, and it's a bit more specific to the PEO business, had impacted that business we -- and in the PEO business you get one shot. It's either gain or lose clients at the end of calendar year. Typically, people are making that decision, as many of you know. We went into that season with what we thought were pretty competitive rates. It turned out that they weren't as competitive as we thought. And PEO didn't have a good selling season in the third quarter. Having said that, 2 things, I think, are important, Tim, to remember about that. The first is that the PEO is one part of a 3-part offering. We talked about HR Essentials, and we talked about the ASO. The ASO is now doing very well and is much larger than the PEO. And the way we have chosen to go to market is to say to a client, we offer you a variety of options in terms of how you want to handle your HR outsourcing. And if an ASO offering is a better option for you, we'll go there. We're not steering you to the PEO option. Others in the market do something slightly different. What we found is that people are tending to go with the ASO option. Even though fully loaded, the ASO and the PEO don't differ all that much in terms of costs. But for us at least, the PEO's performance has been very sluggish. Timothy McHugh - William Blair & Company L.L.C., Research Division: Okay. And then one more, if I could slip in the Icon acquisition. Is it right to think about that as not being very much incremental revenue, given that you sold the product before but I guess some costs would be down. But can you just -- the financial impact of that?

Yes, we think there's an opportunity there, but it's not going to be a significant revenue driver.

Yes, we're really just getting started with that over the last year or so, and we saw that as a chance to bring the development in-house. They have a small team. We can add to that. We can make changes faster to the clocks that we want to make that integrate faster with our products, and we've also found it to be a very good product. So we wanted to be sure we had full control over it. So -- but it won't have a material impact right off the bat, but it is selling pretty well.

Our next question comes from Jim Kissane with Crédit Suisse. James F. Kissane - Crédit Suisse AG, Research Division: Just want to -- not to beat a dead horse here, but just want to confirm that pricing was net positive in the quarter. Because in the release, and I think in your comments, you said that price increases were offset by discounting. So I just want to make sure that is was net positive.

Yes, it was net positive. The better term was partially offset.

Yes, we're just trying to be -- on that one, we're trying to be clear that you have obviously both price increases and discounting. But it wasn't that it got offset, it was definitely net positive. James F. Kissane - Crédit Suisse AG, Research Division: Because last quarter, you also said that discounting had moderated. And it sounds like just kind of reading between the lines, that maybe it got a little bit worse this quarter. Is that fair to say?

No, I don't think sequentially it was that different.

Yes, I think it always gets a little bit -- if you look third quarter to third quarter, it gets always a little bit more aggressive because it's a big selling season for all payroll providers. So -- but we didn't see anything different, I'd say, selling season to selling season. James F. Kissane - Crédit Suisse AG, Research Division: That's right. You said it was in line with last year. And Efrain, you said there's no change in the definition of checks per client or checks per payroll. Why did the numbers change? I guess it was an estimating process change.

Yes, it was estimation. When I came in with the finance team, I asked a number of questions with respect to the computation of it. We took a look at it and saw that there was some refinements we could make on the methodology. It boosted it slightly. James F. Kissane - Crédit Suisse AG, Research Division: Okay. And then one just last question. Marty, the sales force turnover, where did it peak about in the last year? And maybe when was the last time it was below 30%?

I don't remember the last time it was under 30%, but it was -- it peaked over 40%, just slightly over 40% last year. So now we're back down into that, let's say, 31% to 33%, so we're in that. And historically, it's always been, at least in the last 10 years, between 30% and 33% for core payroll. James F. Kissane - Crédit Suisse AG, Research Division: Can you give us a sense where your targets are over the next couple years?

Yes, I think in the short term, I think it will probably right in that historical range. I think in the longer term, certainly, hoping to see that closer to 25% to 30%. I don't think you can go -- with the driving force that we have in that sales team and the effort of farming for new business all the time, I think probably 25% to 30% is the best you're going to do. But we feel good about the recruiting and the training initiatives we put in place and certainly the leadership team and that, that will drive it closer to 30% and a little bit below. James F. Kissane - Crédit Suisse AG, Research Division: That's great. And if I can get one last one, sorry. The strength in sales, was it more larger clients relative to your average or more smaller clients relative to your average?

I'd say about the same or maybe slightly smaller but pretty close to the same. There was not a big change in type -- in size of client.

Our next question comes from David Grossman with Stifel, Nicolaus. David Grossman - Stifel, Nicolaus & Co., Inc., Research Division: Efrain, I wonder if I could just start with the investment portfolio, and I'm not sure you've undertaken this exercise. But if rates stay at relatively flat with where they are and you see trend line growth in balances, can you give us a sense of when we would start seeing positive year-over-year growth in interest on client funds?

So -- okay, just so I know my hypothetical here. So you're saying interest rates at current levels? David Grossman - Stifel, Nicolaus & Co., Inc., Research Division: Right, that the current rate environment stays flat.

You're probably 2 to 3 years out. David Grossman - Stifel, Nicolaus & Co., Inc., Research Division: Okay, and that assumes just normalized investment balance grade?

Yes, just to roll off of the portfolio. David Grossman - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And then secondly -- and I think several people have asked this in different ways, but you guys have given great insight into the bookings and some of the other moving pieces in terms of retention and pricing. But if you assume -- it seems like things have really stabilized to a certain extent. So if you see the bookings that you've seen in the third quarter, is it reasonable to think that the payroll business would kind of maintain its current growth trajectory?

So you're saying -- I want to confirm, David, that by growth trajectory, you mean what we've seen in Q3? David Grossman - Stifel, Nicolaus & Co., Inc., Research Division: Well, I'm just saying, what you'll probably see for the fiscal year.

For the fiscal year? David Grossman - Stifel, Nicolaus & Co., Inc., Research Division: Right, right. So if you're assuming...

I think the way we think about it, David is that -- and Marty, I think, was careful to point this out, third quarter was certainly better than it's been in previous years. We need a couple of quarters of comparable growth to basically say, "Yes, it looks like the ship has turned." I think, our going-in assumption for looking out 6 to 12 months is that, that period is going to look fairly comparable to the past 6 to 12 months. David Grossman - Stifel, Nicolaus & Co., Inc., Research Division: Right, so I guess...

That was a slow turn, a very slow turn. David Grossman - Stifel, Nicolaus & Co., Inc., Research Division: Right. But I guess the question is that -- is the new bookings in the third quarter, since this is your sales season, you got 9 months behind you, is that enough given the current pricing environment and where you are in retention enough to maintain comparable levels of growth to what you've been seeing over the last 3 quarters or so?

David, I guess the best answer I can give you without having gone through the planning course finalizing, we're in that range.

We don't see any surprises with it. I think the big piece over there, the checks and as we've talked about that will moderate as an increase year-over-year. And so we've got new clients that we had a good quarter, kind of a nice turnaround, I think, on improving. We don't know if that's going to continue the next 2 quarters or not. We want to be conservative and see what's happening there and -- but we certainly think we still have pricing power. We think we have -- obviously, I think the macro environment is slightly better, but it's still slow. So I think we're going to be in the range of where we've been year-to-date. David Grossman - Stifel, Nicolaus & Co., Inc., Research Division: All right, very good. And just one final question, and I think, again, this was asked in a different context before. But in terms of the higher investment spending, is your view that the spending that you're undertaking and the increases are really just to kind of maintain your competitive position? Or should we kind of look forward and start seeing a manifestation of that in terms of retention or revenue per client? And if so, what's the time frame that you would start expecting to see some positive impact on those metrics?

Well, that's a great question. I definitely think it's making us more competitive. That's the spend now. Competitors always -- obviously, good competitors that we have try to stay up and above and past us. But with the way we've laid this out, we feel that will make ourself very competitive, and that's what the spend is all about is really being sure that we're ahead of the competition in what we're offering of value to our clients. So when does that start to pay off? I think hopefully very soon because we're making good investments that I -- and what I'm really proud of is the technology is coming out, so it's not like waiting 3 years to get something. Every -- about every 6 months or so, we're producing something that we said we were going to produce on time and of high quality. So I think, obviously, you got to wait to see it, but I think that it will start to show up obviously in the next year or so.

Yes. And David, I guess I would not characterize our current spending as catch-up spending for what we needed to do to catch up to where competition is. And I think that we're working on things, frankly, that will put us ahead of competition. Now whether we will see that in the next -- the time frame for doing that, we'll talk a little bit more about that probably in the summer.

Our next question comes from Jim Macdonald with First Analysis.

Going back to the HR business, you had a sequential decline, I think, in employee -- in work site employees. Could you talk about that? Was that mostly the PEO?

That's -- yes, as we talked about in the Q, a chunk of that's the PEO. But Jim, I'd just caution, if you look at last year and you included the ASO employees of Q3, you would have seen a slight decline in the Q2 to Q3 comparison. And the reason for that is that you just tend to lose more clients in Q3. Normalized last year, you would have lost about 3,000 work site employees. This year, it was about 6,000, mostly driven by the PEO.

And the reason we didn't see it last year was HR Essentials or...

That's right. So that wasn't initially in the press release in Q3 last year. We didn't adjust for HRE then until Q3 -- until the Q3 press release. But when you were looking at it from Q2 to Q3 -- and I forgot which one of you pointed that out, that this was the first year of sequential decline in work site employees. That, frankly, was our bad because we revised it, but you'd have to look at a number of sources to figure that out.

And you mentioned, I think, in your initial remarks that you have made some changes to the PEO business. Could you talk about what you've done there to make it more competitive?

Yes, I think the focus was on -- that we ran, particularly last year, was the health insurance rates. And so we've been working with the carrier to get more effective rates by market. Also, we've worked on truing up our underwriting process. It's been a good process but probably have been very tight, and so that makes it difficult sometimes for the sales process and so forth. And so we're working together with the carrier on the underwriting, as well as our sales teams. A lot of these things we've put in place. It's just been a little bit more challenging environment. And then as Efrain mentioned earlier, the important thing is that, that sales force has options to them to sell to the client, particularly they have an ASO model or the PEO model. And there's really nothing wrong with the ASO model being sold to them. And so I think that, that's been something that they've been more aggressive on is selling the ASO model, and that's done very well of this year. So I think one of the things we're looking at is how do we make sure that the incentives are correct for sales team as well to be sure that the client -- that everything, all is equal there for them selling each product. If one is easier than the other to get through the process and have the successful sale, that's the way they'll go. And right now, I think that was the ASO model.

Our next question comes from Bryan Keane with Deutsche Bank.

I jumped on a little bit late. But I wanted to ask, the 5% sales growth, how was that versus internal plans?

We don't disclose that. We also didn't say 5%, Bryan. We said mid-single digits.

But it was -- the main thing there, Brian, that I think we wanted to demonstrate to give you some sense of it was that it's the first time that, that's increased in over 2 years in that selling season in that third quarter, and we are very pleased with that. We don't really disclose versus plan, but we certainly felt good that it was an increase over the previous 2 third quarters.

Yes, I was just trying to get a sense balancing that with client growth being flattish, if that was kind of a number you expected or -- because I guess you take those 2 components, and that will get us closer to actual what the core payroll growth will probably look like.

It's one way to figure it. But I think we were satisfied with the progress we saw in the quarter.

And then just along those lines, were you guys satisfied also with the client growth or were you hoping to get a little bit higher? Or is that just out of your guys' hands to business formations where that's going to be?

No, I always want -- we always want more client growth. And so -- but I think that we were pretty pleased with the turn and the fact that it improved over the last couple years, the macro environment as we see it hasn't changed all that much. It's just been this steady kind of better, but new business formations still have not improved much. And so to be able to sell more without that, I think that, that's been our focus and so we were pleased with it.

Yes. And the other thing, Bryan, as you know, it's not just what you sell but also what you retain. We had [Audio Gap] comes with market share.

Our next question comes from Sara Gubins with Merrill Lynch.

Could you talk about how you profit from the asset value of retirement funds? Is this mostly fees on a per client basis or does it some vary by total assets in the plan?

Both. So we charge an administrative fee for the setup of and the record keeping for the 401(k) plans. A smaller but still reasonable amount of that revenue stream comes from asset fees. Let me tell you just one other thing, Sara, just to clarify, those will decline over time.

Okay. And then separately, the -- you maintain the guidance on the interest on client funds down 12% to 14% for the full year. It looks like we're well below that so far this year, so I'm just wondering what you're expecting for the end of the year.

Really, no real changes in terms of the trends you've seen in the first 3 quarters. I think that we disclosed the interest rates and size of the portfolio average client. But then also, you can pretty much guesstimate where we're going to end up.

Okay. So maybe that 12% to 14% is somewhat conservative?

I won't go into a lot of detail. But on a gross basis, yes. It could be a little bit.

Our next question comes from Mark Marcon with RW Baird. Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division: I'm just wondering, you've had a lot of different initiatives in place with the sales force for this fall selling season. What were the elements that you'd say worked really well? What still needs to be fine tuned from your perspective?

That's a good question. I think they're all having a piece of it in improving things. I think the comp plan was good. I think that's been positive since the beginning of the year. I think it's made it much cleaner and clearer for the sales reps to sell and know what they're going to make, so that's been very positive. I think the training has been good. I think that picks up more on the new reps that are coming in, and I think the leadership development has been very important. And I think the leadership team, including Mark Bottini and his team, have done very well on leadership development. So I think it's all of those, I can't point to one thing, and it's fine-tuning. I think it's just continual work on those things for better execution. But I think that I don't see any one of those I guess I'd say is not hitting the mark. I think it's just the degree that they've hit the mark, so we'll continue to work on all those. I'd say the primary one has continued to be leadership development. I think the best thing to execute better is to have great leaders, managers out there who are supporting the reps. And that keeps the -- that definitely has driven the turnover back down because when you've got a good leader, you stay plugged in and you execute. And that's really important to us. So I'd say the leadership development is what we continue to really focus on. The rest of things, I think, are going pretty well, and they may have tweaks for next year, but I don't see anything major. Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division: Great. And then what about the price bundling and that strategy, how do you feel that went?

Yes, I think okay. I think there's some adjustments we can make. And as Efrain said, we're working through the fiscal '13 plan now, and that's all encompassed in there. So we're finalizing our thinking on that and probably could give you more a quarter or so from now, but there'll be some tweaking there but again, nothing major. The good news is I don't see major, major changes being made but I think we could -- there's always pricing adjustments and packaging and discounting and so forth that you look at. So I don't think it's hurt us dramatically, but I think we could do a little better there, and you'll see some change there.

And Mark, one other thing I'd add on that is that here on a quarterly basis, we look at where our packages are. We look at where our discounting is. And we tweak, and we pile it and we look at different options in terms of what seems to work in a given situation. We especially do that going into the selling season so that we're in the best competitive position. And we obviously keep one eye out on what the competition is doing. It's really important, and I think we've learned this, to not stay too stagnant in your offering and not stay too stagnant in your pricing approach because our competition's pretty sophisticated in terms of what they do, and we keep an eye on that. Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division: Great. And then this has been asked in multiple occasions, just trying to get it, reasonable assumptions for at least our models as we look out to next year. And so this isn't a guidance question. But if I think about the number of clients that you lost declined, you actually ended up having your best fall selling season, early year of selling season in 3 years. You're going to have a moderate increase in terms of the number of clients that you have in place. With all of those factors being in place, why wouldn't your core payroll revenue growth stay at least at the level of the organic growth? And I know -- I recognize that in the fourth quarter we annualized the SurePayroll acquisition, which has been adding between 100 to 200 basis points per quarter. But if we strip that out, is there any reason why the core payroll shouldn't increase at least at the rate of the organic?

Yes, it's a good way to get at next year's guidance, so here's what we're looking at, Mark. So what we look at is we look at the environment coming out of the year. We've had a good -- a reasonably good quarter. We're cautious about where we end the year at. That will determine whether we're flat, slightly down or slightly positive to end of the year. So that's one element. Second, is we make a call on what we think the discounting environment is going to be in going forward and decide what we think of whatever price increase, which we had not decided, by the way, at the moment yet, will stick and won't. And then third, we have to make a decision with respect to what we bake in on checks, and that's a bit of a wild card at the moment in our crystal ball. Your crystal ball is probably just as good as ours, although we probably wouldn't use it. We'll develop our own scenario. You put all those together and we see an environment that's not too dissimilar from the one we've seen this year. That's our going-in assumption. That's about as far as I can go. Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division: Okay. And in terms of what SurePayroll has been adding, has it been closer to 100 basis points or 200 basis points relative to the organic growth rate?

To the organic growth rate? It hasn't been 100 basis points. You mean for the year, Mark? You mean year-over-year? Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division: Yes, as it relates to just the core payroll.

X acquisition, so first quarter was 4, second quarter was 2.8, this quarter was 4. So call it mid to high 3. And then when all is said, we're going to be about 1.5 to 2 points from SurePayroll. Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division: Okay, great. And then on the HR services, it looks like you're making really good progress, particularly with regards to health and benefits applicants. Could you talk a little bit more about that in terms of what the trajectory is there and where we are in terms of generating profits from that initiative?

What I'd say about insurance -- I'll let Marty fill out my comments, is that while we highlight health and benefits, there's actually other parts of that business that include workers' comp, they are having a tremendous year so far. They've done very, very well. And we had excellent leadership in place driving that -- the insurance business. There is some uncertainty, obviously, depending on what happens with health care reform. We assume that we'll continue to do well in that business. We've been growing 20%-plus, that's what we assume going forward. Obviously a little of that is subject to a heavy caveat based on what comes out of the current court proceedings.

Yes, I think exactly what Efrain said, it's 20%-plus growth. We see that continuing. I think there's been a little pressure on the commission side of it, in the health side because of health care reform. That's -- we'll know by next quarter a pretty good sense of at least what the Supreme Court is going to do and whether that has changes to it. We are developing backup plans to say, "Okay, if that changes the environment, how do we react to it?" Because I think we've got a very successful product there in business. As far as margins, we don't really talk about that as a separate business, so we've never really gotten into that one as specific. Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division: I meant more from the perspective of for a long time we were investing and it was a bit of a drag on margins just when we hit the inflection point in terms of going from losses to profits.

In insurance, Mark? Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division: Yes.

No, no. We turned that corner at least a couple of years ago. Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division: On the health insurance?

Yes, on health insurance.

Our next question comes from Tien-Tsin Huang with JPMorgan. Tien-Tsin T. Huang - JP Morgan Chase & Co, Research Division: So I'll be quick. [Audio Gap]

To deal with calendar year processing. And then third, there was higher IT spending in the quarter.

Our next question comes from John Williams with UBS.

Yes, I'm probably keeping everybody from lunch now, so I'll keep it quick. Really 2 quick questions. Number one was on margins and the balance between the need to invest and expand margins over time. Just wanted to get your 2 cents. Do you feel that you've made the appropriate investments and that you're pretty much done with those in terms of through the cycle over the last few years to be positioned for the inflection point or you think there's still some more that you might need to do?

Well, I would say, if you look at where we -- how we've been spending over the past year or 2, I don't anticipate dramatic increases in spending. I think we're positioned to take advantage of an upturn if it comes. Now having said all of that, I do think that the price of being in this business demands that your technology get better and better, and that's not a surprise. And that's one reason why we continue to take business from local and regional competitors that just can't keep up. So I don't anticipate dramatic increases in spending. I think we are continuing to make the right and the appropriate investments to grow the company, but you do have to spend to keep up with technology.

Okay, that's helpful. I know we've talked a bunch about pricing. I'm just curious about the competitive environment. Obviously, you've been able to catch some pricing here. But competitively, one of the questions that always comes up when we talk to investors is, what are you seeing and I guess, what are you seeing?

I would say not much change. As we've mentioned, even during the selling season, we're always a little bit more aggressive competitively but not much change in the overall environment for pricing or discounting.

And from the perspective of new folks coming in with potentially disruptive products, have you seen anything different? Is there anything that you're getting in terms of feedback from the sales force that perhaps something is maybe rocking the boat a little bit more than, say, a year ago?

No, not really. Nothing that we hadn't anticipated and are working on.

And the other thing I want to mention, that I think is important to remember for us compared perhaps to other companies is we have a very, very sophisticated operation in SurePayroll that does its business over the web, and it gives us an insight into the companies that are operating in exclusively a SaaS mode, what they're seeing and what their opportunities are. So we haven't seen any dramatic shifts.

I do have one more question from Rod Bourgeois from Bernstein. Rod Bourgeois - Sanford C. Bernstein & Co., LLC., Research Division: Rod Bourgeois here. Two quick questions. First, what needs to happen -- so with one quarter left in the fiscal year, what needs to happen to achieve the upper half of your fiscal '12 revenue guidance? It would be nice to do that given the setup to fiscal '13. But would things need to be more positive to get to the upper half of the fiscal '12 revenue range?

You're going to have to see a sharp acceleration in Q4. Rod Bourgeois - Sanford C. Bernstein & Co., LLC., Research Division: Okay, that's what I thought. That makes sense. And then on the -- one last shot at the pricing question. Can you specify your actual year-to-year growth in pricing, net of discounting? And I guess the reason I'm asking is, if net pricing growth was only moderate with discounting flat year-to-year, then that may imply less pricing growth than what would have been expected in fiscal '12.

Yes, I understand the question. I -- we can't specify that in part because some of it is competitive and proprietary, so we're going to take a pass on that one. By the way, Rod, not to be too dismissive with the question, it's fair. I think that you can get to certainly an approximation. We'll put out the data at year end. And you know we've been pretty open about what kind of price increase we have. So I think you'll be able to look at that price increase checks per client database, and I think you should get a pretty good feel for what that looks like.

And I think, as we've continued to say, that the environment really has not changed very much so -- from a pricing and competitive standpoint. So there's not -- there hasn't been any big surprises there that would change much. Rod Bourgeois - Sanford C. Bernstein & Co., LLC., Research Division: Got it. And just one comment on that. With retention at almost record levels, it seems like the setup for putting a meaningful price increase in fiscal '13 in place, it seems like the setup is reasonably good. Is that the way to think about it?

We haven't gone through the pricing discussion and plans, so we'll update you on our thinking. I will caution one thing, Rod. We will not give a specific price increase amount, just simply won't, and we have our competitive reasons for doing that. We'll simply indicate what we think what a general range will be, but we will not get into that anymore because it's too sensitive.

At this time, we have no further questions.

Great. Well, at this point, we'll close the conference call. If you're interested in replaying the webcast of this call, it will be archived until April 30. I want to thank you for taking the time to participate in this third quarter call and for your interest in Paychex. Have a great weekend. Thank you.

Thank you. And thank you for joining today's conference. You may disconnect at this time.