Welcome everyone and thank you all for standing by. At this time, all participants are in listen-only mode. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now, I’d like to turn your call over to Mr. Martin Mucci, President and Chief Executive Officer. Thank you, Mr. Mucci, you may begin.

Thank you and thank you for joining us for the discussion of Paychex’s third quarter fiscal 2015 earnings results. Joining me today on the call is Efrain Rivera, our Chief Financial Officer. This morning before the market opened we released our financial results for the third quarter ended February 28, 2015. We will file our Form 10-Q which provides additional discussion and analysis of the results for the quarter by the end of the day. Our earnings release and Form 10-Q will be available on our Investor Relations page at paychex.com. This teleconference is being broadcast over the Internet and will be archived and available on our website for approximately one month. On today’s call, I will update you on the highlights in our operations, sales and product development areas, Efrain will talk through our third quarter financial results and our guidance as we wrap up fiscal 2015, and then we will open it up for your questions. We were pleased with our third quarter results as we continue to make good progress toward our key initiatives. Our selling season execution was very strong, producing double-digit growth in new annualized revenues sold, we’re pleased with that. We also continued to our success in adding new bank and franchise referral arrangements and increasing our web leads in addition to our CPA referral channel. We remain focused on selling great value to our clients, helping them realize the full breadth of technology and service that Paychex has to offer. Demand for our HR outsourcing solutions continues to advance with gains in both clients and worksite employees. This has made a significant contribution to our double-digit growth in HRS revenue. Payroll service revenue continues to advance as a result of increases in revenue per check and client based growth. Total service revenue increased…

Thanks, Marty and good morning to everyone. I’d like to remind you what I customarily remind you that during today's conference call, we will make some forward-looking statements that refer to future events and as such involve some risk, refer to the 10-Q for a full discussion of these risks. Before I get into the specifics of the quarter results. I'd just like to say that fourth quarter expectations for payroll and HRS revenue indicate that we'll meet the full year guidance that we've provided throughout the year, more on fiscal 2015 guidance later on. In addition we introduced our minimum premium plan health insurance offering for PEO clients and worksite employees in the third quarter of last year. We have just passed the anniversary of this new health insurance offering and we have seen strong acceptance by our PEO clients. Due to the self insurance provisions within the new offering, certain PEO direct costs are now classified as operating expenses rather than a reduction in service revenue. This change had no impact on operating income although it did have some impact on margin as those of you who have been looking at our results over the last three quarters understand. This new health insurance offering did not have a impact on our fiscal 2015 third quarter and nine month results. As Marty indicated, our third quarter financial results for fiscal 2015 represent continued progress building on the solid start we experienced through the first half of the year. Here are some of the key highlights I will provide detail in certain areas and then I’m going to wrap with a review of our full year 2015 outlook. Total service revenue grew 8% for the third quarter to $694 million and 9%, $2 billion for the nine months. Interest on…

Thanks Efrain, we will now open the call to questions.

Thank you. At this time, we will begin the question-and-answer session. [Operator Instructions] That question comes from David Togut with Evercore ISI. Your line is open.

Thank you and good morning.

Hi David.

Can you provide a little more detail on the underlying drivers behind the double-digit growth in new annualized revenue, as told during the peak selling season? In particular, breakdown between payroll service and HR services bookings?

Well David we don’t usually give that much detail on it but I will tell you that we were strong across the Board. I would say both payroll -- all areas of payroll as well as HRS, were both very strong and probably the best sales and we had a pretty good sales we had seen over the last year. But this is probably the best sales results in a selling season we’ve seen in I would say seven or eight years.

What accounts for that?

Well I think very good execution on the sales side. I also think that the channels that we’ve been developing from our constant CPA channel has been continuing to be strong. The bank channel, we've picked up a lot from the bank channel from a referral standpoint. We’ve also added a number of franchise arrangements for where the supported or the preferable company for payroll and I think we’ve just done a good job overall also team selling. So going in is not just payroll and then coming back to sell the other ancillary services but going in right up front in selling the full value of all of the products to the client right up front. So we’ve seen good growth in payroll. We’ve seen good growth in HRS, in the Affordable Care Act products, our employers shared responsibility product has been strong and certainly HR outsourcing both PEO and ASO all have been strong. I think its execution. I think it’s a lot of work that the Head of Sales, Mark Bottini, he has been doing with that team to build a good referral and pipeline as well.

With that rate of new annualized recurring revenue growth taken together with your current client retention trends, point to a change in your revenue growth rate for FY'16 and FY'17?

Well, I can’t really get into guidance, now I think we will have a better sense of that at the next quarter to talk about '16 but certainly bodes well for a start anyway.

Thank you very much.

Okay. Thanks David.

Thank you. The next question comes from George Mihalos with Credit Suisse. Your line is open.

Hey guys thanks for taking my question. Just wanted to start off on the core payroll side, the growth of 2%. I guess I'm closer like 2.4%, the way we calculated. But, anything else to call out there aside from timing, meaning was there any sort of slippage maybe on the pricing side 2Q to 3Q or a bit of a slower rate of client growth, or anything else?

Yes good question, so client growth no, pricing no, checks a little bit less than we expected. So little bit color on that. So we’ve seen moderation in checks per payroll. We’re not calling it out specifically because when it’s trending around 1% it really is not a significant contributor to revenue overall. But what we did see was that checks have just been a little lighter, were a little bit lighter in the quarter than we anticipated. Now just two more points of detail on that, what's interesting about that number is again I ruled out client and I ruled out price, because that’s not a driver here. Timing is primarily the reason, but secondarily what’s going on is that even though we saw an increase in the amount of bonus dollars that we paid in checks, that’s what we seem to be seeing in the data. We actually saw a slight decrease in the amount of bonus checks. So it looks like people were being paid a little bit more in bonuses, but the size of those bonuses resulted in lower checks. So it was a little bit lighter and that really kind of drove much of the difference in payroll service revenue. We’ve accounted for that as we look forward. I think we’re just in this environment now where with check per client or check per payroll growth is going to be moderate going forward. So that's some color on that point.

Okay. Appreciate that commentary. And then just my second question, on the prior earnings call, I think you guys talked a little bit about M&A and your appetite to do something there. Just curious what you're seeing out there in the marketplace and if you still have an appetite for, I guess what you would consider a large scale acquisition in addition to any tuck-ins?

Yes we do, I think there is -- we still a see a lot available, we’re looking at more than we probably ever have in the past, everything is pretty highly valued. So we’re going to be very selective as to what we do, but we’re looking at both something that would be product tuck-ins, but also just add to the base because we think whether it’s PEO, payroll or other services, we think we’re pretty effective at what we're -- how we're executing and it’s a good time to acquire. May not find something, but we are pretty deep into number of things we’re looking at the time, and size would be -- we would be very selective, but we certainly have the cash to do it if that makes sense.

And just to be clear, you’re going to be sticking to your sort of a payroll acquisition or something in that area or in HRS services, you’re not going to any sort of other areas?

Yes that’s correct.

Okay. Thank you.

Okay.

Your next question comes from Jason Kupferberg with Jefferies. Your line is open.

Hi Jason.

Hi guys this is Ryan Cary calling in for Jason. I just want to build on George's question. Although you reiterated the full-year guide of 3% to 5% for the payroll services, has your outlook on where you might fall in that range changed at all after this quarter meaning, do expect 4Q to make up for any of the moderate softness or a little bit below that range we saw in 3Q?

When we issue guidance, we expect to be somewhere around the middle for the year. I think that’s where we’re at right now.

Okay. Great. And do you see any material changes in the competitive environment as you got deeper into the peak calendar year-end selling season and I have to ask a question on pricing as well. Last quarter you seemed comfortable pricing would stay in that say 2% to 4% band. Has that been any material change in either direction over the last quarter? I would love any additional color. Thanks so much.

Yes. I don’t think so. We didn’t literally see because actually we felt very good about the quarter from a selling perspective. I would say the competitive environment was about the same, didn’t see any extra pricing pressure. There is always competitive pricing pressure out there, but we didn’t see anything pick up necessarily there was no big competitor plans or things that they were doing that we saw that made any big difference there. So I would say pricing is generally holding like we thought it was last quarter and competitive environment about the same.

Great, thanks so much.

Welcome.

Thank you. The next question comes from Sara Gubins -- on behalf of Sara Gubins, your line is open.

Sure so Efrain, you mentioned that some payroll service revenue was being deferred from third quarter into fourth quarter. Now that you're through this third quarter, could you give us a sense of magnitude of that, and this is David Ridley Lane for Sara Gubins.

I thought it was you David, David I think it’s implicit in what I said that we expect to be somewhere in the middle of the range if you heard my comments earlier, I said that that fourth quarter was comparable to the first half of the year and a kind of I will leave it at that.

Okay and then could we get an update on the sensitivity of the portfolio to the first 25 or 50 basis points interest rate increase?

Yes on the short term, it’s going to be about $4 million somewhere in the range to little bit less, little bit more. And that just assume the short term prices. What that does to a long-term rage is a good question. I don’t have a crystal ball on that and timing at this point, our best estimate is Q2, but again our crystal ball has been exceedingly fuzzy.

Got it, thank you very much.

Okay.

Thank you. The next question comes from Smitti with Morgan Stanley. Your line is open.

Thank you. I just had a couple of follow-up questions on the minimum premium plan, maybe you can talk about how the claims have trended versus your expectations and whether you’ve got in any closer to rolling out this offering to more states?

Yes, so I would say that claims experience thus far has been about what we expected. We’re pretty conservative in terms of our approach and takes kind of belt and suspenders view from an actuarial perspective. We have two actuaries look at it and have pretty extensive conversations about how we set prices. I think one thing that I just like to reiterate from our perspective the PEO is not a insurance play. It’s an HR outsourcing play. So we understand the payrolls of selling cheap insurance in the PEO and it’s not a direction we want to go in. So I think claims have trended about where we expected them to be. I didn’t get -- I forgot the second half of your question, Smitti.

Just can you give us an update in terms of your plans to roll out the offering to more states?

Yes, at this point, we’re still getting through kind of a full year of this one. We feel very good about it. As Efrain said, I think we’ve done very well on the claims and so forth, but it’s a year into it and we don’t have immediate plans to expand it outside of the area but that is where a big amount of our sales are. So I think we'll give it a more experience before we look to expand it.

And just falling along on the minimum plan, can you talk about how the client ramped has look like over the past year and whether you switch clients over or whether it’s really new clients signing up for the product?

It’s primarily new clients that we’re signing up. When we initially did it, we obviously moved existing clients on to the plan, now what we're doing is we're selling new clients. I would say PEO client base is growing nicely double-digit. So I would -- one thing I hope we’re not leaving the impression that it's the minimum premium plan driving PEO growth, it really is that there is a lot of interest in the market now for bundled HR outsourcing solutions plus that would also include healthcare and that’s driving the market.

Got it. Okay. Thank you.

Good.

Thank you. The next question comes from Tim McHugh with William Blair. Your line is open.

Yes. Can you help us contrast the double-digit growth in annualized new sales? I guess what was that growth number a year or two ago? How much of an improvement is that versus what you've seen in the last couple of years?

Well, I would say it's certainly gone from single-digit fairly flat actually to single-digit to now double-digit in par annualized revenue and so this is as I said, I think this is probably the best selling season we've seen in seven or eight years. So I think every good execution. I think it's much stronger than last year, which was pretty good and as I said its very much across the Broad. So it's not just PEO in the HRS services. It's a good team selling. We're seeing good payroll and HR outsourcing 401(k) really across the Board. I think this is very good execution and I do think obviously the market is coming back a little bit from a small business in mid size business environment. So I would say how I characterize them is best in seven or eight years from an increased standpoint from a total par standpoint.

But last year it was improved, but you did have a still kind of mid single digits last year even.

It was in single digits. I wouldn’t characterize it as mid single digits.

Okay. And does it change your thoughts on. I think you've talked about trying to get unit growth or client growth back up to kind of somewhere in the 1% to 3% range. What are your thoughts on that as you I guess exit this selling season based on what you saw?

Well it's still a combination. We want the units and the revenue both and that’s the way our comp plans and our incentives are set. So we're still looking for both and we're still trying to -- we certainly expect to be in that range from client growth perspective.

But you want to be I guess I was trying to see if you would increase that range given the sale season or if it's in other words I guess if you still would say 1% to 3%.

Yes, I would still -- no I would stay in that range from client growth perspective. I think this is an ability to sell higher revenue per client. As much as product it is selling more complete bundles to clients and more complete and more ancillary services as well. So I think client growth would still be in that same range. I wouldn’t necessarily bring that up, but I think we are selling more revenue per client because of the better execution the team selling etcetera.

Okay great.

Thanks Tim.

Thank you. Our next question comes from Kartik Mehta with Northcoast Research. Your line is open.

Hi Efrain, hi Marty. Efrain, you talked a little bit about the float. Are we at a point, now, if we assume that rates stay kind of where they are and don't worry about increases, that float income year-over-year should be flat and if rates go up you could start seeing an increase there?

Yes. I think you should see it tick up modestly. Yes, I think that’s where we are at. We've kind of -- we've weathered the storm and the storm appears to have passed. Hopefully we're not in the eye of something, but its seems to be that the worst certainly has passed and from the perspective of the portfolio and how we will manage it interest rates now just represent upside as I like to say the embedded optionality of the stock.

And Marty, you talked a little bit about price increases and this quarter we haven't seen, really, any increased competition. As you look at the next price increase, which I think you usually do sometime in the May timeframe, anything change in the environment which would change your mind as to the type of price increase you would do this fiscal year compared to what you were able to do the current fiscal year?

No I think we would still be in that same range. I think we got more sophisticated as to kind of where we put the price increase based on clients, products and the competitive nature of those products with the portfolio of different products we have, but I still think you would expect us to be in that -- you should expect us to be in that 2% to 4% range.

And then just one last question. Efrain, you alluded to this a little bit when you were talking about the PEO and I'm wondering, is there a way to quantify any ATA benefits you're getting? And, if that benefit goes away next year? Or, is the PEO at least the way you look at it and the HRS business, the trends are fairly strong, so we should continue to see the growth you've been witnessing?

My initial answer to that is that I would expect a continuation of trends, having said that we are going through the planning process and having our usual discussion with sales about what we think is attainable. I think we are -- its fair to say we're in a favorable environment. How we set that for next year’s plan still remains to be decided.

Thank you very much.

You are welcome.

And the next question comes from Gary Bisbee with RBC. Your line is open.

Hi Gary.

Hi. Good morning. Just going back to the minimum premium plan for one more question. Can you give us a sense, is that growing much more quickly than other PEO? And I guess now that we've annualized you adding that, I'm trying to think, will that be growing faster and thus be somewhat of a drag on margins even though there's a little profit impact for several more quarters? Or, is most of that behind you now that you've got the introduction of that?

I think the next quarter is when it will pretty much anniversary Gary. So we will see a little bit a drag into next quarter and then starting the following quarter it should be a more fair compare, but the point you are making is a fair one to the extent that more PEO clients attach healthcare. It does have a slight drag on margins, simply because we don’t get much a margin flow through. But, after fourth quarter it shouldn’t be significant.

Okay great. And then I think we all know PEO -- because of the pass through, somewhat lower margin, but when you look at the mix of new business and just the composition of your growth in the last year or two and going forward, how do we think about the puts and takes around margins? Is stuff -- a lot of stuff coming in at a lower margin? Or, some of it is incrementally more profitable to existing customers? What are the main issues?

Yes. So Gary. That’s a good question. The answer is if you look at most of HRS with the exception of PEO, if I take all of those products, they're all growing pretty strongly and they all have margins that are comparable to payroll. One exception to that is insurance, but it's still too small to exert an overall drag on margin. So the answer is we shouldn’t see significant delusion there. There may be a moderate impact if PEO really, really starts to grow much faster than everything else. It's been growing nicely but it's part of the mix and its reflected in our results. So unless that really took off, it shouldn’t have a significant impact on overall margins.

Great and then just one last one, last time the company got north of $1 billion of net cash in corporate investments there was a sizable buyback. I think it seems like you've been more likely to do some steady buybacks over time rather than the one big. I wondered if you've given any thought to maybe a special dividend or some other way of returning more quickly a portion of that excess cash.

So we -- I guess my normal answer to that is that when its above a $1 billion, we have to think about what we do with it and it's a function of where we are with respect to opportunities within the M&A portfolio. So to the extent we don’t see those materializing in a shorter term timeframe than we have to have that conversation with the Board and they're ultimately going to decide what make sense but we will be having those conversations.

Great thank you.

Thank you. The next question comes from Jim MacDonald with First Analysis. Your line is open.

Good morning, guys. On the double digit new bookings growth do you think we will see that more in HR or in somewhat in payroll or how is that going to play out?

I think both of them are pretty strong. But I think it's a little stronger in the HR side. I think that’s obviously where we have more opportunity to sell the ancillary, the wide breath of ancillary products that we have. So a little bit stronger on the HR side particularly as Efrain said between PEO, ASO, 401(k) our online service, time and attendance kind of everything, but payroll is in there. So I think it's certainly been a little stronger on the HR side, but both of them are good.

And I would say on this that Marty mentioned it was double digit, it was in the third quarter it was in double digit in payroll. So to Marty’s point we were pretty strong across the Board.

Great. And this I think is similar to other questions, but as people continue to adopt the minimum premium plan, will you continue to get a little bit of a tailwind in revenue growth that you sort of had this year from new revenue recognition?

That's a good question. You really don’t see as much of it next year. We really obviously got a -- two things. We obviously got an uplift this year. We've been careful to call it out because we don’t want people to misunderstand what’s going on in the underlying numbers and most people understand it. We were within $3 million of what the street had on revenue. So everyone understands kind of what’s going on. You get a modest tick up, but after this year you would -- the impact is not significant.

Okay. And just one sort of on the repurchase your share count kind of started to drift back up again, any thoughts on that?

Yes. I wish the share count didn’t drift up, but we will -- I would say we will repurchase opportunistically. I think that's where we're at right now before I think Gary’s question earlier on would we do something more? We'll have to take a look at where we are with M&A and address whether we think something larger is warranted.

Great thanks.

Thank you. The next question comes from Bryan Keane with Deutsche Bank. Your line is open.

Hi Bryan.

Hi guys. This is Evan Bull on for Brian. Just real quick on the bookings growth in the December and January quarters, maybe directionally, was that ahead of your expectations, below or right at? Just given the magnitude of those months?

I think it was pretty close to our expectations. We set pretty high goals for the sales team and what we expected in particularly in selling season. I would say it was pretty much at our expectations because we set pretty high ones.

Sure, that helps. And then you guys have introduced a number of SaaS-based products over the course of the past year. Can you talk about the traction with those products and maybe the competition and kind of the competitive dynamic there? Aside from ADP who else are the players that you're competing with directly?

Yes I always say the name competitors because it just gives them creditability. I think ADP is the one we run into the most. There is a couple of other that have recently gone through IPOs as you run into but we're winning some of those clients back actually right now over service issues and so forth. So I think from a product standpoint we stand up very competitively and all SaaS, the ability of the SaaS products in the bundling of these integration is so critical to us and we're continuing you will see over the next six months to really even more fully integrate a lot kind of I think they're best-in-class products. So we have myStaffingPro for example which is sold and integrated but it will see even better integration this year as well as stratus time, which is I think the leading time in attendance SaaS offering that we purchased last June and now you will see it not only as it integrated now, but it will grow much of a full integration. So we compete very we'll. It's still primarily with ADP and then there is some of the pays that we call in that you'll see, but again we're starting to win those back. They're pretty small losses for them at this stage.

Thanks, that helps guys.

You're welcome.

Thank you. The next question comes from SK Prasad from Goldman Sachs. Your line is open.

Thanks for taking my question. First one is probably just on the timing impact. You guys talk about double digit growth you're seeing in bookings. How long does it take to actually see that from a revenue side?

You start to see that probably a couple of quarters out. That’s when -- so you know the first quarter is not much depending on where it occurred. You start to get the client set up. There is a little bit of time and then probably after the second quarter that’s when you're starting to see the impact.

Okay. That's clear. Probably if you could provide some color on some of the newer products, which you guys have launched over the last few quarters. PEO, I understand it's at a lower margin profile than the Group level, but just thinking about this newer products are there any products or so is this, which are at higher margin than the Group level?

I would say as Efrain mentioned earlier most of the products are at a pretty strong margin level across the Board. I think insurance Efrain mentioned was pretty strong margin, but that’s still a small part of the business although the health insurance in particular Workers Comp has always been pretty strong. The health insurance is really starting to pick up now and that's in addition to the Affordable Care Act products that we have. I think ours is a business we work very hard to make sure we have the strongest margins possible obviously with our high margins in the industry now and we keep trying to drive those. But I think when you look at the newer products that we either purchased or built set us time from a time and attendance, SaaS product, myStaffingPro from a recruitment and applicant tracking product, BeneTrac, the benefit enrollment all of those have -- will have pretty good margins particularly as we build scale and more fully integrate them into the bundles. So all those products are doing well and they’re getting out of the gate and this is even before we more fully integrate them into the Paychex flex our SaaS kind of the SaaS based for the whole thing.

And probably just last one regarding float income yes there are some positive comments coming from Fed and you might end up seeing some positive impact from that, but just from a long-term strategy around your portfolio, would you be open to concerning options like small business lending given your strong distribution strength and strong customer base?

The answer your question SK we have that discussion probably I would say once a quarter. The challenge we see there, so we’re looking at ways to partner, we do partner with Biz2credit on small business loans and referral arrangement. We’re just very cautious about tiptoeing into an area that could be highly regulated. So that's why we've been cautious about doing it. It’s an area of interest if we could participate a little bit more fully we would look at it but that's the inhibitor.

Okay. Thank you. Thanks Martin.

Thanks.

Thank you, the next question comes from Jeff Silber with BMO Capital Markets. Your line is open.

Thanks so much. Efrain, not to nitpick here but in looking at the supplemental schedule, if you look at the operating margin guidance for the fourth quarter, 35% to 36%, I think last quarter that number was 36% to 37%. Is there something going on that we should be aware?

Yes, I think Jeff, so we're first of all eagle eyes there. I did not call it out except that in my comment what you saw were some discussion about higher cost in the quarter and the higher costs were driven primarily by sales related expense. And so we're just simply calling out that we think given strong sales performance now we're moderating a little bit the margin given the strong sales performance in the back half of the year that's what's driving that modest change.

All right. That makes sense and I wish I could take credit for it, but somebody pointed out it to me. Just one other question you mentioned on the checks per payroll and I know it’s not as big of an issue as it was before and you expect more normalized growth in the fourth quarter?

Correct.

Is that because of the bonus issue you mentioned that shouldn’t really impact the quarter?

Yes so it’s not going to impact the quarter and I think the timing shifts that I discussed in Q2 these happen from time to time. I’m sorry that I mentioned in Q3 that doesn’t occur in Q4 and then we're back at a more normalized rate like what you saw in the first half of the year.

All right great, thanks so much.

You’re welcome.

Thank you. The next question comes from David Grossman with Stifel Financial. Your line is open.

Thank you good morning.

Good morning.

I was wondering if you would just step back to the cost in HRS and perhaps help us better understand ASO versus the PEO on what the trends are you are seeing in the buyers of each of those different products?

Yes I think primarily the PEO has typically been in States where they're just more comfortable and more used to PEOs, but I think what's expanded a little bit from a PEO side David is because of the Affordable Care Act they’re looking more to kind of feel more comfortable, kind of within a co- employer relationship. So there is a little bit more acceptance I think to the PEO in that just the typical states of Florida, Texas et cetera type of states. So we do see that growing and I think that has been frankly a lot of the Affordable Care Act has pushed more people into seeing the opportunity and just feeling more comfortable being part of shared kind of employment service. And those who don’t need to go there probably have the ASO and both I think the ASO is still coming primarily at it from an HR outsourcing type of business. We’ve seen that drop down so where clients didn’t think about HR outsourcing at 30 employees or 20 employees now do because of the complexity of the regulations of the hiring and firing and other compliance issues. So both are growing, I think PEO still tends to grow a little bit more from thinking -- starting to think about the insurance but then realizing that the HR support is there and that’s why they buy totally. Because that's really how we sell it is the value of HR support, but the ASO continues to be HR and I just think it’s still complex now, the Affordable Care Act there is number of immigration reform issues that are out there for hiring and so forth. All of these things add more people to say hey I want to be, I want to outsource my HR to somebody who is going to stay current and of course we have been a leader in this business that we have more client employees than anybody else in the business by far that we service and in over 400 individuals around the country who has serviced the clients face to face. And I think that has made for great growth.

And to build on that David I think that when you look at how we are going to market and how we sell that product. ASO tends to be as Marty mentioned tends to be a little bit lower typically work site employees and within the base, PEO tends to be a little bit bigger and a combination of inside the base and outside the base. So our PEO sales are not just existing Paychex’s clients but also outside the base.

And is the relative growth rate -- just without getting into the specific numbers -- are they comparable? If not, do you expect them to diverge at all over the next couple of years?

I think they're generally comparable, yes they are pretty close on both side just a preference for what probably the clients thinks. I think the other thing that we probably didn’t mention is selling this more upfront, we have found that typically our model was sell them payroll and come back and say do you need HR services in three months or six months. And we are selling much more upfront, if we think the client is of a 20 plus in a complexity, we were going in team sell and I think we are winning more clients were in upfront and ASO or PEO basis.

Okay. And just one other question. Do you sell the ancillary services without payroll? And if you don't, have you ever considered doing that?

Good question, so the answer is yes, we do, although for example we reported I believe last year 580,000 clients. We think we had in excess of 20,000 clients that don’t take payroll but take other ancillary products. And I think David it points to the fact that the company that we were prior to the recession in very different from the company that we emerged out of the recession. We are much more of an integrated full service provider to small and medium sized businesses. And you are starting to see that in the client base and we will update some of that information when we get to the end of the year.

That’s very good. Thank you.

Okay. Welcome.

Thank you. The next question comes from Mark Marcon with R.W. Baird. Your line is open.

Hi Mark.

Hi Marty, hi Efrain. Good morning. With regards to the core payroll growth that you've seen, can you characterize where you're seeing the strongest growth in terms of, is it the smallest end of your other client size? Or, just the average small client and what are you seeing on the MMS side?

I would say on the average, it is on the average, don’t necessarily the smallest clients, although new business formation has picked up some obviously and kind of getting back to where we were pre-recession levels. And I think in our sales to new businesses are back up over last year this year and so I think there is some small but I think primarily it’s net average based if not slightly higher I would say meaning one or two employees or something like that. So I think we’re right in the average and in the mid market I think it is about the same, I think we focused very heavily on the 50 to 500 in that mid market space and I think that has been a sweet spot for us. We certainly have clients that are above that. But we are really focusing the team on that 50 to 500, it is a very hard space right now for multiple products, those are the clients that need multiple products that are integrated in SaaS space and we fit really well there.

So you are seeing the same level of growth in that 50 to 500 as in that sub-20 group?

Yes I would say we are pretty close I would say yes.

Great and you still have some improvements to make to that 50 to 500 product set right?

Well I think what I mentioned earlier is over the next six months you will see even stronger integration. So all on the kind of the same user interface and so forth. So they're integrated today from a different levels, but over the next six months Stratustime that we acquired last year myStaffingPro and BeneTrac will see even enhanced integration…

Single sign-on, single database?

Yes, good. And Mark just I’m sorry go ahead…

Just -- which will make that even a stronger product right from applicant tracking right through to retirement as they say, but particularly on the frontend of the applicant tracking and the benefit enrollment.

Building on what Marty said, the way we segment markets mark is under 50 and 50 to 500. We look at it from a unit basis the growth is pretty comparable.

Okay. Great and with regards to the sales that you’ve seen can you characterize the number of add-on modules that you’re seeing now relative to say a year ago?

I guess I would say this is what you mean. We saw a lot more bundled services…

Right.

Certainly than standalone payroll, that has gone up dramatically over the last four years.

What does dramatically mean?

I would say from low double-digits is a percent to mid almost, okay double-digit kind of. If you think double hundred, so we used to sell probably standalone payroll, this is the change in the wholesale theme probably 10% to 20% of bundled services right up front, 10% to 20% of the time now we are selling a complete bundle probably 40% to 50% of the time. It is pretty dramatic.

That's great.

That's the way we bundled the products as well and the way that sales has looked to increase the revenue per client and really to sell the client everything they need right upfront is part of a bundle.

Great and then what percentage of your sales are now coming from brand new businesses?

I would say it is still close to half. It is still close to that 50%.

But that is picking up?

Yes.

Okay. Great and then if the economy stays as it is would you expect your new business revenue growth target to basically stay about the same?

I think so.

Yes Mark I think it is really been typically between about 45, then low 50s, 52, 53, it is hard to envision that that changes that much. I mean part of what distinguishes us from a lot of companies is that we are remaining that new base to get our customers. So we get the 3% payroll they have eventually became an 8%, 10%, 20% payroll. Because we mind that, so that is part of the way we sell how we do that, how we go to market over time may change, but that's really core to how we're approaching the market.

Okay. And then lastly this is completely separate from new business formations in terms of a question but is specific to your bookings growth, when we take a look at the target that was set and if the environment stays the same, in terms of how you are judged, do you think that your target will roughly stay the same as what we have recently seen in certain documents?

So that is a very wonderfully elliptical euphemistic way of saying, we typically have a pretty tough target. Management doesn’t get paid. We don’t start to having conversations until we are getting close to double-digits. So we will expect that we will have a double-digit target and we will expect it if we don’t need it, we will suffer the consequences. So that is kind of where we are at from management’s comp perspective obviously sales don't set of comp.

Well congratulations on a good year, this year.

Thanks.

The next question comes from John Williams with Topeka Capital Markets. Mr. Williams your line is open.

Hi John.

Good morning guys, thanks for taking my questions first. So you had mentioned in the release a couple of things that I thought were interesting and maybe speak to, what's happening in the wider world, specifically regarding number one pricing and number two just the fact that you are starting to see wages move up a little bit. I was wondering if there is any read that you have perhaps more on the wage side than on the pricing side you have talked a bit about the pricing side but curious to know what you're seeing on a wider scale with wage inflation and if that's something you think is become an issue in the next few months?

I think wages, we've generally seen around 2%. So I wouldn’t say it's anything overly strong, I think we saw Efrain I think mentioned earlier from a bonus perspective, which we watch, bonuses were higher. It weren’t -- didn't seem to be as many necessarily or bunch of an increases we thought, but they were higher, but general wage has been only has been pretty consistent at around 2% increase.

Yeah, I think you're picking up John on the 3% client fund balances and so that incorporates not only wages, but anything else that we're paying. So it looks like it's ticking up moderately.

Okay, that’s helpful. Thank you, guys.

Okay.

Thank you. The next question comes from Lisa Ellis with Bernstein. Your line is open.

Hi Lisa.

Hi, good morning guys. Thanks for taking my call. Can you comment, just following up, on the strong bookings and then also, increase in sales expense? Can you just give a little bit more color around sales productivity and how that's trending compared to, say, growth in the sales force?

Yeah, I think we're showing obviously good productivity in this third quarter and the selling season from a standpoint of revenue per reps. So we’re seeing pretty productivity there kind as we projected or set our goals I guess I’d say. And so that always drives when you tie it back to expense in the third quarter because we have a lot of sales in the third quarter when January starts for payroll in particular that drives the sales expense up. But I would say sales expense kind of per sale is generally consistent with where we thought it would be and we’re continuing to get productivity out of the sales team I think they’re executing very well as you look over last few years in particular.

Terrific. And then second one, on the ASO and PEO businesses, how much of the growth there is coming from Greenfield versus how many of those deals are you think that it's competitive or actually a takeout?

I would say in the PEO side, I think it's probably 60, 40 I seeing that number lately, but I would say more new, just when you think about it trends tended to be with our overall business. So we're 50% new businesses. I think if that’s what you are asking from a payroll standpoint. I think the PEO is similar to that may be a little bit more on the new side but I think it's right in the range of 50-50.

Terrific. Okay. And then last one, just a longer-term question. In your comments up front, you talked a bit about flex and the health care reform offering in myStaffingPro and then made some comments in response to question about looking more actively at M&A. Can you just take a step back and give us an idea of looking out two, three, four years, how you envision the product portfolio evolving?

Yeah, I think when you look out, it will be fully integrated software as a service offering meaning single database UI, very client friendly, mobility will be tied into it very directly. One of the things we didn’t really comment on today just quickly in the comments is mobility, our mobile app has been continually -- we’ve added to the mobile app and it has seen, pretty dramatic usage being picked up even more from client employees than clients and so we’re seeing a nice kind roll up of client employees, which we think will add to retention by the way, which will because the client employees now will be interfacing with our products and will get -- we’ve very positive feedback on the mobility. When you look out, it's going to be that single source for our client to come to us for everything from higher to retire as they do now and I think it will just be a very full product set. I think the M&A piece of it is some product tuck-ins were needed, but to be straightforward we’ve got pretty much the products that we need. Now it’s finishing the full integration of a single database within this year and then it will be adding, I think where we can execute and add more ability and make the company more efficient. So PEO’s payroll companies probably 401-K is always out there in any off shoot of anything from recruiting etcetera those kind of businesses. So it’s a pretty wide scope that we look at from an M&A perspective, but our job will be to drive upper single digit revenue growth on the topline and still be one of the most profitable companies in the business.

Terrific, thanks guys.

Thank you.

Thank you. The next question comes from the Joe Foresi at Janney. Your line is open.

Hey, guys this is Robert Simmons on for Joe. Thanks for taking the question.

Sure.

Actually just had my first question, but what are your thoughts on international expansion?

I’ve been in Germany now for nine or ten years. We doubled our size last year within acquisition and continued sales growth. So we’ve got a nice base there. Brazil we started last year and were kind of chugging along. It didn’t help the kind of Brazil, economy kind of slowed down at a time that we were starting up there, but were kind of learning there and were breaking into the business of winning over the CPA so that they will refer more of their payroll business out to us. We're still very interested in it. We were going to focus on two or three countries kind of the third country we haven’t quite found a good entry way in yet. We’ve looked at number of them. We -- it will always I think at this point it tends to be small, it's kind of tend to be small part of where we are as we approach $3 billion in revenue, but it's still of interest to it and we continue to look at acquisition opportunities and ways to increase sales and profit there.

Great, thanks guys.

Okay.

Thank you. The next question comes from Matt O’Neill with Autonomous Research. Your line is open. Matt O’Neill: Yes, hi good morning guys. Thanks for squeezing me in at the end. I was just hoping you could give us any updates you might be willing to provide on the short payroll business, specifically, and possibly if you could parse the client growth rate of 1% to 3% and the contribution from the SaaS side? Thanks.

Yeah, sure. We don’t really well in SaaS most of our products now are or most of our clients are on SaaS. So, well over 80% of them. From a growth standpoint, we don’t breakout share payroll anymore, but they’re doing fine. Really they've had good client growth year-over-year and I think they’re competing very effectively with particularly the micro businesses for payroll. All of that is done through web marketing and in sales on the phone. Once people call in, I think they've been very effective at that in growing their client base and we continue to be pleased with that and continue to always watch who we are competing against. Not a lot of new competitors there. There some startups got up some quite a bit of press for a while but then it's kind of dropped out a little bit because they're not as a full product and ensure and so I think primarily it's into it that we run into as a competitor there and folks just wanting to stay manual do at a payroll manual.

And the other thing I would add is, you surf the web, there is a bunch of these different ratings services, but they just won a recent award in terms of user access and appearance and so they're very, very formidable competitor in platform in that micro enterprise space. Matt O’Neill: Thanks very much.

Thank you.

Thank you. And our last question comes from Ashwin Shirvaikar with Citi. Your line is open.

Hi, Ashwin.

Hey guys. So good job on the bookings, the run rate there.

Thank you.

I guess my question is, as the bookings roll into revenues, can you talk about -- are there incremental expenses involved and then sticking to that question longer term, just longer term expense growth assumptions, where you're making investments in.

Yeah, hey Ashwin so two things. In a quarter when we have particularly strong sales execution and our expenses tend to ramp up, so we had probably a little bit higher expense growth in the quarter and then in the back half of the year based on the performance we're seeing. Hopefully obviously that leads to little bit better build revenue going forward. But I don’t think its unless we set our plans too low and they constantly beat them that’s not the way we tend to do. We tend to set them pretty high and the sales force has a done a great job of rising to the challenge. With respect to expense, where we -- I think there is really going to be no change in terms of the approach we take. We’re going to leverage operating expenses as much as we can. We're going to continued to invest in IT, probably at a little bit more of a moderate rate than you’ve seen in past years or then has been embedded in the SG&A number, which is where it appears. And then we’re going to continued to make selective investments in sales, where we think there is opportunities to grow the business. So I think that that will not change dramatically. Quarter-over-quarter you might have some changes as results are higher than where we expected.

So, the incremental IT investments is that just part of ongoing transition as you move towards more product related, more cloud basis and…

As you know, our double-digit increases in IT investment for many years and I think what we’re saying, it tends to flatten and we’ve reached at a very good point of the amount of productivity, we’re getting and the development needs and that's still a very -- it’s become a very large part of our investment as you would expect with a SaaS based company that’s very much technology driven service.

Last question, if you can have bit sort of the relative sizing of various HRS offerings ballpark?

So the biggest now certainly is as I say is HR outsourcing both ASO, PEO and what we call our HR essentials product which is more a telephonic support HR light, HR outsourcing light. The second is our retirement services business and then third insurance nothings change there. Those are all businesses that are growing nicely and performing well within the portfolio.

I was hoping you can put numbers to that, but okay may be you’ll at your investment.

Biggest followed by the next biggest followed by the smallest.

Okay, thank you guys.

Okay, thank you.

Thank you. There are no further questions in queue.

Alright, thank you. At this we will close the call. If you’re interested in replaying the webcast of this conference call, it will be archived until approximately April 25. We thank you for your interest in Paychex and for your participation on the call. Have a good day.