Paychex, Inc. (PAYX) Q2 2016 Earnings Report, Transcript and Summary

Welcome and thank you for standing by. At this time, all participants will be on a listen-only mode until the question-and-answer session of today’s conference. [Operator Instructions] Today’s conference is being recorded. If you have any objections, you may disconnect at this time. And it’s my pleasure to turn the call over to, Mr. Martin Mucci, President and Chief Executive Officer. Sir you may begin.

Thank you, and thank you for joining us for our second quarter fiscal 2016 earnings release call and webcast. Joining me today is Efrain Rivera, our Chief Financial Officer. This morning before the market opened, we released our financial results for the second quarter ended November 30, 2015. Our Form 10-Q, which provides additional discussions and analysis for the results of the quarter will be available in the next few days, our earnings release and 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 web site for approximately one month. On today's call, I will review highlights for the second quarter related to sales operations and product development. Efrain will review our second quarter financial results and discuss our full year guidance. And then we’ll open it up for your questions or discussion. We made good progress across all major product lines during the second quarter. Compared to second quarter of last year, payroll revenue advanced 4% as a result of growth in client base and revenue per check. HRS revenue grew at double-digit rates in the second quarter once again led by our success in selling HR outsourcing solutions to our clients, and total service revenue grew 7%. We continued to experience solid results and momentum across our sales organization with double-digit growth in revenue sold compared to last year. Our team’s selling approach continues to produce results by introducing the full suite of products that Paychex can offer our clients upfront. We are encouraged by this momentum as we enter our main selling season right now. Our execution and service operations also continues to be excellent as demonstrated by client satisfaction results and retention level that remain consistent with recent highs. The employees in our service organization have done a great job as we move to more flexible service options with Paychex Flex including the 7/24 service. We expanded our human capital management product suite again with the recent launch of our integrated Paychex Flex Time and Paychex Flex benefits administration modules, these are two of the newest modules for cloud based HCM platform. Paychex Flex Time is a market leading time and attendance cloud-based solution, provides real-time data access and is designed to be exceptionally easy and intuitive to use for our clients, it gives employers unprecedented visibility and control over labor scheduling, tracking, and reporting. Paychex Flex benefits administration provides employers with a robust customizable system built to improve employee productivity, communication, and decision-making and allowing complete oversight and control of employee information effectively to manage our company's benefit plans. We also have best-in-market mobility offerings in our opinion for both administrative users and employee self-service that allow access to our HCM suite from a single mobile application. We continue to receive positive reviews for our Flex platform that we’re very proud of as evidenced by our recognition from the Brandon Hall Group excellence awards for an advancement in workforce management technology for small and midsize businesses and PC Magazine's recent review referring to Paychex Flex as excellent and calling it more robust and scalable than many of the competitors’ platforms they reviewed. Turning to the Affordable Care Act, last fiscal year, we launched our Paychex employer shared responsibility service to assist clients navigating the healthcare reform. Our ESR product includes monthly monitoring with automatic alerts as well as year-end reporting, and we are pleased with the continued level of client acceptance that we have experienced. We have increased our implementation and support spending to address the increased demand that we’ve received for ESR. I appreciate the great hard work and dedication of this ESR team helping our clients through this first year of complex ACA requirements. Our Paychex insurance agency was named as the business insurance magazine’s list of best places, the work and insurance for the very first time. This is a notable recognition, and I am very proud of the agency employees and the growth we've seen in the insurance business. On December 2, we announced our planned acquisition of Advanced Partners based just outside of Cleveland Ohio. We are enthusiastic about the opportunity Advanced Partners present and the experience and successful leadership team that will be joining Paychex. They offer customizable solutions to the temporary staffing industry, including payroll funding and outsourcing services that include payroll processing, administration, and invoicing. The staffing outsourcing business is a growing industry that serves many small and midsize staffing firms, which is an ideal fit for us at Paychex. Also given Paychex's extensive product suite, financial strength, and access to capital, we can help expand advanced partner’s product offering and accelerate its growth. This acquisition will close shortly. We remain committed to adding additional value for our shareholders with our dividend at $0.42 per share. We maintain a strong dividend yield, one of the highest in the industry. The Paychex stock repurchase program remains in place and we have acquired over a million shares of common stock in the first six months of fiscal 2016. And in summary, I am very pleased with the continued strong execution of our sales and service teams, our product strength, and financial performance, and I appreciate the great work of our Paychex employee team. I will now turn on the call over to Efrain Rivera to review our financial results in more detail. Efrain?

Thanks Marty and good morning to you all. I just want to remind everyone that during today’s conference call we will make some forward looking statements that refer to future events and thus involve risk referred to the usual disclosures. As Marty indicated, second quarter financial results for fiscal 2016 represented a continuation of the solid start we had to the year. I’ll cover the highlights and provide greater detail in certain areas and then wrap with the review of our 2016 outlook. I’ll add some comments on second half guidance, so as I get mid way through my comments you will start to hear those. Total revenue grew 7% for the second quarter, 8% for the six months to $722 million and $1.4 billion respectively. Total service revenue also grew 7% for the second quarter and 8% for the six months to $711 million and $1.4 billion. Interest on funds held for clients increased 8% for the second quarter and 7% for the six months to $11 million and $22 million respectively. These changes were driven by higher average in best interest rates I should say, and higher average investment balances. Expenses increased 5% for the second quarter and 6% for the six months, primarily in compensation related costs and strong growth in the PEO. The increase in compensation related costs was driven by higher wages and performance based compensation costs. Operating income net of certain items increased 9% for the second quarter and 10% for the six months at $283 million and $568 million respectively. We maintained strong operating margins of 40%, but anticipate that our full year will remain within our guidance of approximately 38%. The second half of the fiscal year consistent with prior years is expected to result in lower margins, primarily due to higher selling and operations costs, which are variable and more detail on that later. Net income increased 9% to $189 million for the second quarter and 16% to $398 million for the six months. Diluted earnings per share increased 11% to $0.52 per share for the second quarter and 17% to $1.10 per share for the six months. The six-month period was positively impacted by the net tax benefit related to prior year revenues that was recognized in the first quarter. When we exclude this impact, net income and diluted earnings per share would have risen 10% and 12% respectively. Let us turn to payroll revenue. Payroll service revenue increased 4% for both the second quarter and six months to $427 million and $860 million respectively. We benefited from increases in client base and revenue per check. Revenue per check grew as a result of price increase net of discounting. Checks per client really didn't benefit payroll revenue. HRS revenue increased 11% to $284 million for the second quarter and 13% to $564 million for the six months. This increase reflects strong growth in both clients and worksite employees at Paychex HR services, which includes our ASO and PEO products. Insurance services benefited from continued growth of our ESR product that assists clients with healthcare reform and an increase in health and benefits applicants together with higher average premiums and clients in our workers comp insurance product. Our HR administration and time and attendance products contributed to the growth through robust sales with these solutions. Retirement services revenue benefited from growth in a number of plans and an increase in asset fee revenue earned on the value of participant funds, retirement services revenue growth was all set by pricing impacts in the respective prior year period. Let’s look at investments and income. Our goal as you know is to protect principle and optimize liquidity. On the short term side, primary short-term investment vehicles were bank demanded positive accounts, high-quality commercial paper and variable rate demand notes. In our longer term portfolio, we invest primarily in high credit quality in municipal bonds, corporate bonds and U.S. Government Securities. Our long-term portfolio has an average yield of 1.7% and an average duration of approximately 3.3 years. Our combined portfolios have earned an average return of 1.1% for both the second quarter and the six months. On December 6, 2016 as you all are aware the Fed raised federal funds range by 25 basis points. The first interest rate hike in nearly a decade. We expect the impact for the balance of the fiscal year will be modest. Let’s take a look at our financial position. It remains strong with cash and total corporate investments of $930 million. Funds held for clients as of November 30, 2015 were $3.7 billion compared to $4.3 billion as of May 31. Funds held for clients vary widely on a day-to-day basis and they average $3.7 billion for the quarter and $3.8 billion for the six months. Out total available for sale INVESTMENTS including corporate investments and funds held for clients reflected net unrealized gains of $34 million as of November 30, compared with net unrealized gains of $14 million as of May. Total stockholders’ equity was $1.9 billion, reflecting $304 million in dividends paid during the six months and $63 million of common shares repurchased. Our return on equity for the past 12 months was 39%. Cash flows from operations were $420 million for the first six months or 4% increase from the prior year. This change was a result of higher net income on cash flow from operations offset by fluctuations in working capital. The fluctuations in our working capital between periods were primarily related to the timing of collections from clients and payments for compensation, PEO payroll, and income taxes. Now I’d like to turn to fiscal 2016 guidance. Let me remind you first that our outlook is based on our current view of economic and interest rate conditions and net guidance for the full-year is unchanged from the previous quarter. I will reiterate our full year ranges and then give some color on the back half of the year. Payroll service revenue anticipated to remain in the range of 4% to 5%, HRS in the range of 10% to 13%, total service revenue in the range of 7% to 8%, and net income growth is anticipated to be in the range of 8% to 9%. Please note that the range excludes the benefit of the net tax benefit we recorded in the first quarter. Our effective tax rate for the year, excluding the impact of the net tax benefit discussed above will be approximately 36%. Our interest on funds held for client and operating margin are expected to be consistent with prior guidance. Now, current guidance doesn't include the announcement by the fed of about 25 basis point change in rates. This is going to equate to approximately $1 million after tax for the remainder of this fiscal year. On the call, I will talk a little bit about why it may be more modest than you assume, but I would just say to preface that conversation that much of that impact won't be start to be felt until January and then it will be modest. Our guidance also does not include any expectation of future increases. We don’t look at forward rates to determine what guidance should be, we simply make an assumption once the fed is active. There obviously is a chance that the fed will continue to raise. We will update guidance when that happens. Full year guidance, currently excludes the impact of the advanced partners acquisition that Marty referenced earlier and which we expect to close shortly. It is not expected to impact earnings in the current fiscal year, meaning it will not be dilutive in this year, neither will it be accretive in the balance of the fiscal year. I’ll describe separately the impact of advance shortly. So, while it isn’t our typical practice to provide specific guidance on quarters, we do want to be as transparent as possible and provide you with some color on third and fourth quarter this year. Payroll revenue growth for the third quarter is anticipated to be at the lower end of the guidance range. While payroll revenue growth in the fourth quarter, we anticipate to be at the higher end of the range. As we stated in previous calls, the fourth quarter will benefit from one additional processing day this year. This was the case in the first quarter, as you all remember. HRS revenue growth for the third quarter is anticipated to fall below the low end of the full year guidance range as we indicated in previous calls. I call that out and when we started the year. This is a result of strong third quarter and the prior year resulting from very strong PEO performance and we had benefited from pricing in our retirement services businesses, while both are doing fine. They just simply don’t - are not as strong as they were in the prior year. For the fourth quarter, we expect HRS revenue growth will be within the full year range. In addition, we anticipate, as is typically the case, higher selling expenses in the second half of the year, but this year given the strength of our sales performance in the first six months of the year, we believe that selling expense will be higher than we had planned. We also anticipate higher operations expense due to stronger sales that I just mentioned and also very, very strong demand for our ACA compliance solutions. So, you will feel much of that in the third quarter. Again, current year guidance is not changed. So, as I just mentioned the guidance that I discussed doesn’t include any impact from advanced partners. So, when we close this is what we anticipate. For the balance of the year, we believe that the acquisition will contribute approximately 1% to payroll revenue growth and approximately 1.5% to HRS revenue growth. That’s in the balance of the year, second half. That impact will be, primarily will be split more towards the fourth quarter then the third quarter because we anticipate that will only recognize two months of revenue in Q3. So, the waiting will be a little bit more towards the fourth quarter. And we anticipate that additional expenses, operating expense from the acquisition will offset revenue in the balance of this year, won’t be dilutive, won’t be accretive, will essentially be neutral. So, I hope that was clear and with that I’m going to turn it back to Marty for questions.

Thanks Efrain. At this point, we will now open the call to your questions or comments. Operator?

Thank you. [Operator Instructions] Our first question comes from Jason Kupferberg from Jefferies, your line is open.

Hi good morning guys, happy holidays.

Thank you.

Same to you.

Thanks. Thanks. I wanted to start with a question on share buyback, I don’t think you guys repurchased any shares in the quarter and I believe you’ve got about 100 million left on the authorization. So, wanted to just get a sense of whether that was because you see some additional M&A opportunities at size in the pipeline beyond advanced partners or did you just find the price of the stock not attractive enough or any other factors at work there?

Hey Jason that’s a good question, I think I would get it bad upside the head if I said the stock price wasn’t attractive.

[You are] very, very honest with us Efrain.

Yes, I try to. We purchase opportunistically, so that’s part of what our plan is. You know on the M&A front, I think there is an element of that advance was a nice acquisition, but I would say as I had been saying now for a number of months and finally we have some evidence of this, the pipeline is robust. So, we see a lot of opportunities for M&A in spaces we like at prices we like. So, I think it’s a combination of all those factors.

Okay. And so just as a follow-up, I guess as a two part question, as we go into that key year end selling season, how do you feel you are set up with the product set, sales force capability, should we expect a double digit sales growth that you’ve been seeing to continue, and then just along with that any macro comments about new business creation and general hiring trends that you would like to share?

Yes, this is Marty Jason. I think we’re feeling very good. We’ve got great sales momentum. It has continued Q1 and Q2 double-digit par growth, and we would expect that to continue. This is a really important quarter obviously for us from a sales perspective, but we’re going in with great momentum, and in particular in the mid market, very strong in the mid market and this is something that the product development work and the technology has been so important for Flex, and we’re really seeing that payoff now. We’re really seeing very strong results on the mid market, even as competition is out there pretty consistently and we’ve talked about that, we’re really seeing very positive results from a growth perspective in what’s sold. So, we’re going and feeling good about it. We feel like the product work that we’ve done and some of it here this last quarter is when we introduced really the fully integrated time and attendance and a benefitted administration into Flex, positions us extremely well for this selling season and frankly ongoing future quarters.

And just the new business creation and small business hiring?

New business - yes, I am sorry, yes in fact our sales from new businesses is up, quite a bit stronger than last year, so while the small business index would say that it is pretty consistent from an employment growth, I would say sales to new businesses are up a bit. So, we are feeling pretty good about that. I wouldn’t say it is a huge surge, but it is certainly consistent and up a few points from last year at this time. So, I think that’s very positive.

Okay, I appreciate it. Have a good holiday.

Thank you.

Thanks.

Our next question comes from Danyal Hussain from Morgan Stanley, your line is open.

Hi good morning Marty and Efrain. Thanks for taking my questions.

Hi, Dan.

Just high level one about Advance Partners and understanding it hasn’t closed yet, but when we are looking out to fiscal 2017 and beyond, can you just give us a sense for what is the sort of margin profile looks like whether it is, if it tucks right in whether we can expect it to be further in line with the company average?

Well this is a good question, as you know it was interesting about advance, now I’m going to exclude purchase accounting because that will obviously impact it, but if you look at it from an EBITDA margin, what was really unusual about the business was it was pretty comparable to where Paychex was which is saying something. I mean we look at lot of acquisitions, we run into very few that have very solid growth, very solid margins. They’ve built a great business, not a flash in the pant, they’ve been at it for almost 20 years with the strong track record of growth.

Yes. We feel, obviously very good about the opportunity as well. So, not only is it a good margin business, but as Efrain said, the leadership team there is staying with us and being part of Paychex and they’ve built it over time I think very carefully and very strategically and certainly very profitably. So, we think it’s going to fit in extremely well, and we think that with our access to capital and product, we’ll be able to accelerate in distribution. We’re going to be able to accelerate their growth even more.

Got it thanks, and then just a question on Flex, so I think Efrain you mentioned in the past that Flex constitutes the majority of new sales, but you’re not mandating client migration over the Flex, is there a point where you can eventually stop offering some of the core products and really push the Flex product more to new sales, and then looking a couple of years from now, is there a reasonable timetable for when you expect majority of clients will have ruled over and then what impact you might see from a retention of margins?

Yes, I think - at this point, we are not forcing it. I think we are doing it the way we had hoped, which is, this is attracting new clients and accelerating those sales by the way to new clients and it’s attracting current clients to come over. So, we’re presenting that if you want -- you have certain needs from the product that if you want to migrate over you can, we’re not pushing that too hard yet and we’re not necessarily putting it kind of a drop dead date on migrations. It’s always better to be on the newest platform, but frankly the existing platform is satisfying a lot of needs for existing clients and many of them don’t like to move. So, I think that’s - we don’t have a certain date, but we are going to handle it kind of carefully and we are going let the clients at this point do probably most of the moment and we’re feeling good about that. Certainly the new sales, the majority, particularly in the mid-market are all on Flex and that’s going extremely well.

The other thing I would add Daniel is just to put it in context, if I exclude sure and frankly if I include it doesn’t really change what I’m about to say 90+ percent of our clients are on either Flex or on Sure’s platform, which frankly is the hybrid of core Advance and their own platform. So it’s not a huge part of the base, obviously we are selling primarily midmarket clients on the new platform, yes.

Got it, and then maybe a quick modeling question if I could, you mentioned retirement services impacted the growth rate I guess over the trailing four quarters. Could you just quantify that?

I didn’t catch the first part, if I was …

The retirement services, you I think change pricing, [indiscernible]…

Yes, yes, it’s just, that’s basically what's causing the growth rate to drop a bit in addition to PEO, I won’t quantify it any more than that, but we periodically take pricing in different segments of the business. HRS is a little different than Payroll where, Payroll it’s pretty typical every year, HRS we look at different products and try to gauge where market has decided to take some of those actions last year and didn’t repeat this year.

Perfect. Thank you.

You’re welcome. Thanks.

Our next question comes from S.K. Prasad Borra of Goldman Sachs. Your line is now open.

Thanks for taking my questions, Marty if you could just [indiscernible] as you are heading to the selling season this quarter. How is the balance in comparison to last year? Can you share any insights on the [indiscernible]

So, S.K if I heard your question, sorry I know you’re traveling, the question was set up for the selling season, compared to last year how we feel about that was that what you asked?

Exactly that.

Okay yes, sorry just couldn’t make it out. The - I feel very good about. I mean when you’re carrying the kind of momentum, the good thing about selling season when you're heading into it is, how did you kind of start the year and particularly Q2 for that’s kind of the beginning of it as you get into October and November is very good. So when you’re seeing double-digit growth in par we had an increase in sales reps, but it was pretty small single-digit kind of increase that we normally have. To see double-digit and what we’re selling in the par revenue that we’re selling consistently in Q1 and Q2 we feel good about Q3. And about the selling season now you never know till you are kind of through January, but we feel very good about it, we got full product suite. We got full onboard of reps of sales reps, we got very consistent driving leadership that’s there. So, everything is very favorable for what we feel will be a very good selling season, great momentum going in.

Thanks Martin and next one probably on capital allocation, you talked about the pricing and pipeline [indiscernible] now more it looks like you do more M&A compared to say terms like special dividend?

I don’t know if more M&A it was always difficult to talk about a pipeline that no one saw except me, or Marty and I, but I think I would say the margin I wouldn’t say will be on an accretive or in acquisition tier here. But I said the margin we have more things lined up closer to being executed than we have in the past. So, you’ll see it, now just before that gets misinterpreted they’re primarily tuck-in, I would say that that advance is a good example of the kinds of things that we’re looking at we’re not looking at large scale transformative M&A. But there are better opportunities out there and we’re looking at opportunities to fill out what products set and tuck-in to existing businesses.

Okay, the last one was obviously large debate on topic around the fee and what kind of margin [indiscernible] larger solutions. Can you just from your view point what are the margins such if you are producing is it actually margin in the long-term, do you have to take a hit on the near-term?

Yes, this is the perennial question. I think S.K. look we try to balance it, obviously if we can get much faster growth and sacrifice a little bit of margin, we’d look at that. But the life doesn’t present those need dichotomies, a lot of what we look at is are acquisitions that we think at least won’t be dilutive to our margins when we run across businesses that that we think have good growth prospects and I point to Payroll as an example of that where when we initially bought it was dilutive to margins and now it’s catching up to our margins. If we have a chance to improve the margins then we’ll take a bit onto to get something that will improve growth and help us to improve and we could improve the margins over time.

And then I just I was asking question on [indiscernible] and the margins you’re getting from those solutions?

We’re just getting from mid-cap partners. Yes I’d just say if I heard your question correctly that they’re on an EBITDA basis pretty close to Paychex corporate margins.

Thanks Marty. Thanks Efrain. Happy holidays.

Okay, thanks.

Thanks, same to you.

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

[Rina Kumar] : A - Martin Mucci Hi Rina[ph].

Hi, could you just walk us through the largest drivers to your 80 basis points operating margin expansion this quarter?

This quarter, I would say lot of that was just primarily driven by a lower operating expense in the quarter. So we went into the quarter with a certain expectation around what we needed in terms of operating expenses came out a bit a little bit later than we anticipated that’s really the primary driver.

Got it, could you quantify net price increases are you realizing in both Payroll and HR services this year?

I won't go any further than calling out what we typically say that on payroll we’re getting 2% to 4% price increase where you can assume that’s in that range. We don’t typically call out HRS, because it varies year-to-year. So, we’re getting some price increase it’s not certainly as good as I mentioned on a call as what we got last year. The other thing I would say to Rina is, one of the things that’s occurring, particularly on the Payroll side is with the sales force able to sell more full-featured packages, especially under 50 you get some mix benefit too. So all of those things help our revenue per client picture.

Understood. Thank you and happy holidays.

Thank you.

Our next question comes from Kartik Mehta from Northcoast Research. Your line is now open.

Hey Marty. Hey Efrain.

Hi Karthik.

Hey Efrain you talk a little bit about Advanced Partners, is this an acquisition or an industry that you think you have to build scale to really benefit from this, or is this, you would like to see what you have and then determine if you want to take the next step. But further consolidating?

I think if you mean by consolidating acquiring more I think, I mean we feel good this was a really good fit for us. As Efrain mentioned we had a big pipeline that we look at and that we look at this company here they are outsourcing support Payroll fund and funding support to small and midsize staffing companies like 7,500 staffing companies placing 200,000 times a year. This is a nice business that there's a number of - there's a few businesses that do this, but nobody as much I think to this scale and have done it very thoughtfully over the years. I think as we look at the business we've got clients with staffing companies that I think are great opportunities for the funding side of the business for them and I think we've got a lot of products that we could offer to their clients I think this is a good fit we’re going to see how this goes, but we’re always looking to say hey if it make sense both from our standpoint and from theirs as well from their leadership. I think there maybe some count consolidation efforts that are available out there.

Marty, I know this is a fairly small acquisition, compared to the overall Paychex, does this change the risk profile is this acquisition change or risk profile of the acquisitions you’ve looked at and - compared to the acquisitions you’ve looked at in the past?

I don’t think so, I think we’re always looking for, as Efrain said this has got a good strong margin to it that's close to ours it's got a nice solid growth. I don't think it really changes the risk profile much, I think one of the great things that they did frankly was had very good risk policies and procedures to be sure. This is a bit of a trickier business to be sure you're handling the right risk and you’re taking on the right risk and they just done a done a remarkable job. And I think with our risk team, our risk management team working with them I think we can help that even more with more tools and more information. So I don’t think it really changes the risk profile at all.

And then Efrain, on the flow portfolio, one, any changes you’re going to make as it seems though the Fed is probably going to continue increasing rates, and two is that, 25 basis points about $2 million to net income, is that the right way to look at it on an annual basis or is there something different this time around that might mute the increase you would get in net income from rate increases?

Okay, two good questions. So Kartik the simple answer is that it depends on the shape of the yield curve and if the yield curve steepens then you have one portfolio strategy approach and if the yield curve stays relatively flat you have another. So we look at that in the spring so that’s why I can’t say definitively, hey, this is what it look like in 2017. In addition I would like to see if the Fed does do something in the spring. It will certainly aid the portfolio, just the question is how much and how we configure the portfolio. On the $2 million, I don’t think that that’s far off Kartik. The only trick and the reason why I call out $1 million is that, number one, we don’t really expect to see too much benefit except through, I’m sorry until sometime in January. It’s not the best timing because our balances increase significantly in December and beginning of January by that time we’ll be passed the peak of our balance. So we don’t get quite as much by the time you’re talking February before we start to see a lot of the - some of the benefits you don’t have that many months left in the year. So that’s part of what’s guiding. And the final thing I would say is that if you’re looking at for example money market rates and what banks are doing, the effects of the interest rate increase are really slow rolling. They will eventually get there but it’s kind of a slow role at this point.

Yes, thanks, Efrain, I really appreciate it.

Yes, you’re welcome.

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

Hi, guys. Good morning.

Hi, Gary.

Good morning.

Just following up on that last one on rates, so did I hear you right you are not including in the guidance the $1 million benefit you think you will get from the Fed hike and if I did hear that right why not?

No, I guess what I was trying to say was that, it doesn’t alter the guidance significantly. I am calling it out, it’s about $1 million. It just doesn’t change significantly where we are at in terms of the guidance on interest rates.

Gotcha. Okay. And I know you don’t assume any future increases.

Right.

But if - in the guidance, but if the Fed did view what the Fed folks say which is in next calendar year at 1.375%, I understand that it depends on the shape of the yield curve but you do have about half the float in overnight stuff that we value pretty quickly. So we can start to see that really benefit if they do go through with that.

Hey, look, you’re right Gary, that’s absolutely right. I’m not trying to be excessively conservative. I obviously I’m somewhat gun sighted and tell people we think that that’s exactly what’s going to happen. And I’ll tell you I’ll be the happiest person around if that’s where we end up. I’m extremely hopeful but you’re right that’s exactly what would happen that would ripple through those short term portfolio and have a pretty significant impact on stock.

Okay, good. I think the way you do it makes sense. And then just one question on ACA driven demand, I know in the last few years, HRS has been real strong as you’ve had a broad halo effect, more customers are interesting in considering their options in Europe trusted source they turn to. But is - should we think of the ACA compliance offering as having been a significant part of bookings and something that could drive some real acceleration in calendar 2016 or should we think because I know ADP’s talk that way [indiscernible] even with their ACA compliance have seen just massive bookings growth or should we think that within the broader HRS portfolio it’s certainly a positive factor but just one of many and more steady as she goes continued strong growth.

I think I would say steady if she goes on HRS growth. I think it certainly is helping. It still remains to be seen after the first filing day where clients fall out and are they going to stay with it, are more clients going to come in. I think some will fall out that probably we’ll say, hey, I didn’t need it and I think others will say I should have had it and we will add. So I think we’ll still have good sales with ESR, the ACA product through 2016 kind of calendar year because I think some things will fall out, I think some clients will fall out and realize they should have had the product and then didn’t file because we’re already getting calls like that now like, hey what do I do and it’s a little bit late to gather all that information. So I think it’s a little bit early but it’s very positive. We’ve seen great acceptance of the product and frankly as we mentioned in the prepared comments, we’ve had to ramp up some cost in the quarter just to kind of handle all of the inflow of data and everything the clients are giving us. So I think it will still be a positive right through the calendar year.

Great. And then just one quick one, as you add on these incremental components to the Flex offering, should we think of it as an material revenue opportunity to have existing customers turn those on or is there more of a sales effort that will take some time to drive that incremental revenue as you add these important components. Thank you.

Sure. I think it will take a little bit of time. I think we kind of make sure that we’re bringing the clients along carefully. We are paying close attention now. The operations team and the client retention teams talking to those clients realize a net benefit than we make the sale of the additional products and turn on those additional modules. The biggest benefit is when you’re selling the entire product combined to the new clients but we’re certainly going back and marketing to the base that you now have available more modules that you can turn on. So I think there is certainly an opportunity there but we’re not going to rush it and blitz the base. We are letting the clients, did comfortable with Flex and then show them that there is additional modules which will help not only sales but retention, more importantly as well.

Great. Thank you. Happy holidays.

Thank you too.

Our next question comes from Jim MacDonald of First Analysis. Your line is now open.

Yes, good morning, guys.

Morning.

A couple of follow-ups. Advance partners you talked about 1.5% increase in the HRS side from that eventually, what categories is that and are those categories new to you like the financing?

Yes. That’s primarily the financing part of the business. So it would be HRS then we’ll have to figure out longer term kind of where it goes. The other part just to anticipate a question someone will ask, the other part is payroll services. The business is split pretty evenly between the two.

Okay. And Martin mentioned that MMS is growing strongly now. Besides the obvious competitors is that coming from any other sources, expansion of the market or just where you think that’s coming from?

I think there is some expansion and the fact that as we’ve talked about the need for the total product set has come down. So I think there is more clients in that 50 plus, maybe 50 to 150 employees that are needing more product and more services and they are out. They may have been on an in-house solution and that was much more simple and they needed more, they needed time and attendance, they needed HR administration, they needed benefits administration. So I think that I do think the market is expanding a bit in the fact that who needs the complete suite of services which has been positive, but also think obviously we are taking share from some competitors as well. Even though there is more competitors out there and talking about things, I think we’ve seen little bit more share we are taking now as we have a complete product at HCM suite of cloud based SaaS services.

Great. Happy holidays guys.

Thank you.

Thanks, Jim. Take care.

Our next question comes from Tim McHugh from William Blair Company. Your line is now open.

Yes, thanks guys. Just wanted to clarify a couple of things. I guess the comments on advanced - that revenue contribution of 1 point to payroll 1.5 point to HRS, that’s for the six months left in the fiscal year, is that the right way to think about it?

That’s correct, Tim.

But you will only have it for five. So if we are thinking about the quarterly run rate it’s quarterly contribution, I guess full quarter it’s higher than that. So…

Yes, it would be, so yes assuming we close this month, which we in or like we would we’ll do we expect to close shortly, yes you would have two months in Q3 and then three months in Q4.

Okay did you quantify the size of the purchase price, I guess we’ll see it in essentially…

No you’ll see it, you’ll see it.

Okay. And the comment about retirement about pricing I guess I was - I wasn’t clear exactly is the comment just you’re taking last price than you did a year ago so the growth rate is lower or is it?

Yes that’s a…

Okay there wasn’t a onetime bump last year that was a onetime revenue source I guess?

No, we review pricing along all of our businesses and periodically in HRS in particular don’t necessarily in a given year increased the price, but may increase it so…

Did you see some sort of client pushback that’s why you took didn’t take price again this year?

No we just, we try to figure out what, we do a lot of work on pricing to figure out what makes sense, so we don't end up having an attrition or retention problem.

Okay. Thanks.

Yes. Okay. Thank you.

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

Hi good morning. Thank you for taking.

Hi Rick.

Hey how are you?

Good.

Thank you for taking my question happy holidays.

Yes. Thanks.

The first one just on the a minimum premium plan and the PEO, you’ve had it in the place now for over year just wonder if you could sort of talk about the success that you’ve seen there if you only to plan to extend it further and then any impact on the risk in the PEO book?

I think, now we’ve done a good job on the risk is we handle it very carefully and I think the sales and the risk management team there that worked very well together, which is what we expect and they’ve done a good job. Things went very successful, I think it’s fairly limited to the area, but it's done well and I think we’re always looking at ways to expand it if that opportunity presents itself and so we’re very open to doing that.

Thanks and then just pulling up, wondering if you could just talk a little bit about the margins again, can you just remind us sort of what your investment plans are for areas like IT, I think you had talked about in the past, now it's sort of growing in line with revenue, is that the right?

It took on a little faster than revenue, it probably will continue to grow a little bit faster than revenue, it just was growing at significantly higher than revenue growth. So, I think it's moderated a bit. But I think if you lead technology enabled services business tech spending is going to outpace revenue growth at least over the intermediate term that will do that for us and that’s just the price of being in the business. And we have to we look at other ways to leverage the business to ensure that we deliver the bottom line.

Okay and then just the last question just sort of philosophically here with the Advanced Partner’s acquisition just wondering how much of it was interest in adding more capabilities and then the staffing market more in-line with the stuff that you already do and how much of it was getting some of the funding stuff so it sort of expanding your services. And in future acquisitions how much to either those two bulking up the existing verse expanding into new plan to it. Thanks.

It’s an interesting - I think it’s a little bit of both. I mean always we’re looking for to drive top line growth and continue to leverage and being a very profitable company it makes the M&A very tight the selection very tight and give it at a very valuable good value. So, I think it's a little bit of both I think we can expand what we saw was a great opportunity just as you said to take what their products are and expanded to a number of clients that we have that are staffing firm small to midsize staffing firms. And we think that's an immediate benefit and then also adding more, not only product to what they're offering, but the access to capital. This business needs capital, access to capital to be able to continue to grow the funding business and we certainly have that not only in cash, but in access to more capital besides. So, we think between the two of them we can accelerate their growth and therefore our growth and do it at a very profitable, a very profitable way to do it. So this was a perfect fit for us. And it’s very much focused on that small to midsize staffing from which there's thousands 10,000 of them, and I think they had a very decent market share, but still a lot of room to grow. So very good and we think that temporary staffing business frankly is going to continue to grow we’re seeing part-time employment is growing almost 3 percentage points in the last two years. So we think that with overtime rules ACA and a number of other requirements the staffing business and temporary employee business is going to continue to grow and we want to be part of it.

The gig economy is here to stay.

Thank you very much.

Okay.

Our next question comes from Jeff Silber from BMO Capital Markets. Your line is now open.

Thank you so much. Last week when Congress signed the year end budget build there were number of so called tax extenders that were extended over longer time periods than they usually are, I know one of your competitors went out trumpeting one of them specifically they want to see the work opportunity tax credit. Is that something you think would be an advantage to you or are there any other items that were in there that might be something to help us for business going forward. Thanks.

I think just generally all those, they all encourage or they tend to encourage most of them investment new business startups and existing businesses to invest more in their business and to give some tax benefit for that. I think that's all positive all makes the economy stronger, I think the fact that those had expired I think would have dampen investment in particularly in small to midsize businesses. So, I think they’re all positive. I don’t think it was any one that would stand out to us to be that big of a benefit. But they certainly are all positive for the overall business environment.

Okay that’s helpful and Efrain I’m apologizing in advanced, I’ve got another interest rate question for you.

Well go ahead.

You mentioned, I think you were going to be look at the strategy in the spring?

Yes.

Is that because you’re just doing planning for next year or you are anticipating interest rate increases coming in the spring?

I think it’s both so Jeff, so how you can figure the portfolio not going to long digression here for you. But what ADP does is different than what we do. They borrow short-term, they invest long-term, we don't do that to a significant extent, we just haven't seen the value add in recent years to do that, but the shape of a yield curve really has a big impact on why do you do that or you don't do that. And so we’re little bit and wait and see. We think our internal betting is that Fed will probably raise again in the spring and then it'll start to become a little bit more clear to us what the shape of that yield curve is going to be, so we can plan into 2017. So, it’s a little bit above.

Okay great. Thanks so much.

Okay.

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

Thank you guys, good morning.

Good morning.

So, I just want to start off with a clarification question with the guidance being what it is, it does include a few months of advance, it does include the modest impact of higher interest rates. What you're really saying is that neither of those factors taken together is enough to do to change your guidance profile, but they're still included in there?

That’s correct Ashwin that’s the point, so we could characterize it in a number of different ways. But the guidance ranges that we give even with all those changes at this point we don't anticipate significant change from what we said at the beginning of the year.

Got it. And then conceptually as your sales force sells a wider range of products and include Advanced and there for example it’s more complex offering that that makes sense in terms of revenue per client. But as you try to manage that what specifically is the forward risk profile associated with federal funding, which frankly is not a end market that I fully understand yet. And does that mean a need for more sales force training, more expense in that area?

Yes I think that one, Ashwin I think that it will be sold by a specific sales force, it may be referred and it very much will be referred by the broader sales force but that sale is very specific to and something that Advanced has done a very good job on is having highly trained sales reps who bring a proper risk client risk profile client to them then it goes through underwriting as well. So that's why I think they've done a very good job on a risk. So it won't have to - we won’t have to train our entire sales force, we’ll look for them, we’ll train them on the opportunity and the product. But just to get the referral to the other - to a specific sales force that will evaluate the risk profile of the opportunity and then bring it to underwriting.

The other thing Ashwin that that we liked about the business was that as I said, approximately half of what they sell are services that were very, very, very familiar with. So they are selling Payroll and Outsourcing services, but in a particular vertical, which happens to be these staffing firm. So, the profile really is not significantly different, other than the funding piece of that that we think they do exceptionally well.

Got it and I apologize if this was asked, but I had to hop off for just a brief bit, the pushout of certain elements of ACA and Cadillac tax specifically is that, I mean how are you thinking about that for your specific client base does it have an impact?

I don't think that one has an impact very much on our small to midsize businesses, I don't think you usually, they won't normally run into that that issue. So, I don't think, it will it’s, I do think it's going to be a very interesting still a year calendar year ahead of us in 2016 for the Affordable Care Act products right now, because I said, I did mention certainly that the demand has been very strong and in fact we've added some expense to support all that inflow of data from clients. And I think that the sales will kind of some clients may say hey after the filing date I don't always need this I don't need this product others will realize that they did need it and there will be another, kind of surge in sales I think in 2016. So I think the sales are still continue to be pretty strong in a calendar year 2016.

Got it, my last question really is and this is potentially a few months too early, but do worry about the interest rate sensitivity obviously higher interest rates good for you, but interest rate sensitivity of your client base I mean do they care as just looking at one of your share Payroll surveys, which applies to a piece of your - of your client base that 45% of clients don't care, but that means that 55% do care any thoughts there?

Yes, I think first of all where new businesses small businesses and those who are starting up typically don't go through a bank for their credit anyway. So, I don't think they will be too impacted by a number of increases that until it gets much higher. So, I don't think we’re going to see a big impact on small business to start. They usually use other funding sources and so forth. So, I don’t think a big impact there. I think midsize businesses that are more capital intensive that need to borrow, we’ll see some impact as the rates start to go up. But in the near future it's hard to anticipate that they’re going to up enough to drive that much impact to them, Efrain.

Yes, I’d agree.

Okay.

Okay got it, happy holidays guys.

Thank you.

Yes, bye.

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

Hi guys, just a couple follow-up question have you guys started on using your balance sheet more to do small business lending?

We’ve thought about it. It’s a pretty crowded space out there with a number of companies out there doing it and we have we continue to look at that as an opportunity we are - we have some partnership with this to credit and to do some referrals with them but we’ve continue to look at the business as well. But it is a pretty crowded space these days.

Hey, yes you guys just have pretty good access to financials, so you would have a pretty good idea of good and bad loan potential, so I thought it would be an interesting option?

Yes, we have launched it.

I just want to ask you about retention going into the big selling season. How do you guys feel of retention going forward coming into the selling season here?

Yes pretty good so far at this point. We’re feeling good when we talked earlier about a price increase and we held our price increase, we’ve held the increase well and our retention has been near it’s historic best. And so it’s early, because you really get that best sense at the end of December and into January, but at this point we feel good about it, our retention is continuing to hold.

Okay and then can you quantify you talked about sales growth be in double-digits and ahead a plan. Can you quantify how much ahead a plan that is?

No, but it’s strong. I would just say this Bryan, so I called out higher sales expense, because I typically don’t do, because it’s - we’ve got a range and frankly the street can figure out what that range is. But I would say through the first six months when we where preparing for the call we had a discussion about whether to call it out, because some quarters you have better sales growth and you have than others. But given the strength of what we’ve seen in the back six months and in our planning process we thought we had to add to selling expense, because they are up to a very strong start, so it's strong by our standards. Yes.

Okay and then the common question we’re going to get on that is how does that translate that strong sales, the double-digits into revenue growth, maybe you can just remind us Efrain best way to…

Yes, typically you’re not seeing that sales growth probably for another 4 to 6 months going forward. So there is a bit of a lag some of it you see as soon as two to three months some of it a little bit longer cycle, because you have to set clients up. So you start to see that translating into 2017 sales.

Okay great. That’s all I had. Happy holidays.

Thank you.

You too.

Our next question comes from Sara Gubins of Bank of America. Your line is now open.

Hi, thank you.

Hi Sara.

Question first on ACA how the adoption of the compliance product trend during the second quarter, I guess I’m wondering if you talk about being at about 50% adoption last quarter and that have been up from 25% to 33% in the prior quarter. So, I’m wondering kind of what the penetration is looking like?

I think it’s a little bit higher than that Sara, but not dramatically higher. We never thought that we’d get a 100% adoption in the base, because there are other solutions out there. So, I think we’re trending above certainly about 50%, but it's not a 100%. And we don't anticipate that it will be.

Okay and then quick question on Advanced Partners, how cyclical has their business been in the past given the end market?

Yes, not very, I mean obviously I guess this is counter currency, I haven’t looked at where they were in 2008 or 2009, but they’ve had a pretty steady track record of growth. You can argue that one thing take a downturn you actually have slightly increased demand for temporary versus full-time employees. So, but their growth patterns been a pretty steady that was one of the thing that we looked at.

Okay maybe they’re getting picture and maybe [indiscernible]?

It, I think yes it could.

Okay and then can you talk about sales expense being higher, did you change the plan for sales headcount growth did you talked about 3% this fiscal year versus the 5% last year?

No, no. Yes no we didn’t I mean whatever we said at the beginning of the year is still holding we’re above in sales that’s particularly on the Payroll side. So that's true, when we call out higher sales expense is not headcount, it’s because our sales are variable and so if we anticipate that sales is going to have a good selling season, which is what we believe will happen and we rarely talk about it that way. We’re little bit more cautious than we just bump expenses and so right now in this street models that I have seen in third quarter we’re not taking into account that selling expense so.

Okay great, thanks a lot.

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

Good morning Marty and Efrain. Happy holidays.

Thank you.

Thanks. You too.

So just a follow-up on that the sales expenses up not because of headcount, but because of better performance it takes about four to six months if it’s up double-digit then what sort of incremental bump does that do to revenue relative to a steady state?

Yes, I guess Mark, I will go through the arithmetic, but I think the thing always to remember is that our retention averages about 86%. So, yield a little bit of it of effect this year and then you get the rest of it next year in order for you - when people ask this question, in order for you to start accelerating up to double-digit you’d have to really have appeared a multi-year period of very strong sales performance. Now we hope we’re somewhat on that trend, but you need more than one to make it occur. That's part A. Part B of the explanation, which is going to lead me to part C, part B is simply to say that sales is one component of the equation, obviously retention is the other component of the equation and how the pieces of that fit together we put together a plan tells me where sales growth is going to go. You have seen that in the last three years certainly even excluding the impacts of the minimum premium plan, we've seen revenue bump up because sales the leading indicator has been growing, so I see it as simply that I will have to get to 17 when I give you guidance, but I think we feel good. If we see this sales growth continuing through the year that's going to be a positive for next year.

All other things being equal we should end up seeing total services revenue accelerate slightly at least?

I would say, if we continue with the strong performance, yes.

Great and then how much - can you just remind us what the ACA ERS is adding in terms of revenue?

We don't disclose it. What's tricky about that is, if I were to give you a number I'd have to say also then that ESR cuts both ways in that it represents an opportunity for additional sales but it's also other sales we might not get because people are focused on selling it and there's tremendous amount of demand so it's buried in the HRS number and that's about as far as we will go.

Okay, is all of Advanced on HRS?

No that's Mark, so I called out very carefully the balance of the year and I think Tim asked earlier, so I called out a 1% increase for the balance of the year on service revenue and 1.5% for HRS for the balance of the year as Tim mentioned earlier is about five months or so that we expect so no actually the business is evenly split between payroll services, what we would consider payroll services revenue and funding, which we're going to lump into HRS for now until we figure out where a better category is for it.

Right and Advanced is growing double-digits?

Yes they’re and strong profitable.

And so the pipeline that you mentioned I mean how rare is it to see something that’s reasonably priced growing at a decent rate and as profitable you are?

Well what we disclosed the cash flow you guys can determine how reasonable price is, but we thought it was a reasonable price for the prospects of the business. It is fairly rare, I would say that.

Yes.

Okay. Any thoughts with regards to sales headcount going next year how you’re thinking about trending that?

Yes, I would think party it would be consistent depending on which area and so forth we're getting into studying that now and we will actually after selling season, but I think we would continue to probably increase a little bit more. You may see a little bit more virtual because that's where we've seen the growth in last few years, but there's still field resources would continue to go up as well.

Okay and then one last question just on the international front whether we're thinking about Germany or Brazil any updates there?

Germany has continued to I think do well the client base is really getting up their performances so sales performance is good and retention is very good. So, I think we’re doing well there and Brazil has just been slower than we expected a number of things have changed the economy is not as strong there’s some political stuff going on in the legislation that we expected that would be more of a disruptor, which was requiring more electronic filing for small businesses, it’s been delayed now for a couple years. We expect it still get done, but it’s taking longer so that disruption to drive more Payroll from accounts into a third party has been slower much slower to happen than we expected.

As to the other thing Mark just to build on what Marty said we remained interested in building out the international portion of the business and M&A is also focused on looking at those opportunities too. Yes.

Great, thank you. Happy holidays.

Thanks you too Mark.

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

Hi good morning guys. A question, you've talked for a couple quarters now about the transition to this bundled selling approach out in the field. Can you give an idea within HRS pars a little bit the relative growth rates of the ancillary services and how they've been impacted by that bundled selling approach versus the ASO/PEO piece of HRS?

We don't really break it down to that level but it definitely has helped our attachment rate at the beginning of the sale. Our old approach was, we will sell payroll. This particularly the small businesses we will sell you payroll and then come back with different sales forces and this team selling now with the 20 employee or so size has really gone much better. It's still early in the process, but we're seeing nice results where the clients not only is it we're selling more of a complete bundle, but also the clients have a, they're happier because they weren't looking for just payroll. They were looking for more and we're being able to satisfy them the right way I think up front, but we don't really break it down much more than that. Anything you want to? Okay.

Okay second one is Flex related. I think you mentioned that that is appealing to more of a mid market client. Can you give an idea of what size of client you're seeing a new uptick in in terms of demand and I guess any other changes or differences you're noticing about Flex?

First of all as Efrain said the majority of the clients are on Flex. What I should say is the mid market that 50 plus it's more interested the full bundle of the suite of complete suite of products, so Flex can be payroll only, it can be a complete bundle of services and we're seeing bigger uptake in the bundle for those probably even 20 and above because that need has come down, so I think it's just Time and Attendance for example. In the past, you'd be pretty good size necessarily in employee before you'd be interested Time and Attendance now with overtime rules Affordable Care Act, and also by the way the technology of Time and Attendance, there's just a much greater need for it. Clients want it. It's easier, you can do it on your mobile Approximately, now client employees can punch in and out on their phone. So, I think the need has driven down in size and the technology and our breadth of products and mobility has made it a lot easier for clients to incorporate it into their businesses. So, I think the impact there is that the majority of clients are on Flex and the 20 plus, 30 plus employee clients are taking much more of a full suite or some portion of that suite of products.

Okay terrific. Thank you.

Okay. Thank you.

Our next question comes from David Grossman from Stifel Financial. Your line is now open.

Hi thank you. I had a throughout four minute so if this should been answered we can take you to offline. But just had a couple of very quick follow-up…

Yes.

So the first is I think here commentary implies that your checks for client were relatively flat and can you remind us is that a function of where we are in the cycle, or is there something else driving that metric?

Yes, so David if you'll look at our average client size, we're balancing around 17 or so and it's really nothing more than the fact that under 50, we were having a lot of more growth than we were in previous years and you have a tendency there that has a tendency to depress the number of checks per client. If I same-store it you're at somewhere between 0-1%, so because checks per client are not really a significant contributor, we really just don't call it out so that's basically the dynamic of what's occurring. As you grow that you tend to see that impact.

Right, I guess I was just trying to reconcile that with your commentary about some of the growth momentum in your new bookings it’s being driven by MMS and…

Good point and I think that’s a fair point. It’s early in the cycle so it’s in the end we were start skewing higher than you would see that pop up. But it’s going to take a little bit of time before you start to see that.

Right and then the second question I had was on HRS, I think I understand the impact of the retirement services pricing action. However, what if anything maybe going on in the underlying PEO business, just curious what the trends are in that business relative to where they’ve been because they have been relatively strong, I think we can agree it so.

Yes, they are still very, very strong. So, just to remind you what is varied, or not varied, what’s included in nature as, so you got insurance services, you got HR outsourcing, you have retirement services and you have actually online services and I will just remind everyone that when we had the Investor Day I said, we really need to kind of think about how we represent Payroll services going forward because it really doesn’t capture the activity that’s going on in that segment of revenue. Having said all of that PEO still is relatively small as a percentage of revenue for the company as a whole and even within HRS it’s still certainly well south of 50%, but it is growing very, very rapidly, faster, much faster than HRS is growing as a whole.

Yes. I think it is a very strong market for the product particularly with the Affordable Care Act and the need for HR, more HR because of the regulations and so forth. So, yes it continues to be very strong demand.

Alright, so no. The takeaway there is no change in trajectory of that business despite the growth rate at category?

No, we feel pretty optimistic about that.

Okay and then just one final question, I guess there have been several questions about the booking moment that you are reporting, can you help us, I mean you called out MMS as being a component of that moment, but is there anything else in there in terms of the mix whether it be a fully outsourced solution versus not, you said it was revenue per client going us with more modules being purchased but just curious if there is any kind of new trend emerging that maybe driving that network?

I think obviously employee share responsibility helps too. So that is part of the equation there, but if I look at all of the different sales forces and the products that they sell, the combined effect is really strong we don’t have sales forces that - we don’t have any that are performing under where we expect. So, we got a lot of cylinders hitting all at once.

I think the mid market is the strongest if you look at that that’s been the biggest strong and the PEO and the HR outsourcing have been particularly as Efrain has mentioned. So, I think overall though as we’ve seen nice growth in all of the sales forces, nice par growth, but the leaders have been at this stage the mid market and they have - remember they have a much fuller product suite now and two components were just added, fully integrated and so they are selling much of higher revenue per client and their - its success is up.

Great. Well congratulations and have a great holiday.

Thanks David, you too.

Very good.

Our next question comes from Tian Jing Wang of JPMorgan, your line is now open.

Hi thanks. Just wanted to ask on PEO demand as we cross into the new calendar year, any change in your thinking around level of demand in general for PEO?

No, just continue to be strong and selling season will kind of tell the tale, but it continues to be very strong and frankly has picked up in some parts of the country where we’ve added more reps where we were not selling as much PEO. So, I think the demand there is still good and looks sustainable.

Okay good. Just one more. Just on the HRS side, I know you always sweat rounding and one number, I think you mentioned it was in the far below the 10% to 13% range, I mean are we talking about rounding to 9% kind of issue or is it going to be bit different from there?

Thanks Tian Jing for asking the question. Everyone is figuring out. So, yes we are going to anticipate somewhere in that 9% range.

Okay, like I said I know.

No, sure question.

Just wanted to make sure, have a safe end of the year guys, thank you.

Thanks Tian Jing.

Thank you.

Our last question comes from Glenn Greene of Oppenheimer, your line is now open.

Thank you and thanks for fitting me in. Just two questions and clarifications, the first one is on sort of the booking momentum commentary, you know if I recall the kind of the last couple of quarters have been strong as well, so is it, did we accelerate in terms of booking momentum is this more just sort of sustainable trends we have seen over the last few quarters, just sort of how you would characterise it?

I think it is sustained, I think it is up a little stronger, particularly in the mid-market, but it sustained double digit for at least the last few quarters. So, I would say it is up a little bit, but it is certainly, you know and that is good thing it is not like it popped up one quarter and then it slowed down. We have seen some nice momentum going into the selling season here.

Okay and then just to clarify Efrain on Advanced Partners, and you sort of in your prepared comments you said it was excluded from the guidance and I think in our response to questions that are included in guidance and maybe just a nuance, but maybe the answer is just that it doesn’t move the needle enough, but I kind of just want to check my math that it is like 60 basis points to growth and a 120 basis points to the back half.

Yes Glenn. So, what I was trying to do was carefully parse two things, first tell you what growth looked like before I added in Advanced Partners right, so I talked about that and then after I did that, I said okay, after you have gotten that right because you got to get your models right than what will Advance include when it is closed? So that is when I said in the balance of the year whatever your models say based on what I guided you to you are going to get about 1% in the balance of the year for payroll service revenue growth and 1.5% for HRS growth in the balance of the year and was clarified that that’s probably going to be about five months or so. So, I just was trying to say the overlay of Advance looks like that. When you put all that together with guidance we’ve given for the year, we’re still overall within the range of guidance that we provided for the year.

Okay, and just a quick math on a full year run rate, is it something like $35 million of revenue, is that reasonable?

I see where your math works and I can’t disagree with it.

Okay great. Thanks a lot.

Yes.

Okay, I think that’s all the questions. At this point we will close the call. If you are interested in replaying the webcast of this conference call, it will be achieved until approximately January 22. Thank you for taking the time to participate in our second quarter press release conference call and for your interest in Paychex. We very much appreciate that. We wish you all very happy holiday season. Thank you.

Take care.