Welcome and thank you for standing by. At this time, all participants are in listen-only mode. [Operator Instructions] This call is being recorded. If you have any objections, you may disconnect at this point. I'll now turn the meeting over to your host, Mr. Martin Mucci, President and Chief Executive Officer. Sir you may begin.

Great, thank you. And thank you for joining us for our discussion of the Paychex's First Quarter Fiscal 2016 Earnings Release. Joining me today is Efrain Rivera, our Chief Financial Officer. This morning before the market opened, we released our financial results for the first quarter ended August 31, 2015, and our earnings release and Form 10-Q will be made 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'll review highlights for the first quarter in relation to operations, sales and product innovation. Efrain will review our first quarter financial results and discuss our full year guidance, and then we'll open it up for your questions. We're off to a good start in fiscal 2016 with positive results across our major product lines. We've continued our momentum in both sales and new product enhancements. Client satisfaction and client retention also remain at high levels. Payroll service revenue growth of 5% was in line with our expectations and we also continue to see strong demand for our human resource outsourcing solutions including double-digit growth in client work site employees served. Total service revenue grew 8% in the first quarter. I want to mention very important to us that Paychex was recognized as a leader in the July 2015 Gartner Magic Quadrant for payroll business outsourcing services advancing from our challenger position in 2014. The 2015 Magic Quadrant evaluates the capabilities of 12 key providers of payroll BPO services across the globe and I would like to read to you some of the facts that came out of Gartner's release. Paychex ranked highest of all participating providers in overall satisfaction across payroll functions, technology, provider customer relationship and…

Thanks Marty. Good morning to all of you. I’d like to remind everyone that today's conference call will contain forward-looking statements that refer to future events and as such involve some risk referred to the usual disclaimers. As Marty indicated our first quarter financial results for fiscal 2016 show we're off to a solid start for the year. Here are some of the key highlights for the quarter. I'll provide greater detail in certain areas and wrap with a review of our 2016 outlook. Total service revenue grew 8% for the first quarter to $712 million. Interest on funds held for clients increased 6% for the first quarter to $11 million. Now we’ve had a number of quarters in a row where we've strung together increases on funds held for clients. So that part of the P&L is starting to bounce back. This was driven in part by 2% increase in average investment balances. Expenses increased 7% for the first quarter, primarily driven by higher compensation related cost and growth in our PEO. The increase in compensation related cost was driven by higher wages and performance-based comp cost. Operating income, net of certain items, increased 11% to $285 million for the quarter. We achieved operating margins of 40% up from 39% in the prior year quarter. Remember that our operating margins typically are higher in the first half of the year. At this stage in the year, we anticipate our full year operating margin will fall within the guidance we have provided. We'll update again of course in Q2. Our effective income tax rate was 29.7% for the first quarter compared to 36.3% last year. This change is due to the recognition of a net tax benefit on income derived in prior years from customer facing software we produced. During…

Thank you, Efrain, and now operator, we'll open the call to questions.

Thank you. We'll now begin the question-and-answer session. [Operator Instructions] Our first question comes from Mr. SK Prasad Borra from Goldman Sachs. Sir, you line is open.

Thanks for taking my question, two if I may. Help me, to start off, Marty to what extent the full year guidance is just being more conservative and given you have such a strong stock through the year, are you expecting second and third quarters to slow down and if that's going to be related to more processing days or something more to think about?

SK, this is Efrain. I’ll take that. So we're always glad to have a strong start to the year that helps and increases our confidence in the guidance for the year, but one quarter doesn’t make a year. I will say also that we called out that Q3 was going to be somewhat weaker than the other quarter. So there probably is an element of conservatism in our guidance, but at this point, we're not going to peg it any higher. We’ll update in Q2 as we see results for the year come in.

Okay. That’s great. Probably just second question, with regards to what you guys were talking about at the Investor Day. The focus clearly seems to be on generating more revenue per client, but client growth also is something we should probably benefit from sales and marketing investments. Are you seeing any progress on that or would say that from your end, it’s very clearly going to be just revenue per client and client per growth should stay at 2% to 3% levels at best.

Yes, SK, I think – no, I think we're seeing progress on both. We don’t give the client growth until the end of the year once a year, but it's very consistent, I think we're showing consistency in both where the team is selling the integrated selling upfront is doing well on the revenue side from the packages and of course the new products that we're rolling out, but it's also driving more interest in more clients and selling more clients. We’d always like it as strong as it could be and it’s early and selling season will tell us a lot more here in the next quarter or so, but no, we're pushing hard for both and we're making progress on both.

Probably, just last one on competitive landscape, have you seen any changes at all given the acceleration in investments by a lot of the newer start ups, especially in the payroll space?

Not really. I think we continue to see good results from a selling perspective and so while they're out there, I don’t think anyone has -- no one has the sales team that we have, the distribution model and the number of sales people and the effectiveness. And so on the low end I think they sell very effectively and the low end being size, and then certainly the mid market, I think we're at the strongest -- we continue to be at the strongest position we've ever been in from a product and service perspective. So we really haven’t seen a lot of changes. If anything I would say we’re in a better position than we were last year at this time.

That’s great. Thanks Marty, thanks Efrain.

Thank you, SK.

Our next question comes from Mr. David Togut of Evercore ISI. Sir, your line is open.

Thank you. Good morning, Marty and Efrain.

Hi David.

Could you gauge net price increases that you're realizing both in the payroll services and human resources services business this year?

Yes. A little bit different on HRS and we typically don’t get real specific about how much we take. That’s a little bit different typically from payroll service, some day, some years I should say. We don’t increase certain product lines, but I would say on payroll services, we're solidly within the 2% to 4% guideline and don’t appear to be having any problem holding that -- those price increases.

Got it. And could you ballpark for us what the bookings growth was in the quarter?

No, we won’t do that. It was strong, we feel pretty good about it. I would just say this David, not to be too coy because I get that question all the time, what really matters is how we did in the selling season and so much -- you're going to have a good quarter and we've had good quarters in the past first and second and not had a good selling season in third quarter. So we feel pretty encouraged about where we started the year. We think it bodes well for selling season, but we're not in selling season yet and we'll update when we get there.

Yes. I think that's very -- very consistently we feel very good about it as we did at the end of the year and didn’t have any bumps getting off to a good start, but as Efrain said, the selling season makes the difference for us.

Understood. Thank you very much.

Okay. Thanks David.

Our next question comes from Mr. Smitti Srethapramote from Morgan Stanley. Sir your line is open.

Great, thank you. First question is on the PEO space, one of your competitors has recently seen higher medical claim cost and even though you guys haven’t experienced those given you're exposed to different states, can you talk about whether or not that's impacted your view on taking insurance risk?

Yes, good question. So we saw the same, excuse me, saw the same things that have been seen in the market. We saw the results I should say. Our experience is very different. We employ teams of actuaries and set our -- set our premium expense very, very conservatively. So there is no guarantee you can have a hiccup, but we do a lot to minimize it. We also have pretty low -- we have pretty conservative ceilings for reinsurance and I think all of that is great. But I think the most critical part of the entire equation is what you do from an underwriting standpoint when a client is presented to you? One of the things that we did, this was before I got here and one of the things that Marty instituted was a very clear line between the authority that underwriters have and sales have. While they operate cooperatively, we task our underwriters with protecting the quality of the pool and that has served us very well. So there is inherent risk in that area, but I think we manage it very well. When we looked at what others were doing and how they had structured their approach to risk, it was a bit different from what we do.

Okay. Thanks. And maybe continuing on the PEO side, can you provide more details on the growth rate of your worksite employee count and whether that's still in the 20s?

Yes. We won’t update the worksite employee count to give you specific numbers. We'll eventually release all of that information, but I would say it is fair to say that part of the reason why Q1 results were strong was that PEO was an element of strength in the quarter. So we continue to do very well in that area.

Okay. Thank you.

Sure.

Our next question comes from Mr. Jason Kupferberg from Jefferies. Sir, your line is open.

Hi Jason.

Hey there. Thanks for taking the question. Wanted to just pick on the PEO topic as well here to start, the momentum that you're seeing there to what extent do you think it’s coming from share gains versus the general rising tide lifting a lot of boats just given the catalyst of the Affordable Care Act?

I think obviously a lot of it is coming from the Affordable Care Act. I think there is just a lot of interest in the market, but I think at the same time, because we're kind of a proven leader in the space and I've a very good sales team on this, I think we're picking up more share of what’s now becoming a PEO sale. So I’d say, Jason, it’s a bit of both because there is such an interest now particularly as it's getting closer and closer to respond to the Affordable Care Act from a PEO standpoint frankly and an insurance standpoint and because of our positioning of our product and our success, we're picking up more share.

Okay. And then just switching gears over to Flex hiring, if we try and just get a bead on magnitude of contribution, obviously it's an important offering, is there material revenue baked into this year's guidance for it or should we think of it as more of a potentially material contributor in fiscal '17?

I’d say probably more of a contributor in '17 because it's going to take a while to build up, but it's adding a lot of strength to the packages that we’re providing. Not only is it giving them full recruiting and hiring, but we’re selling -- you can -- we sell onboarding as even a separate offering, which is a paperless onboarding that doesn’t have to be a mid-market sale. It can be a 20 person that hires a lot and it’s all paperless from an onboarding perspective. So I’d say this year it’s kind of getting started and you’ll see a start to it, but the bigger magnitude of it will come in future years and starting in '17.

And just last one for me. I wanted to catch-up on the M&A pipeline, because it felt -- appeared at a time like you guys had sort of opened the aperture a little bit in terms of opportunities you were willing to consider. Obviously you're staying disciplined in evaluating those opportunities, but would you say there’s been any directional move in the pipeline in terms of it being closer to bearing fruit versus not in recent months?

Yeah, I’d say so, although you never know till you get to the finish line, but we certainly have been very active in a number of fronts on it and -- but as you said, we're still being very disciplined. So we've a pretty wide funnel at the beginning. We bring it down pretty tightly to where we think it’s a reasonable valuation that's going to add a lot of value to us, but we’ve got -- there’s a few things in a hopper now that we’re evaluating. Did they get over the finish line, you never know till we’re ready to announce, but we’re very active in it, that's for sure.

Okay. We’ll stay tuned. Thank you.

All right. Thanks.

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

Hey good morning Marty and Efrain. Marty, I wanted to ask you about the Paychex's Flex and the percentage of customers that have converted to that particular version of Payroll processing?

It’s hard -- the basic product that we have what was Paychex's Next Generation, all clients are on Paychex's Next Gen, then Flex adds kind of a another full product suite to that. So we’re in the process of moving some of the clients over. But there is a number of clients that are already on what I would say is the foundation of it. So a lot of clients are not going to see -- the majority of our clients are not going to see any movement. They’re not being moved to anything unless they drive -- this is more of a mid-market product suite that they are going to see more and they’re being offered that. We’re still offering the old product suite. What we’re saying is, hey, if you want to come over to a fully -- a full suite for human capital management that is fully integrated within a single employee record, we will move you over. So we’re kind of in the early stages of that, but it’s not a big push to force everybody over. It’s more -- hey if you want these additional enhancements come over and it’s really targeted more in that mid-market space. The majority of our clients won’t see a move. So there’s not going to be any disruption that we expect there at all.

I guess, I was getting to Marty -- is there -- have you see a -- are we experiencing greater sales of products as people have moved over to Flex especially in the mid market, concerning there will probably be more demand for some of your products?

Yes, it’s early, but I think yes. That’s what they’re looking for and so that’s why we’re excited with the Gartner change to put us as a leader because that’s what they’re looking for is that full suite of products, fully integrated single employee record and data base and we’re seeing an increased demand there. And I think if you were to talk to the sales team, particularly in the mid market, we just left the sales conference of our top performers a few weeks ago and extreme excitement about selling the product and being very competitive in the marketplace. So, I think, it’s early, but you’ll start to see that really pick up at it will add as we talked about a little bit earlier, much more product per client.

And then Efrain, just any change in philosophy in how you manage a flow portfolio considering there might be interest rate increases going forward here?

Not yet, but it’s on my list of objectives. So, Kartik, what we need to know is when they’re going to raise and then what the increase in the -- the rate of increase will be. And I think that that’s been signaling as directly is I’ve ever heard it, signal when it’s going to happen? And I expect that when they signal or when they implement their first increase, they’ll give some direction as to what we can expect then in subsequent increases. That will permit you to decide how to position duration of the portfolio. So I’m waiting for all of that information to get a better sense of how we sit down and strategize around the best way to position the portfolio. So that’s coming in the -- probably in the second half of the year.

Okay. Thank you very much. Appreciate it.

Thanks Kartik.

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

Hi, good morning. Thank you for taking my question. The first question is just, you said you just came from a sales conference. I was curious, what feedback you heard from your sales people on any potential changes to client behavior, given the financial market weakness and also some of the concerns about the global economy?

Yeah, I think generally, when we release for monthly small business index and in fact I was just in New York City yesterday because we’ve expanded it now for different industries, we're seeing continued -- particularly in the small business under 50, we’re seeing continued better employment growth than prerecession levels of 2004 and so -- and it’s down a little bit from last year, but it’s consistently above that level. So we’re feeling like a steady improvement in small business formation and employment hiring and I would say the sales folks certainly felt that way. I think the bigger excitement at the Sales Conference was just about the products that we're rolling out in the full feature in the strength of the competitive offering along with the service options, now 7/24 service and a lot of different options that more self-service that clients can provide. So they were pretty excited first to be there. Obviously their top performers and second, that they got a good year in front of them they feel.

Thank you. And then on the ESR offering, do you have -- just wondering if you could give an update on how that's progressing, what percentage of the clients that you think might take it have taken it so far? And does it feel like it’s going to be down to the wire type of offering where people take it at the very end? Thank you.

Yeah, sure. I don’t -- we don’t really release I don't think how many are taking it from yet at this point. I would say it’s very active and I think it will be active down to end. We continue to provide it to our clients. I know some competitors have stopped providing it. If there is a lot of work involved then we're making sure that the clients upfront understand that there is a lot of information needed from the client for us to do this successfully for them, but I think we’re handling it very well. We’ve increased the resources who are selling it. We've increased the resources who are supporting it because we're continuing to offer it and I think this will be -- yeah I think this will be pretty active right through the end of the year and I think then there will be another surge probably after people who realize -- clients who realize, hey I should have had this when it comes time to file and now I need it. So I think we'll have kind of another resurgence of sales probably in the end of the first or second calendar quarter of next year, but it’s going very well, it’s going very well.

Thank you very much.

Okay.

Our next question comes from Mr. Gary Bisbee from RBC Capital Markets. Sir, your line is open.

Hi, good morning.

Hi Gary.

First question, you talked a lot about the success in selling bundled offerings in recent years, but one thing I don’t think we've heard as much commentary on is just how you approach up-selling additional components of products into the basin and what the success has been in doing so and any commentary you can provide on that?

Yes, sure. Gary one of the points I've tried to make is one of the things we shifted, typically our model was sell payroll and then the other sales forces with the other products come in kind of after that pretty much on a timetable basis. You get someone comfortable with payroll then you come in and talk to them about the value of 401-K record keeping about the value of HR outsourcing, insurances etcetera. Now what we found is certain client sizes and complexity of the client, we come into that client with an integrated team selling approach over the last, I would say year, year and half now, and it's been very successful. So what we found was we were not selling the full value of what the client was looking for many times in our old approach and so if we see a client that's a certain number of employees, has a certain hiring pattern, has a certain complexity to their business, we'll go in with multiple sales forces or multiple sales of products and sell them all at the same time and that's been going very well. I think once we got the sales teams comfortable with it, they've been more successful and we're getting a nice track record as we get this -- as we get some real momentum going.

Let me build on that, what Marty said so that's the team selling approach. On the other side of it, we've done a lot of data analysis, a lot of modeling based on predictive behavior modeling and we have models that basically predict what your -- the next best offering will be when you don’t take a bundle. So that science keeps getting better and better. So we know at certain stages of your lifecycle and based on what products you’re doing and the characteristics -- your client characteristics, your customer characteristics, what offering is likely to be the most successful. So we deploy those models out to the sales force too. So both of those have -- approaches have helped us become more efficient.

Is that a telesales -- the selling of more stuff to existing customers or is it your feet on the street?

No, it’s -- actually it’s more of the feet on the street. It’s -- I think we’re much more effective on the telesales side as well, but that’s been really more for the single product sale or a follow-up sale. But the feet on the street have been much more on the integrated team selling approach, because we have many offices, but obviously have multiple sales teams, but they're just kind of approach the client at different stages and now if the client is the right -- looks like the right fit for multiple products they’ll go out and sell as a team and we’re finding some good success in that.

Okay. And then just the 15% HRS growth obviously continue to be really good but is that a clean like-for-like number or was there a little bit of benefit still from the mix with the minimum premium health plan or is that really…

No, there is always going to be a little bit of benefit from MPP, but that wasn’t a significant part of what happened actually because you were -- we have the same product mix in the quarter, but MPP really did not dramatically impact that number. It really was strength of PEO, strength of VSR and frankly across a lot of other HRS products.

Okay. And then just a last one, I know you talked about M&A, but you’re going to do things only if you can get the right pricing and what not. How should we think about just the cash build from here? Are you likely -- I think you've indicated special dividend, didn't seem of real interest, I know you’ve been doing some buybacks but a lot less than your cash flow. Should we think that the likely approach is just continuing to build cash until you do find the M&A or are there any other options that you’re…

Yeah, Gary I get this question a lot and what’s difficult and my answer always is the same, what’s difficult for the street to evaluate what we’re doing is you don’t have insight into the pipeline and the probability of our pulling the trigger on deals. I would say that most -- you can assume that most of the deals that occur in the Fin Tech space of any reasonable size we've looked at and that for whatever reason we've decided on evaluation that didn’t permit us to get to the finish line, because we’re pretty disciplined about how we go about it. Having said all of that, the pipeline as Marty said is pretty robust and so we see a number of opportunities that we’d like and we’d prefer to simply have the cash to move quickly and deploy it in first instance. To the extent that we got to a point where really the pipeline looked -- didn’t look as robust and I think that we’d start looking at other ways to deploy cash to shareholders. But part of the way we do that and part of our confidence in the future is that, in this summer we boosted dividend pretty significantly and we've been buying back shares. If you look at our share count vis-à-vis the last quarter you see the bias is downward, which is something that we started a couple of years. So all three of those are elements to how we’re looking at cash. But in terms of large cash outlay beyond dividends, we think the pipeline, there’s opportunities there in the space. And we think that valuations have come down to a point where there’s a number of things -- opportunities that seem reasonable now that maybe weren’t reasonable 18 to 24 months ago.

Great. Thank you.

Okay. You're welcome.

Our next question comes from Ms. Sara Gubins of Bank of America Merrill Lynch. Ma’am your line is open.

Hi thanks, good morning. It sounds like your margins outperformed in the first quarter versus your internal plans, is that fair and if we ask you to talk about what drove the upside?

Boy Sara, that's a pretty interesting deduction. Yes, they were a little bit stronger than we had anticipated. However, I would say this. So there is two elements that always typically in the first quarter, we're trying to peg how quickly we go out of the gate in spending and so it’s typically the case that we're a little bit slower. So some of that is timing I would say and then we did well in sales and we feel pretty positive about that. We still don’t think it’s enough throughout. We're still not confident enough throughout the remainder of the year to call it as an upside to where we are, but we certainly had a strong start to the quarter -- to the year I should say.

Okay. Great, and then switching gears back to healthcare reform and the ACA product, it sounds like it continues to grow strong and you think that that could continue for a couple of more quarters. How much of a lift is it to the average revenue per client?

I don’t think we've really from a competitive standpoint we haven’t given out all the pricing and so forth. So to be careful and I don’t want to say too much, but I would say it’s a significant increase, it’s a pretty significant it's I don't know for a…

Good uplift and you see it in HRS. So…

Yes, yes.

And we're seeing a lot of success for that. I am not trying to be clear about it, but I just want to be careful how I am talking about the pricing of it because there is just a lot of discussion about pricing of Affordable Care Act and there is a lot of different plans out there right now that people are saying they're doing certain things and I think clients got to look very carefully at pricing and what they're getting for the product that they're buying. Because some are giving them a lot, I think we're giving them a very full valued service and others are kind of giving them a form to fill in and I think that’s what may shake out here towards the end as clients are going to be little surprised may be at what they bought and what they didn’t buy. But it continues to have really nice momentum for us. Sales are doing well with it. A number of sales teams are selling it and as Efrain said, you're really seeing it in the HRS revenue uplift.

But one thing I would add to that Sara is that PEO was strong, ASO was strong, HR outsourcing in general was strong. So what ESR has done is it’s had a bit of a Halo effect on a number of other products. Even when you don’t sell the product it permits you to get in the door to have a conversation. I think there are very few clients that won’t entertain a call about what they're doing with respect to ACA compliance because there is so much confusion in the market about it.

Okay. Great and then last quarter you had said that you're about a quarter to a third and have penetrated for a potential client that might take it. Is that as high now as half? Is it going that rapidly?

I think that’s probably a reasonable range in terms of where we are at here. Where we end up is something that we're just monitoring to see.

Yes, I think that's fair.

Thanks a lot.

Okay.

Our next question comes from Mr. Jim MacDonald of First Analysis. Sir, your line is open.

Yes, good morning guys.

Good morning.

Just a couple more on the ACA, so I think you mentioned is sorry, that's an HRS revenue, HR revenue, not payroll.

Correct, yes that’s reported in HRS.

And have you recognized much revenue from that or does it get recognized as you kind of bring the clients on Board or how about like ramp up how to be show we think about that?

Yeah, so what’s you're seeing now is we really started building in the back half of last year. So you start to see the benefit of that in this quarter. So you're starting to see the pickup from the number of clients that we signed on in that. We'll watch through as we go through the year and by the time we're at the end of the year pretty close to having recognized most of it, most of the increase I should say.

By yearend and just on a different part of ACA with a number of the public exchange you're seeing pretty high price increases for their health products and they're eliminating products. Any impact -- can you talk about the impact of that on you guys in this fall enrollment type season?

I think it’s kind of couple of different impacts. One, we're not seeing it impact this much on the pure insurance sales basis too much yet because they haven’t seen all of those increases aren’t all out yet there. You'll see it probably all of it into this next couple of weeks actually as they roll up. The only thing I would say is that because of the work in the PEO and the MPP plan, we've seen a very competitive low increases there for our products and I think that’s helped us a lot. That’s part of the reason when you took on a little bit more risk in that because we felt we could manage that very well and it's been very good for us on much I would say much lower increases to our clients under those plans than the national averages certainly that we're seeing the regional averages. So I think it’s going to -- it's benefitting and we'll continue to be a benefit for us particularly in the PEO side where we have an MPP and on the health insurance side, I haven’t quite seen it yet, but Jim our clients aren’t going to have a lot of choice there if they don’t have in more cities they're going to have carriers that are all going double-digit increases unfortunately -- but we haven’t seen a big impact to slow anything down from an insurance standpoint.

Great, thanks a lot.

Welcome.

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

Thanks so much, kind of an obscure question here about a month or so ago, the National Labor Relations Board had a ruling that people believe could in fact affect the franchise business where unions are going to be able to negotiate with the franchise ors. If I remember correctly, you do a lot of work in the franchise area, please correct me if I am wrong, but if you do, have you heard or seen any impact -- potential impact on your business accordingly thanks?

Yes sure. We've not seen it yet. I do think that it’s one of those things that's just another negative that's out there that it makes people little bit slower on maybe hiring or starting up an additional franchise let's say. If I own a couple of franchises, I might be just a little more cautious on whether I start another one or not based on the ruling. I think a lot of that still got to shake out, but it certainly adds more confusion and concern to those. We don’t have a ton of franchise sales. When you look at in the scheme of our sales and our client base, but it's certainly increasing because we've done a lot of work in selling the franchise side, but that's been picking up. So I would say we don’t have an impact yet, but I do think it may generally put a little bit of damp around whether I open up a second franchise or not.

Yes, that’s helpful. Is your franchise exposure on the payroll side, the HRS side, or mix?

Mix, mix. We sell all products to the franchises.

Okay. Great. Appreciate the color, thanks.

Sure.

Our next question comes from Mr. Tim McHugh from William Blair. Sir, your line is open.

Hi, it’s Stephen Sheldon in for Tim. Most of my questions have been answered, but just want to ask as we get a little closer to the key selling season, can you may be talk generally about the where the sales works currently stand and have you been doing hiring? How are recent hires been ramping in terms of productivity just any color on how you're positioned there would be appreciated.

Yes. I think we're in good shape going in from first of all from just being very -- we got all the hires in. Training is done, I think Mark Bottini and the leadership team did a great job in getting everyone in kicking of the year really well. We've sales kicks offs, lot of training during the first quarter and so forth on new products. I think we're at a great positioning of training for example. We do an awful lot now of web training and so forth and from a client -- from a growth of sales I would say we are up about normal like we normally add to the sales force. We had our ads and we were pretty much right on track. The good news is everybody is in the seats, well trained and particularly with all the product changes they're well versed in the product and we could feel that in the momentum of it at the Sales Award Conference.

Okay. Great thanks.

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

Good morning, Marty and Efrain.

Good morning.

You got a really nice start to the year.

Yes, thank you.

Could we drill down just a little bit with regards to just the core payroll, the acceleration we saw this quarter? Did you say there was like one extra processing period in this…

Yes. One extra processing day.

And how much of an impact did that have?

Yes. Good question, Mark. I won’t say specifically for the quarter, but we're going to have two of them this year and we think that the impact will be half a percent. So if you use arithmetic averages you can figure out what the impact was.

Just to be specific the 0.5% is for the total year.

Correct.

Okay. And the other quarter that it will -- we’ll see this impact will be.

Is it the fourth quarter?

The fourth.

Fourth sorry

The fourth quarter.

Yes. I am sorry.

Okay. Great. And then you also mentioned that we should be cognizant on the third quarter.

Yes.

Can you remind this?

Yeah, so I quote that out, I would just refer back to my comments in Q4, I quote out, at this point we think that that quarter will be just -- it’s more timing and will go into a long amount of detailed update in Q2, but that will be weakest of the quarters. It’s mostly about timing of different revenue flows within that quarter and I quote that HRS is potentially being below the range of the full year guidance. I said that in Q4. We’ll update in Q2, but we expect Q3 will be relatively speaking the weaker of the four quarters in the year.

And then with regards to this -- for the quarter that we just had on the core side, even when we strip out the impact of the processing there, we’re still doing well. Can you talk about the biggest single driver behind that in terms of -- you certainly saw pricing stick through, you've had good bookings, but what would you say would be the primary driver?

Well, I think it’s a combination of holding the price and retention. When you look at that immediate quarter sales were obviously -- we’re very comfortable and positive on sales, but the impact is when you retain the clients and as I mentioned we continue to be at our best client retention levels. And on top of that, we’re holding the price increase in the range that Efrain gave. So it was a good start to the year, that’s when you see kind of that first quarter you see what happened with the price, indeed we have to take more discounting and so forth and we felt good about holding the price and felt very good about the client retention as well, good job on the service team.

And did the retention ramp up at all?

Since we don’t give it, I would say it’s very consistent with where we ended the year, which was a record high.

Okay.

The other thing Mark that I’d call out is we didn’t say anything about checks per client. Obviously there is a lot of things to talk about that were positives. But checks per client were flat to down in the quarter and so when you compare one quarter over another, we still were seeing positive results in checks per client through much of last year. We didn’t see that benefit, that’s a mix issue that I had called out in the past. So we feel pretty good about where we were from a field service revenue standpoint.

Absolutely and then with regards to just the client segments that you’re seeing the strongest growth from, is it -- would it typically be in that six employee to a 11 or maybe a little bit slightly higher?

I would say it’s across the Board. It’s not like the quarter that we’re seeing any one segment pick up better. The good news to us is we’re doing well in the let’s say our typical under 20 segment and we’re also doing well and better I think even because of the product and the service options in the mid market. So I would say it’s across the Board.

Okay. And exclusive of that kind of the really small one the former or share payroll plays?

No, that's included, so it’s both.

Okay. And then congrats on the upper quadrant that’s relatively early, any sense for the ability of the sales force to leverage the improved recognition?

I think we’re just – it’s pretty recent, but we’ll certainly find any way we can. They’re certainly very excited about it because it’s always exciting to see third party particularly like Gartner puts you into that leadership position and that it’s based on our clients being surveyed. And our client saying hey this is a great product and a great service and then Gartner coming out of it saying, hey not only is it good now, but you’re leader because you're positioned well for the future. So we’ll definitely be looking to capitalize on it. And knowing the sales team they’re well trained and well versed in the things that are happening with Paychex's they will be able to capitalize on it well.

And the other thing Mark I’d add to that is that, Marty's strategy really started seven years ago about investing in IT and I want to reiterate two things. One is that, this is part of the strategy of how we move Paychex from where we were prerecession to where we are right now. And I think it's been a long time in the making number one and second, I think that external validation is a lot better and more powerful than simply trumpeting what you think, what you believe about yourself. So I would say there is a lot of smack talk by competition about how good they are? We don’t talk that way, except right now and we prefer to let third parties validate how good we are and let our customers validate how good we are. We could not have had that honor unless our customers thought very highly about what we do, that’s the second point. Then the third point is that a lot of our spending now our increases in spending have been around IT and it helped us from the standpoint of being able to go to and might build a credible case that we were entitled to certain treatment of the expenses we were making based on the strategy that we employed. So I think it validates a lot of different things that the Management Team has put in place.

Great to hear. Thank you.

Okay Mark, thanks.

Our next question comes from the Ms. Lisa Ellis of Bernstein. Ma’am your line is open.

Hi, good morning guys. A good question on the team selling approaches you’ve implemented that over the last year, year and half, can you dimensionalize the range, the upside you’re seeing in revenue per client, when you’re able to sell in the fuller suite of services?

I think, it's pretty significant when you sell it upfront. It's also a timing thing remember because I would assume that we're -- normally we’re selling those other products but a little bit farther down the road, but we’re finding one, we’re selling more of it upfront. Two, I think by offering the total package, we're selling more of it because we're hitting the client at a time that they see the full value more than just selling them payroll and coming back later. I don’t know if we give the exact percentage or anything, but it’s certainly double digit increase in over the kind of the revenue per client that we would normally see upfront. We just want to get more of that over time, but then I do think we’re having more success, we may have -- we thought we may have been missing some opportunities actually by selling kind of a payroll-only and then coming back later when the client upfront may have felt better particularly today in saying I really wanted HR outsourcing altogether. I wanted a PEO or an ASO offering and that’s what I really needed. I needed and that’s what we’re finding because that's come down a lot in employee size and so it fit the team selling very, very well.

Terrific. Good, and then just one quick follow-up on retention, I think you said, I just wanted to confirm you said retention is kind of holding at -- holding relatively stable?

Yes, that's right.

Perfect. Thanks guys.

All right.

Thank you.

Our next question comes from Mr. Tian Jing Wang from JPMorgan. Sir, your line is open.

Great, thanks. Good morning, good quarter here. Just on the HRS side, I heard that it was little bit better the PEO, the moderation comment for the rest of the year, is there anything specific there that we should be aware or it was just the previous comments on conservatism?

Well first of all, there is some conservatism, so we'll come back in Q2 and update, but the other thing Tian Jing is we had really strong -- we had really strong HRS growth in the back half of the year led by PEO. And when you start anniversarying some tougher compares and there is some revenue shifts going on within quarters particularly in Q3. So we want to get a little bit more of a sense how the year is building before we do anything to guidance.

Okay. Just wanted to make sure and then just on the -- just one more, just on the back of the minimum premium concept here, I know it's -- on the earlier side for you, but have you given any sense of what the mix now is of minimum premium versus the fully insured plans in terms of what you’re selling, what's taking and what's not?

It’s still less than 50% of what we sell in the PEO and remember the reason why I say that is that it's only in the State of Florida. So we have our PEO business in Texas and California and a number of other important states. And for the -- at least for the near future, that’s where it will remain, but Marty mentioned earlier and I think it was in response to a question about what's happening with healthcare premium increases, we're very, very competitively positioned. So we’ll see and monitor how we do throughout the remainder of the year. We feel really good about both our underwriting standards and also what we've been able to do with that plan. So that could change as time goes on.

Okay, good to know. Thank you.

Okay. Thanks.

Our next question comes from Mr. David Grossman of Stifel Financial. Sir, your line is open.

Thank you. Good morning.

Hey David.

I was just hoping to follow-up on a portion I think that's been asked in several different ways over the course of the call and that’s really getting into this whole concept of unit versus revenue per client growth and how we should think about how that's evolving. And I think you've given us several data points on what’s driving revenue per client, but show your details on exactly how to think about that specifically in terms of percentages and how to think about your model longer term in terms of how that could impact the growth rate? So perhaps, I know that’s a long winded question, but perhaps you could give us some more information or insight into how that should evolve and the impact to growth rate?

I think, first of all, it’s still very balanced. We're going after both and I think we've been -- obviously I think we probably went on the side of much more revenue per client growth the last few years as we added additional product. And so that makes the sales team very successful and we did well on raising the revenue per client, excuse me, but that’s because we had so much more product and product bundles and we were very successful with that. That kind of shifted us back to hey how do you balance that and so I think what you're finding is the sales team much more focused and compensation plans etcetera in training on both. Hey we want to increase the units and we've talked about where we wanted to be in unit growth in the past in that client growth and we're continuing to push to get there and we've seen very consistency through the first quarter. We're trying to continue to balance both of those. We're feeling really good about the revenue per unit continuing to increase because of the fuller product set and the offerings that we have and the success in selling it and then -- and retaining it by the way. And then the unit peace is we're finding other ways to do that not only with the sales on the street, but from a more of a digital marketing and web based product or web based service or more, people coming in that way buying more payroll-only kind of thing and doing that with telesales. So I just want to make sure it's clear. Hey we're looking to balance both. I think we're going to have success in both, but I would say that revenue per unit is what's been stronger the last couple of years and that seems to continue. Efrain, anything you want to add to it.

That's right.

Okay.

And so should we think of the unit growth being driven more if you will on the smaller client size who are perhaps using one product like payroll or is that over simplification?

I think that’s over simplification. I think we're pushing -- like I would just -- well I would that's typically obviously where we see most of the growth because 80% of the clients are still under 20, and half of our sales come from brand new businesses, so that certainly is fair to say. But I would say we're feeling much better about the mid market strength given the product suite that human capital management full suite of products. So I think units are going to come from there as well. It’s a little bit -- it's obviously a little bit longer sales cycle and so forth. So I would -- I think it's fair to say that since half of the sales still come pretty much from brand new businesses that the units are going to come from at least half of them are coming from smaller payroll-only generally, but I think you're going to continue to see the growth in the mid market better than it has in the last few years because of the product suite.

Right. And then just one other follow-up question is again related to a question that's been asked several times, just about the Affordable Care Act and how it's impacting the overall business. Could you just give us a sense, I think you said Marty, that you saw surge and then you're seeing -- you're expecting and want to get into calendar '16, people may recognize they didn’t do enough, if I understood your comments correctly, is that the way to think about it in terms of just very simple out about in terms of the timing of when it could affect your business differently than it has in the last several quarters?

I think so. I think it’s referenced and I think as the sales come in now and they're I think for this stage, they’ll peak probably in the October, November, the sales will, then you’ll start to get the full revenue of that on a monthly basis right after that. And the clients, I think clients will see because we talked about kind of the percentage that are taking it of the ones we think it applies to, I think clients will see in the March, April, probably even May timeframe because the filings are in March, they’ll start to see gee, I should have done more or it did apply to me and I didn’t think so or I just didn’t take the time to address it. I think sales will pick back up then. I’m not sure that will have a big impact in Q4 for us because it will be a little bit late in that process, but I do think sales will pick back up in April and May for those who didn’t take it, that’s my guess at this point based on what we’re seeing. Because some clients are just -- some are great, they’re all over it. They’re taken it. Others are waiting kind of late in the game, but I think we’ll see that and then I think you’re going to see a number of them that say I still don't get it. I’m not going to do anything until I have to and then they’re going to have to react in April.

Okay. And then just one last question just on the impact of potentially of higher rates Efrain, so it would appear at least in this fiscal year given higher position it would have a nominal impact and then we would just factor in that you’re going to stay short on the curve at least for the time being or perhaps should we think about this a little bit differently if we do get an increase in rate over the next six months.

Yes, David I think you’re right until I get a better sense of how that develops it's really tough to figure out what the duration is, whether we should barbell the duration whether -- what the best value on the curve is. You could do a lot of modeling. We’ve looked at it looking at forward rates, so it doesn’t really give you a sense of what’s the best strategy to employ. So since we get a sense of when they’re going to raise and get better insight because I think the fed should tell us and what the pace of change is going to be then I think we can figure out what makes more sense in terms of configuring the portfolio.

Okay. Very good and congratulations on a great quarter.

Thanks David.

Our last question comes from Mr. Phil Stiller of Citigroup. Sir your line is open.

Hi Phil.

Hi guys, thanks for squeezing me in here. Just wanted to ask about M&A further on that topic. So maybe you guys talked about the pipeline being busy. Perhaps maybe give us a little more color in terms of what types of opportunities you’re considering whether it’s market expansionary, new products and then also perhaps some commentary on the size might be helpful in terms of how big the targets are considered?

I think -- I'll start with a size standpoint; it's been anything from small to pretty large that hasn’t concerned us too much at all. The second thing is not as much about product now adding product because I think we’ve really done that well over the acquisitions we've done over the last few years and frankly that's what's exciting now as when you see recruiting. We don’t even mention this, but when you see recruiting and onboarding roll into the Flex products suite, that's myStaffingPro, one of the best recruiting packages in the industry that we acquired few years ago and now have built into our package in integrated single database kind of thing. So I think we’re pretty solid on product, might be something there, but we’re very solid on the full suite of products and now it’s expanding into other things that I guess either adding more client base. So that's payroll companies, PEOs, etcetera, it’s adding more and maybe a little bit of an off-suite of that, but not too far. So it goes small to large, it’s not as much product as it is, I think expanding our market share and maybe going off a little bit different than what we are, but not too much.

Yes. And just to build on what Marty said, so we typically have done smaller tuck-ins. Our largest acquisition certainly in past five years was Sure and that was a little bit over $100 million. So when we say large, we’re not talking about transformational opportunities. We’re certainly looking at opportunities that are in the hundreds of millions of dollars, but not transformational and there is a wide range of assets on the market that are of interest to us that are forward in that range.

Would you guys consider taking on debt to fund an acquisition or is that off the table?

We’ve addressed that. The answer is that if it was the right opportunity, we would consider it. So that's not off the table. We haven't seen too many of those. There have been some that were of interest to us. But again one of the things that investors should expect when they invest in Paychex is we're not going to grow -- buy things to grow the company in that way, we think we have a pretty solid business model with good organic growth characteristics. And we think there are some assets out there that are of value they can help, but our strategy isn’t to grow by acquisition. Our strategy is to buy things and grow then.

Great. Makes sense Thanks guys.

Okay. Any more questions

There are no more questions sir

All right. Thank you, At this point, we'll close the call. We're very proud of the team at Paychex and our first quarter results. If you're interested in replaying the webcast of this conference call, it will be archived until October 30 and just a reminder, our Annual Meeting of Stockholders will be held October 14 at 10:00 AM here in Rochester. That meeting will also be broadcast over the internet. Thank you again for taking the time to participate in our first quarter press release, conference call and for your interest in Paychex. Have a great day.