Paychex, Inc. (PAYX) Q2 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the Paychex Second Quarter FY20 Earnings Conference Call. At this time all participants are in a listen only mode. After the speaker presentation, there will be a question-and-answer session. [Operator instructions] Please be advised that today's conference is being recorded. [Operator instructions] I would now like to hand the conference over to your speaker today, Martin Mucci. Please go ahead.

Thank you, and thank you for joining us for our discussion of the Paychex second quarter fiscal 2020 earnings release. Joining me today is Efrain Rivera, our Chief Financial Officer. This morning before the market opened, we released our financial results for the second quarter ended November 30, 2019. You can access our earnings release on our Investor Relations webpage and our Form 10-Q will be filed with the SEC within the next few days. This teleconference is being broadcast over the Internet and will be archived and available on our website for about one month. On today’s call, I will review business highlights for the second quarter, Efrain will review our second quarter financial results and discuss our guidance for fiscal 2020, and then we will open it up for your questions. Financial results for the second quarter of fiscal 2020 reflect good progress on our key initiatives. Total revenue growth was 15% for the quarter, Management Solutions revenue grew 6% and PEO and Insurance Services revenues grew 57%, including the results from the Oasis acquisition. We have been investing significantly in the area of sales, marketing, service and technology. These investments are paying dividends as we've seen continued momentum in new sales efficiencies and operations and the introduction of new and enhanced products. Paychex has been known much more as a provider of innovative HR technology solutions than ever before. Our investments in demand generation and sales are contributing to solid growth in new sales revenue and in particular we are pleased with the strong performance of the mid market space aided by greater attachment of our broad suite of HCM, SaaS-based software solutions, such as our time and attendance and HR administration products. We are now in the main selling season. We believe we are well-positioned for continued momentum. We're also continuing to experience improved efficiencies in our operations through the use of self service functionalities and our robotic process automation efforts. By automating more routine processes, we are reducing operating costs and providing more time for more high value client service interactions with our team. The evidence of high quality service by our teams is demonstrated by our client retention and satisfaction scores which remain consistent with record high levels. We have seen continued increases in net promoter scores, most notably in the mid market space. Let me touch briefly on what we are seeing in the small business environment. The Paychex | IHS Markit Small Business Employment Watch sowed hourly earnings growth at its highest level since 2011 while job growth has been holding steady. Wage increases are beginning to reflect the tight labor market for small businesses. The constant battle for talent highlights the importance of having a partner like Paychex, who can provide solutions to simplify HR recruiting and on-boarding and a competitive benefits package to attract and retain top talent. We are currently operating in an unpredictable regulatory environment. Compliance with a rapidly evolving regulatory landscape is one of the many reasons employers choose Paychex for their HR needs. We're proud of our leadership role within the industry, partnering with regulatory agencies, keeping our clients informed and quickly updating our systems to be in compliance and support changes as they become effective. Just this month, the IRS released the final version of the new form W-4 to be used by all new employees and for all adjustments effective January 1, 2020. By remaining actively engaged with the IRS and providing feedback throughout their process, we were able to have the new forms and related calculations integrated into our systems within minutes of the issuance by the IRS. The workplace continues to evolve both in technology and the way people work. And we are very proud that Paychex has been included on the Fortune magazine's Future 50 list of companies that are best positioned for long-term growth. In addition to solid financial results, Paychex was recognized for its commitment to innovative technology offerings designed to meet the needs of the evolving workplace. We continue to focus on enhancing our product offerings, and the use of technology to remain a leader in this industry. Last quarter at HR Tech, we discussed some of the newest products being introduced. This month, we launched one of those products Pay-on-Demand, which enables workers to access wages, they have already earned before payday. This pay action is a great tool for recruitment and retention of talent, as it allows employees to be paid, when they want, allowing flexibility -- more flexibility than the traditional weekly-by-weekly or monthly pay schedule. Other companies in the industry offer similar services on a smaller scale, but our solution is unique and that it provides our clients with flexible payment options including direct deposit, pay card and digital payment into Amazon or PayPal accounts, however the client employee wants it. The other exciting products we demonstrated at HR Tech are progressing on track and will be launching in the coming months. We continue to focus on investments in emerging technologies such as wearables, real time payments, product integration, data analytics and artificial intelligence. We are proud that Paychex's commitment to tech innovation has been recognized by industry experts. We were very proud to earn Awesome New Technologies for HR award at the HR Technology Conference and Expo in October. This recognizes the enhancements and increased flexibility of our Paychex Flex service product. We were also named to the HRExaminer 2020 Watchlist for artificial intelligence and HR. This recognized our innovation using AI tools and machine learning to strengthen existing operations, our Flex Assistant chatbot currently answers over 200 commonly asked questions, spanning the Flex suite of products and seamlessly integrates with real time live chat capability with a Paychex service agent 7x24 by 365 days a year. In addition, we have intelligent tools within Flex architecture that deliver a more personalized user experience through learning individual user preferences over time that can be listing out how to do something or even watching now short videos to learn how to use the Flex product. Paychex Flex also won a Gold award for excellence in technology from Brandon Hall Group in the category of Best Advance in HR or Workforce Management Technology for small and mid-sized businesses. This is a fourth straight year that Paychex Flex has been honored with a technologies excellence award, which validates our tech vision, investment in that vision and the value tech brings to our clients. We're proud of the experience our Flex platform [technical difficulty] employees enhanced through automation we have built into the application based on individual patterns and preferences. We also continue to see increased utilization of our industry leading 5 star rated mobile app. During the quarter we experience an increase of over 50% in the number of mobile sessions and a 35% increase in the number of mobile only users. This increased mobile usage by clients and their employees has led to efficiencies internally and higher net promoter scores. We are serving clients and our employees the way they want to be served. Shifting to our PEO business. The acquisition of Oasis was the largest acquisition in our history and doubled the number of worksite employees we serve in our PEO. As with any significant acquisition, the integration efforts can cause some initial disruption in sales cadence and some operating inefficiencies as we realize the expected synergies. As we discussed last quarter, we realized some of this in the first part of this fiscal year as we went through that process. That has led to slower than anticipated revenue growth for the year. However, we believe we are in a good position now as we progress with full sales rep headcount, and our operations teams continue to focus on what's most important, that is serving our clients and providing them the right combinations of solutions to help them succeed. We are excited about the continued strong demand for PEO services in the markets that we serve. In summary, we continue to focus on growing our business by making things simple for our clients. Our innovative technology allows us to service our clients in a way that they want, when they want, and where they want. We're focused on continuing to introduce innovations to our technology-enabled service to improve business efficiency and drive even more value for our clients. Our whole suite of HR solutions has been the recipe for growth and positions us for continued growth going forward. The efforts of our employees and their commitment to our clients are definitely making a difference. I will now turn the call over to Efrain Rivera, our Chief Financial Officer, to review our financial results for the second quarter. Efrain?

Thanks, Marty, and thanks to everyone on the call. I'd like to remind you that today's conference call will contain forward-looking statements. Refer to the customary disclosures. In addition, I’ll periodically refer to non-GAAP measures such as EBITDA et cetera. Again, refer to our investor presentation, press release for reconciliation of second quarter to related GAAP measures. I'll begin by providing some of the key highlights for the quarter, and then I'll follow up with some greater detail in certain areas and wrap with the review of the fiscal 2020 outlook. As you saw, total revenue growth was 15% for the second quarter, Oasis contributed approximately a little bit less than 9% to this growth. Expenses increased 18% for the second quarter to $649 million. Similar to last quarter, increases in compensation related costs, PEO direct insurance costs, and amortization of intangible assets contributed to total expense growth. Total expense growth was primarily driven by the acquisition of Oasis. Operating income increased 11% to $342 million, operating margin was 34.5% for the second quarter and EBITDA increased 16%, and EBITDA margin was approximately 40% for the quarter. The EBITDA margin increased slightly compared to a year ago. Operating margin declined due to the amortization of intangibles associated with the Oasis acquisition as you all know. Our expense net for the second quarter of $5 million includes interest expense of approximately $8 million related to long-term borrowings. As a reminder, we borrowed $800 million bonds to fund a portion of the Oasis purchase price. Effective tax rate was 23.2% for the second quarter compared to 23.8% for the same period last year. Net income increased 10% to $259 million and adjusted net income increased 8% to $254 million. Diluted earnings per share were up 11% to $0.72 for the second quarter and adjusted diluted earnings per share increased 8% to $0.70. We received a little over $0.01 of benefit from stock-based comp payments during the second quarter which is included for GAAP but we excluded for our adjusted diluted EPS. Let me provide some additional color in certain areas. Total service revenue was up as I said to $971 million, 15%. Within service revenue, Management Solutions revenue increased 6% to $727 million and PEO and Insurance Services increased 57% to $244 million. Management Solutions revenue growth was 6%, which actually exceeded our expectations, included a contribution from Oasis of slightly less than 1%. The remaining growth was primarily driven by increases in our client bases across many of our services, along with growth in revenue per client. Revenue per client improved as a result of higher price realization and increased penetration of our suite of solutions, particularly time and attendance, retirement services and HR outsourcing, and this has been a focus of our efforts over the last several years. And if you chart our growth and revenue per client, you’ve seen a pretty steady increase. Retirement services revenue also benefited from an increase in asset fee revenue earned on the asset value participants’ funds. PEO and Insurance Services revenue growth of 57% was largely due to the acquisition of Oasis, which contributed 47% to this growth. In addition, the increase reflects growth in clients and client worksite employees across our existing PEO business. Insurance Services revenue benefited from an increase in number of health and benefit applicants, partially offset by the impact of softness in workers’ compensation premiums, as we've been discussing all year. Interest on funds held for clients increased 9% for the second quarter to $20 million, primarily as a result of higher realized gain, average investment balances and interest rates. Funds held for clients average investment balances were impacted by wage inflation and increases within our base offset by changes in client base mix and timing of collections and remittances. Turning to our investment portfolio. We continue to invest in high credit quality securities. Our long-term portfolio has an average yield now of 2.1%, average duration of 3.1 years. Our combined portfolios earned an average rate of return of 2% for the second quarter, up from 1.9% last year. Quickly looking at year-to-date results. Total revenues up 15% to $2 billion, service revenue up 15% to $1.9 billion with Management Solutions reflecting growth of 6% to $1.5 billion, PEO and Insurances reflecting growth of 57% to $491 million. Interest on funds has grown 14% to $40 million, operating income up 10% to $691 million, and net income and diluted earnings per share each increased 9% to $523 million and $1.45 per share, respectively. Adjusted net income increased 7% to $511 million and adjusted diluted earnings per share increased 8% to $1.42 per share. Let me walk through, the highlights of our financial position. It remains strong with cash, restricted cash, total corporate investments of $708 million as of the end of the quarter. Funds held for clients were $3.7 billion, compared to $3.8 billion as of the end of last year, May 31, 2019. Funds held for clients, as you know vary widely on a day-to-day basis and averaged $3.7 billion for the second quarter. Total available-for-sale investments including corporate investments and funds held for clients reflected net unrealized gains of $39 million as of the end of the quarter, compared with $20 million as of the end of last year, May 31, 2019. Total stockholders’ equity was $2.6 billion as of November 30, 2019, reflecting $444 million in dividends paid and $172 million of shares repurchased during the first six months. Return on equity for the past 12 months has been a stellar 42%. Cash flows from operations were $565 million for the first six months, a robust increase of 14% from the same period last year. So, strong performance on cash flow. The increase was primarily driven by higher net income and non-cash adjustments. Increase in noncash adjustments was primarily due to higher amortization expense, largely driven by intangible assets acquired through the acquisition of Oasis. Let me talk about 2020 guidance. I remind you that our outlook is based on our current view of economic conditions continuing with no significant changes, though we have reflected the impact of the three interest rate cuts that have already occurred this fiscal year. I’ll provide our current our outlook and some color on a couple of areas. We've provided updates to the guidance as you saw. Our Management Solutions revenues has been trending positively and now we anticipate it to grow in the range of 5% to 5.5%. This is raised from the previous guidance of approximately 5% growth. And we're doing well in almost all of the buckets that comprise that revenue stream. PEO and Insurance Services now expect it to grow on the range of 25% to 30%. As Marty previously mentioned, we’ve got off to a slow start with Oasis slower than we anticipated. We still maintain a strong long-term outlook and continue to execute on our plans to integrate our PEO business. Interest on funds held for clients is now anticipated to grow approximately 4%, modified from a range of 4% to 8% we started the year, and this simply reflects the most recent federal funds rate cuts. And diluted earnings per share growth has been increased to a range of 9% to 10% growth, raised from our guidance of approximately 9 [technical difficulty] guidance remains unchanged. This followed total revenue 10% to 11%, operating income as a percent of total revenue approximately 36%, EBITDA margin for the full year expected to be approximately 41%, effective income tax rate expected to be in the range of 24% to 24.5%, net income adjusted -- net income and adjusted diluted earnings per share are all expected to grow at approximately 9% for fiscal 2020. Now, let me provide a little color on the back half of the year. As I indicated, PEO and Insurance revenues are now anticipated to grow in the range of 25% to 30%. While the second quarter results were within the range provided 56% to 60%, we have taken a more conservative approach for the back half of the year, given our current trends. In particular, we've continued to experience a lower compensation -- lower workers’ compensation insurance rate that have moderated our insurance -- moderated our insurance services growth. We anticipate that this trend will likely ease as we enter the next fiscal year. We're also seeing modestly lower at risk insurance attachment in the PEO. In addition, this change reflects impacts from the slower start from the -- at Oasis acquisition. We now anticipate that growth for the third quarter of PEO and insurance will be approximately 10%. Management Solutions guidance was increased to a range of 5% to 5.5% growth from our previous guidance of approximately 5% due to favorable trends that we've seen in the first half of fiscal 2020. This incorporates the higher than anticipated growth achieved in the second quarter and assumes that third quarter will come in the full-year range. I refer you to slide 16 in our investor presentation, which shows the impact of the re-class in the fourth quarter of fiscal 2019 of an immaterial amount of Oasis revenue. Please note that the as adjusted numbers on this slide represent the base on which we apply the growth rates we are guiding to in Management Solutions and PEO and Insurance revenues. And the reason I call that out is when I look at your models, two thirds of you do it that way and one third has split between third and fourth quarter. Please look at that number so that you can adjust your models correctly. Operating margins, which for the full year are anticipated to be approximately 36%, do vary quarterly. Our margins for the second quarter exceeded the guidance we provided in the last call, which was a range of 33% to 34%. That indeed was impacted by delays in hiring related to the tight labor market. We still anticipate margins of approximately 38% for the back half of the year. We expect to continue to invest significantly in sales and marketing in the back half of the year while still achieving our target of a full-year operating margin of approximately 36%. And with all that, I'll turn the clock back over to Marty.

Thank you, Efrain. We’ll now open the call to questions, please.

[Operator Instructions] Your first question comes from the line of Ramsey El-Assal from Barclays.

Hi. Thanks for taking my question. I appreciate it. I wanted to ask about the trend and the lower workers’ comp insurance rates. And I just was trying to get an idea of your visibility to how those rates trend. How do you -- what gives you confidence about those rates over time going into next year? I think, you indicated sort of becoming more favorable. What type of read do you gain on that rate?

Well, it's a couple of things. One is that because we have a insurance agency and our pricing policy is on a virtually daily basis, we get a sense of -- pretty clear sense of where that pricing is trending. That's one part. The second is it’s influenced by what state workers’ compensation or where they're setting up pricing. And we know we have a pretty good sense of what states are contemplating or have contemplated changes in workers’ compensation insurance. So, I think the combination of those. And then, the final thing is we're looking at the mix of revenue quarter by quarter. And we know that we started the year with a strong compare and it starts to ease as we get into the back half of the year a little bit.

Got it. Okay. And then, could you talk about your retention trends, and the degree to which those trends are, I would imagine moving in the right direction, giving your confidence in terms of raising the Management Solutions segment guidance for the year?

Yes. We're continuing to see pretty much near record levels on retention across both small and mid-sized clients. We're seeing very good retention numbers. And so, they've been very solid. And, you know how conservative we are. As we look forward, we still think they're going to -- we're going to maintain that going forward. So, we feel the value of the products obviously and along with the needs of the clients during this, particularly this kind of tight labor market, I think are really keeping retention. And we're not seeing out of businesses really increase either. So, all -- both from an environment and from our performance, I think are both keeping our retention numbers at record levels.

That's terrific. Thanks for taking my questions.

Thank you.

Your next question comes from the line of Kevin McVeigh with Credit Suisse.

Great, thanks. Hey. It seems like the organic growth, particularly in managed services is settling in at higher levels, despite much tougher comps. Can you just frame out, like how much of that is retention because Marty, I know you mentioned kind of maintaining those levels. Is it possible you kind of set a new level, based on more of the SaaS offering as opposed to the traditional service? So, maybe just a sensitivity on SaaS for service and what that can do to the retention over the course of time?

Yes, I think, it certainly does. I think we're appealing to the clients the way they want to be served, as I mentioned earlier, and our employees. The employees are playing a pretty strong role these days, more than I think ever in the past. As you see the mobile app, 70% of the usage of the mobile app is the employee of the client. And so, they're having a bigger impact on retention. And we started talking about that a couple of years ago. So, I think that does have an opportunity. The issue is always still, when you see improvement, particularly on the small client basis, there are so many businesses that go out of business every year. And we've been in this a long time and it hasn't changed that dramatically. So, what I think where you do have room for improvement is certainly from a service value standpoint. I think, the need for clients, small businesses, midsized businesses to have software as a service, to have mobile apps, to have self-service available to their employees, all those things are making them more valuable and stickier, I would say to a client. So, we certainly see some -- we're optimistic, but we still also know that so many businesses start up and go out of business on the small end.

And just to follow up on that, Marty, real quick. If it's -- if you're bumping up at that 82% level, any sense of -- how much of that is failures versus maybe other parts that are driving the attrition?

I think, if you put all together, kind of no employees out of business bought or acquired. It's typically been 50% plus a little bit. So, that accounts for about half of it, and a little bit more even sometimes. And then the other pieces are price. And it's still just as competitive as it's always been, hasn't really increased. But that number has been pretty consistent and then service value kind of stuff. So, I'd say 50% to 60% of your roles, all those things together are kind of out of control type of thing.

Your next question comes from the line of James Berkley with Wolfe Research.

Just quick question on PEO side. Would it be possible just to break out in more detail, just kind of that segment PEO and insurance separately, how bookings have been trending on the PEO side and maybe how much of the guidance drop was attributable to Oasis, which you expect to turn around?

Well, let me start and I’ll have Efrain jump in. I think, what we've seen there is, one, we have our -- we think the market is still very strong for PEO in particular. So, the demand continues to be strong, you're still seeing a very tight labor market. So, they're looking for help in recruiting and retaining employees, they're looking for benefit packages that will retain employees and HR kind of mobile app and strength to not only recruit, but retain in that mid market -- small and mid market. The other thing is that the integration of Oasis certainly has impacted this somewhat. We’re off to a slower start. We mentioned it in the first quarter last year. We really began the active integration around June, so about six months ago. And once we started aligning underwriting procedures, sales comp models, service processes and those things, it kind of slowed our sales cadence down at Oasis. And it was definitely impacted by underwriting. We've always been very tight on the underwriting side. We wanted the processes to be very tight. And so that gave us slower ramp up for the sales. And then, we had to wrap up the sales headcount, and that was a little slower than we expected. Now, we're at that full -- near that full ramp up of the sales headcount. And also, we got through a couple of insurance renewals. It's always important to kind of see where we're coming out for the first time with a major integration like that with insurance renewals. And we came through fine. But that and the underwriting, I think, certainly impacted some existing clients. Now that all -- that we’re through that, we have a much better sense of the first year of Oasis and where we're going to come out for this first fiscal year, the remainder of the first fiscal year. We think the market is very strong, our organic PEO business, non-acquisition was very strong year-to-date. And so, we feel still very strong about it. We just got off to a slower start than we thought, and that's going to impact the full year's performance.

I guess, I’d ask another way, if it's okay. If you didn't do the Oasis acquisition, would have organic PEO growth been in line with expectations, like would that have been unchanged?

I think, it would have been pretty much unchanged. I mean, when you look -- we feel very, we're actually performing, sales have been stronger than we expected in our organic PEO business. And so -- yes, I think it would have been stronger. I mean, this is -- we really feel like this is kind of around the first part of the integration. And although we've had the company, we purchased the company in December, we kind of let the fiscal year play out, we had a number of things we were organizing around, running some synergies. Then in -- beginning of our fiscal year, we kind of put new processes in place. And frankly, it had a little bit stronger impact than we thought in slowing things down from a sales and even retention perspective. Now, we've kind of got that turned around and we just wanted to make sure we're conservative, kind of on the rest of the year and how that will come out. But, we feel very good about the market. And yes, it would have been stronger, if you just looked at without the integration, we certainly would have been above I think our expectations on PEO only side.

That's great to hear and obviously doing really well on the merchant -- I mean on the Management Solution side as well. And so, just last question on that point. Just given the tight labor market, any thoughts, incremental thoughts on kind of where we are in the economic cycle? How do you think about things like labor participation rate, how much slack there might be left in that and room for you guys to run in the small business side?

Yes. I think, we're still feeling pretty strongly about how the market is -- how the market outlook is. The optimism still -- it bounces around a little bit, business optimism. But, what we're seeing is the wage increases are the highest, as I said, since 2011 from small businesses under 50 employees, this is what's in that watch. And the hours worked are up also for the highest and like three years. So, we're -- we look at that as demand for the employees. So, the businesses -- the toughest thing for small -- in particular small but midsized businesses right now is, I can't find the people to finish -- to get the work done for the demand I have. That to me points to a pretty strong economy still, and that's how it feels to us. When hours worked are up and the wages are up, it's because hey, I've got the demand, and from client -- from customers that want that. So, I think that's very good. The tariffs and the trade issues, we've seen impact roughly a third, maybe 25% to a third of small businesses. Most of those are much more regional. And so, they're not going to be impacted by that. The third, 25% or third that are impacted by tariffs and so forth, have a harder time but most small businesses are not impacted by that.

Your next question comes from the line of David Togut with Evercore ISI.

Thank you. Good to see the strength in bookings in the quarter. Could you perhaps dimension the rate of growth that you have seen, Marty, both in the small business, managed solutions market and also big market? And then, you called out strength from a macro standpoint. Any additional color about which solutions are getting the most traction, where you think you might be gaining market share?

Yes. I think, one retirement contains to be very strong and I think the Secure Act, most of you probably know got through the house yesterday, and it’s headed for the Senate. If that gets approved, that's giving tax credits for new retirement plans and I think that would continue to be a boost for small businesses, starting retirement plans. And we continue to be just very solid on retirement services, both, what we would call large market and small market, generally are doing very well. Time and attendance, when you thinking about the overtime changes that have been recently made in providing overtime to more, it’s hitting employees of our clients. Time and attendance continues to be very strong double-digit growth as well. And we're -- we tried to stay -- we really stayed I think ahead of even the market from a technology standpoint. So, it’s not just the old punch cards, it's finger scan which has now gone to scan, which has gone to face scan and now wearables we’ll be introducing very soon that you can punch in and punch out on your watch. And these are all things that are being demanded by clients. So, I think time and attendance, retirement, certainly HR overall and the technology that goes with that, meaning I want to see data analytics that help me as a small and midsized business compared to other businesses. We have that data base that other clients or other businesses don't have. We can use data from 600,000 plus clients that say, hey, here is what your turnover looks like compared others, here’s what your wages look like. So, I think data analytics and HR and all of those things, all are pretty strong. And so, overall, we see pretty good growth. Now, we are heading in this -- we’re in selling season. So, it’s too early. We really need third quarter to kind of give us that look on sales. But so far year-to-date, sales have been good and particularly in the midmarket, we feel very strong about the pickup that the products have done in the marketplace.

Thank you. I appreciate all the insights.

Okay, David.

Your next question comes from line of Steven Wald with Morgan Stanley.

Hey. Good morning. So, just maybe going through the pieces of the revenue guide. I know you haven't changed the overall revenue guidance. But if I look at your adjusted numbers, I believe we talked about this after last quarter, the two different adjustments you made there and sort of map out those pieces of your segment guidance, sort of getting to 9% to 11% range on the bottom and top end of pieces added together. Is that generally how we should think about it? It sort of seems like at the midpoint you’d be at the low end of your prior 10% to 11% guidance that's...

Yes. I don’t think you’re far off, Steven. I think that's fair.

Okay, cool. I just wanted to make sure I understood that. And then, because I know this caused some questions last quarter, the Oasis components, I know that you reclassified a piece of it last quarter as to how to think about it? But, I think in the press release you said it added about 1% to the Management Solutions. So, should we think about it as Oasis minus $7 million to $8 million is all in the PEO and the rest goes in the Management Solutions?

Yes. I'd have to -- I'm doing mental math really quickly. I think, it’s a little bit lower, maybe $6 million to $7 million, but I'm not looking at the detail. But, I don’t think that's far off.

Okay. Yes. I just wanted to make sure I was clear on those things.

Yes.

All right. Thanks.

Your next question comes from the line of Andrew Nicholas with William Blair.

Hi. Good morning.

I just wanted to talk a little bit about technology in the PEO business. I was wondering if you could talk maybe about your plans for Oasis and maybe even HROI from a tech perspective. Are both businesses still running on a third party software or other plans to transition to internal proprietary software in the near to medium term? And then maybe relatedly I was just wondering if you could maybe speak to the tech capabilities of your PEO business relative to the competition?

Yes. I think, the capabilities -- well, first of all, yes, they're both on third party and license software, and so far that seems to be going very well. So, we're watching that closely but we're not looking to necessarily move to any quick integration or client conversion to disrupt the base or anything like that. So, we think that the third party software is doing fine and in fact gets upgraded pretty consistently. And so, we feel good about that. The integration, we're tying it in as much as possible to our products as well. So, I think the technology that we're focused on with the HROI and Oasis is how to tie it into our retirement information -- our retirement integration, excuse me, into our retirement time and attendance and so forth so that they can benefit most from those products. And that's going well. And so, we’ll determine over time whether it makes sense to get them to our PEO in house products or not I think, you never want to necessarily move clients through a conversion, if you don't have to. And if that's taken care of it, we're still continuing to watch that. It’s not a focus right now. Our technology and the PEOs that we feel is very competitive. We can see, as I said, the demand is good in the street, and we're selling well particularly on the organic side. If you look kind of non-acquisition and integration, we're doing very well on the organic PEO and in fact are ahead of sales. So, I think our product is performing very well competitively in the marketplace.

Just to add a little bit more color there, Andrew. So, we run on both the Flex platform for our PEO business and we also run on a third party software, which many of you know what it is. But, it's a customized instance to that software. So, there have been a lot of upgrades and adjustments, enhancements made to that system. And I think the challenge, as Marty mentioned is with those customizations and enhancements over time we want to figure out what the right decision is in terms of bringing 411 [ph] on our internal platform and that will take a little time to sort out.

And then, maybe sticking with the PEO space. Just wondering if you could update us on your appetite for M&A there, and maybe more broadly how you would characterize pricing in the space. And last thing there would be, does some of the slower than expected start with Oasis tied to kind of integration issues change that appetite at all? Thanks.

Let me let me start at the end and go back. I think, yes, with any integration, when you update -- and remember, Oasis has had a number of companies as well. And so, we had to go across the number of companies that they had acquired as well. We want to be sure that we felt comfortable with all the underwriting processes, the sales comp models, getting tighter process on service. When we pull all that stuff together, you have some consternation that goes on and some slower ramp-up of hiring of the sales folks, et cetera. And we really think that was tied to just getting things all aligned. And we really didn't push those things until about June into the summer. And so, that put us a little bit behind this year as far as starting out. So. I think it was really geared around that. M&A, still very interested. Certainly always looking at what opportunities are there from a -- when you talk about pricing, if it's pricing of the M&A, the valuations are still I think pretty high, but it all depends. There are so many PEOs, it's such a fragmented environment. But, there is a lot of opportunity I think out there and we're just trying to make sure that we get the right valuations. From a pricing -- from the market standpoint, I think, we're extremely competitive. I don't think the competition in that market has changed very much. And I think we're very competitive and we're seeing that by being above sales of sales forecast in the first part of the year with our organic PEO. So, where there is no distractions or anything at the beginning of the first half of the year, we've seen very good sales results from our organic PEO.

Your next question comes from the line of Jason Kupferberg with Bank of America.

I wanted to ask a follow-up just on Oasis, just so we have the numbers right. I think, originally, the expectation was for Oasis to generate $335 million to $375 million in revenue this year. Can you just help us get a sense of what the new range would look like, obviously just given the integration challenges that you talked about?

I think, Jason, we're still in that range, but we're certainly towards the lower end of that range.

And then, just on the sales force side of Oasis, I mean, I guess, as you went through the integration process, was there any unexpected uptick in voluntary turnover among Oasis sales people?

Yes. Jason, I think, we lost a few. It was a very -- we started making changes to underwriting process and sales comp and things like that at the beginning. It was pretty minor number, but we lost a few, because at the same time, you had some PE firms buying up a couple of other small companies that were trying to attract sales reps. So, I think we lost a few. I wouldn't say it was a -- it was not a big number. And then, that put us a little behind ramping up the sales force, those numbers that we wanted, which we're back at now. So, that's a bit of what we encountered at the beginning.

Okay. And then, just a final clarification, Efrain, just on the EPS side. I know, because there's a couple of EPSs out there. So diluted EPS, you did uptick but your adjusted EPS growth expectations are unchanged, correct? And I think that's the number you focus most?

Yes. That's correct. Yes. That's reflecting -- but we focused on both, Jason. But that's reflecting taxes. I mean, look, I get the question frequently, why do you guys call that out, I think in an effort to be transparent about what we think is underlying operating performance and what's underlying financial performance. Underlying operating performance, we exclude the impact of stock comp. Not everyone does, we do. And then, financial performance is what it is. So, that's what we're trying to be clear on.

Yes. Okay, very helpful. Thanks, guys.

Okay.

Your next question comes from the line of Tien-tsin Huang with JP Morgan.

The ancillary services, can you give us an update on penetration for some of those services, like time and attendance and retirement services, how much more room is there to go?

Hey, Tien-tsin. Sorry for the mispronunciation. But, for some reason, at the beginning of the question, we didn't -- you didn't come in...

You cut out. Yes.

So, we didn't hear the full question, o to answer it. Could you repeat it, would you mind repeating it?

Yes, I'm happy to. I hope this is a little better. Just the penetration rate of some of the ancillary services like time and attendance, retirement services. I think both were called out as being positive. Where are you in that?

Yes. We're definitely picking up. We don't give detailed penetration rates on those, but we definitely are picking up penetration across the base on time and attendance. Retirement continues to go up. The other thing on retirement that has been very helpful to us is in the mobile app, we've not -- we have released probably six months ago where you could sign up on the mobile app. I think I've talked about it before, as opposed to all of the paper that employees of our clients would go through. So the participation rate is up. And that's now retaining more 401(k) clients that otherwise would have dropped out because they didn't have the correct participation of their employee base. So, we're -- not only are the sales stronger, but the part -- the retention of 401(k) in retirement is stronger as well. Health and benefit insurance picking up a bit as well. Of course, we're still strong on the insurance side, and we've linked the PEO to our agency. Being a top 20 agency, we have -- if you don't qualify for underwriting in the PEO, we take you over to the insurance agency to write you, we have a very unique offering at that point by the ability to do that. So, I think all have ticked up pretty strongly. Those are certainly the best that I can think of right off hand right now.

Okay.

Yes. So, Tien-tsin, we only update those at year-end. But, I think just to underscore what Marty said, we're trending above where we ended last year. And if you look at it from a revenue standpoint and break out the revenue on each of those areas that were called out time and attendance, HR and retirement services, those are trending above where Management Solutions as a whole is growing. So, we're experiencing good result. And by the way, I just want to make sure that it's clear. That is our strategy. Our strategy is to approach a client and sell them on the full bundle, which is why we present the revenue in the way we do.

Right, yes. I know, it's been clear, you want to drive up revenue pair. [Ph] So, I get that. So, just as a quick follow-up then. And I know, Marty you mentioned -- I remember last call, you talked about improving enrollment on 401(k), what have you. So, sensitivity to AUM and asset value, given some of the move up here, I'm curious is there an update or any rule of thumb we can use? The equity market has been strong. It sounds like that that's helping you quite a bit here maybe.

Yes. That's a good question. So, it's really assets under administration, Tien-tsin. We'll have to come back. It's not a huge number. So, we wouldn't anticipate a significant change. But, in the back half of the year, as we get into thinking a little bit about next year, we'll talk about it. Right now, I don't think it would be significant, unless there is something dramatic in the market, it wouldn't be significant on the order of pennies in terms of EPS. But, we'll update as we go through the year.

Your next question comes from the line of Bryan Keane with Deutsche Bank.

Yes. Good morning, guys. To me, it sounds like the Oasis a little bit of an integration challenge is more one-time in nature. So, I'm trying to think about what the normalized organic growth rate for Oasis might be, post one-year out?

So, when we bought them, people asked me this. They were growing kind of mid-to-upper single digits organically. That's where they were they. We expect that we will be able to bump that growth rate with additional sales people. Obviously, as Marty mentioned, we're off to a slow start there, but our expectation is we can get it growing above those rates in the future. We got to get through this year and get through the disruption of this year.

Yes, guessing that the growth rate this year will be a little bit below their historical average as a result?

Yes, it will.

Yes. And then, one follow-up I had on the revenue per client increase. It also sounded like you're getting a little bit of higher price realization. Just trying to figure, is that normal higher prices or is that something that you're seeing a little bit different, a little bit more pricing power than usual?

I think we had a little bit more pricing power this year than other years. I think that we do a lot of work on the analytics side to understand how to price each client. I think we've done a good job on the pricing side to do that. So, you hope every year there is opportunities to do it. Obviously, we hope to hold that kind of pricing power. But every year brings another set of challenges. Then, it also depends on competition. So, while I think the level of competitive intensity remains high, it certainly has dramatically increased. And one thing we haven't talked about Bryan, which I think is important is we're having a really good year to begin the year in our mid-market business, which also helps Management Solutions. So, a continuation of those trends in the back half of the year going into next year then has a solid, or I was going to say buoyant effect, that's a little bit too strong, but a positive effect on Management Solutions revenue.

Yes. I think, the investments are really paying off that we've made in the product and the technology on the HR side of the mobile app. Those things are paying off. And as Efrain said, mid market is really coming on strong. We've had a couple of years where it was -- it wasn't as strong as we would have liked, but we're feeling this year -- certainly we're seeing this year, in the first half of the year and now we can tell you more after this quarter. But, it feels really solid about the performance there on the sales side and retention side.

Your next question comes from the line of Kartik Mehta with Northcoast Research.

Efrain, just to maybe get a little bit more color on the pricing comments you made for the payroll business, I'm wondering from a competition standpoint, have you seen a change, or are your competitors getting less aggressive or is this a strictly Paychex issue where you are able to raise prices, and maybe the competition for new business is still the same?

I think it's primarily internal. I think we have -- I think our algorithms internally get better and better every year and I think we understand more clients are okay with certain price increases and what clients are not. I think you have to be very -- do it with a great -- a lot of care. If you raise prices carelessly, you end up creating chopping behavior. I think, the other part is that there are -- I think, the strength of our model permits us to understand, because the level of customer intimacy we have permits us to understand what segments of the client base we can get better pricing out of. So, I think it's more internal than it is external. But, I think, it's important in that equation that the rest of the market is not acting irrationally from a price standpoint.

And then, Marty, just on the PEO M&A question, I know, you said obviously valuations are everywhere, but just from a Paychex standpoint, you said Oasis, you want to get this integration done, maybe it didn't go as smoothly in the beginning as you wanted. Is that slowed down maybe, M&A, would you wait a little while and get Oasis running to the point you want before you acquire another PEO, or do you think you are in a position where if an asset came up, you'd be ready to acquire it?

I think, Kartik, we're very much in position. And we really feel like Oasis is in good shape now. It was really just kind of first half of the year that was -- most of the integration kind of -- just a lot of changes that we had to make that always caused some slowdown. But, I think now we're very much read. And in fact looking at a number of things today is that -- that are out there and available. And I think from a management leadership standpoint and our organization, we're very much ready. Remember how large -- Oasis was the largest private PEO in the country. So, you knew you were going to have some integration there that we had to do more, but as far as everything else from HROI, all the acquisitions we've done, we've had a very solid track record from integrating and then hitting or beating of the numbers that we expected from those acquisitions.

Your next question comes from the line of Lisa Ellis with MoffettNathanson.

Hi. Good morning, guys. First one for me is on the rollout of the Pay-on-Demand products. You called out I think that you just launched one of them in the prepared remarks. But, if I recall correctly, I think you're launching two, right? One that's more targeted toward employers and one targeted at employees. Can you just give us a little more color on the exact timing and the monetization models for those two products? Thank you.

Yes, certainly. So, the one we rolled out this month -- a few weeks ago, was the one for employees. That was the basically Pay-on-Demand. And as I mentioned, it's an expanded -- we think, options better than most I have out there. This is -- you can not only select when you want the money and not only put it in your bank account, but you can put it on a pay card, if you want, you can put it in your Amazon account, you can put in your PayPal account. We think this has the broadest selection of options and flexibility that we've seen in the marketplace. And we get a percentage. Obviously, we're doing that with a third party and we get a third -- a percentage of that back into the business. And we think for the most part though that the monetization of that is really in the retention of the clients and their employees that we're adding another thing to get to employees that's going to want them to stay with Paychex, stay with the mobile app, stay with the pay flexibility, et cetera, which is going to be good for the clients in a very tight labor market. In the real-time payments which is really more geared toward the clients, as you mentioned, that's geared toward the end of the first quarter of the calendar year as it consistently has. It's right on track. And we feel that we’ll be one of the first to offer real-time payments. There will be a charge for that, as we've mentioned in the past, and we're still working through all of that and looking at the marketplace and so forth. But, as we get closer to rolling that out on schedule, then we can talk about the monetization of it.

Terrific. And then, second one for me. Maybe Marty, can you comment on how the new -- it looks like this -- the AB5 law impacting workers in California is going to go into effect? Can you comment just on how you see that type of law impacting Paychex and how you'd handicap your expectation that that spreads across the country? Thank you.

I think, it's funny. Two years ago the gig economy was very big and expected to kind of take over employment, and then it really has kind of quieted down to a certain degree. I think those laws and similar ones will come up. I think, it's the flexibility that we want to give employees. I think, it'll be picked up by states, like you said, like California and New York, places like that first. I think, we'll be ready to handle that and I think, frankly, having a mobile approximately, having Pay-on-Demand, having flexible retirement plans, things like that, we are very well -- we're pretty well geared for that. And we're continuing to look at our product set to see how we can do things more -- even more around an employee versus an employer, which has obviously been our model for many years. So, I'd say it's still early stages, but it's still pretty early on the gig economy too that seem to be the -- it was going to be the wherewithal, it was going to be everything a few years ago, but it's quieted down. I think we were able to handle some of that now and we're continuing to look at our product set with our head of product to see what else we can do to make that easy and to be able to comply with any new employment laws that come out.

Okay, great. Yes. And I guess just to like completely clarify, I think, this law impacts like workers will be classified as like W-2 full time employees versus ones that are classified as contractors. But, you currently essentially cover or process payroll for both of those. Right? I mean, does this...

Yes.

Yes. So, it was sort of mutual effect. Yes.

Correct, mutual effect right now. Yes. I was thinking more of a wider look at that issue of the whole gig economy. And there is a real opportunity there. But, you're right. Yes, we cover both of those now, whether they are contractors, 1099s or W-2s, either way.

Your next question comes from the line of Bryan Bergin with Cowen.

Hi, guys. Good morning. I wanted to ask on margins. So, to maintain margin guide following a good first half year, is there a ramp in the investments absorbing this somewhat in the second half or is it a function of just getting Oasis back on the path you expected or is it more-broader than that? Can you just go into some of the moving pieces?

I think, Bryan, when you look at first half versus back -- I'm sorry, second half versus first half, the key thing that occurs is that in Q4, you have your highest margin quarter. So, you have expenses that are -- that don't ramp anymore, because now you've anniversaried Oasis. And so, expense growth is more moderate, but then revenue is higher, particularly in the third quarter where margins typically are going, approaching or above 40%. So, I think that's what drives it. That quarter is unique in terms of the amount of revenue that it has. And then, the fourth quarter also has a high revenue and expenses aren't ramping along with the revenue driving margins higher.

Okay. I wanted to follow up then also on the on-demand pay product. Can you just talk about some of the early adoption levels on the employee side? And how should we think about the funding mechanisms of these pay products and any potential impacts to the portfolio?

No, it's all done through third parties. So, there won't be any impacts on our float. We're not taking any of the risk on it or anything else. We're just getting a percentage of the fees that are paid. And it's very early, Bryan, it's very early on the adoption. I mean, we've heard certainly the demand for it, but it just we rolled it out a few weeks ago. So it's really too early to say. But, there seems to be a great demand for it. And again, I think this is the most full featured from -- full flexibility from an opportunity. So, we're anxious to see how it goes. I’d be able to give you a better read after the next quarter.

Okay. That's fair. Efrain, just the last one on Oasis. As you lap this acquisition over I guess part of the third quarter, anything to call out in the expected contribution of Oasis to 3Q, anything seasonal in that mix between the two segments to note here?

Nothing that's not contemplated in the guidance. Yes, nothing significant.

Your next question comes from the line of Samad Samana with Jefferies.

Hi. Good morning. Thanks for taking my questions. So, the Company has mentioned mid market strength multiple times in the call this morning. I was curious if maybe you can give us an idea of what the average number of employees for new deals in the quarter looked like, just to see if it's -- how it's impacting the mix versus the historical average, closer to about 16 employees? And then, I have one follow-up question.

It definitely is much larger than that. So, it would pull that mix up. We don't normally give that number out, Samad, but -- I mean it's much -- I would say, look, it's somewhere between probably 50 to 150 to give you a wide range. But. the average is somewhere under 100 kind of thing on a client ID perspective.

Okay, great.

It's much larger than that, the 15 or 16. That's what pulls that up.

Yes. I guess, I was wondering more about what the overall average then would have been for this quarter, just to kind of get a sense of how much it's pulling up the overall average.

Right now, it's pretty consistent. So, I don't think it's moving it enough. I think we -- I don't know if we really give that out other than annual, if that. But, it had some -- I think, it would have some adjustment, but not much, pretty consistent.

Okay. And then, maybe just as a follow-up as I think about the sales head count investments that you're making, is there -- the products that you guys have rolled out, as I think about the mid-market, are you also hiring reps that are more geared toward selling to that 50 to 150-employee type of customer? And should we see -- as we think about the ramping investments in the back half, should we continue to see that trend in terms of the type of sales person you're hiring as well?

Yes, I think we definitely are. We're promoting some from within and from a career path standpoint and we're always excited about that. And by the way, that market goes anywhere -- I don't want to get you the sense that that's only that with that market is. That market goes anywhere from 20 -- frankly 20 or 30 employees these days to a 1,000. But, I would say, it's primarily in that 20 to 500 space, but it goes pretty broad. Yes, we're hiring people with more experience, some from competitors, some from other industries and then promoting some as well from internally. And it -- we'll continue to invest in that and we're pretty much up to full hires where we are now, but we're always looking for good people. And I think success is helping us from that standpoint, recruit as well. That always helps.

Your next question comes from the line of Jeff Silber with BMO Capital Markets.

Thanks so much. I know the call has been going long. I just had a quick follow-up actually for Efrain. I know you don't give a fiscal ‘21 guidance, but in terms of tax rate, is the tax rate that we're using or you're guiding for this year, is that something we should use for next year as well?

Yes, Jeff. Look, I'm going to say, right now, I don't see significant things that would change it. State taxes and stock comp expense move it, but it's probably not a bad proxy right now.

Your next question comes from the line of David Grossman with Stifel.

So, each of the PEOs reported some issue in the most recent quarter, and while each was different, there was typically some element of health insurance involved. So, can you provide some context to -- in contrast to what you're experiencing and what may or may not be happening industry-wide?

Yes. I guess, I’d say, I don't think -- when we look at it, if you looked at retention in particular, and now we're through a couple of renewals, I would say it was a pretty fair -- I think, there is always a combination of underwriting and tightening up where we want our performance to be from a medical loss ratio. And we're pretty conservative and careful on that in what we're -- and our underwriting standards. And so, I think that had some impact on retention. But, I don't think we had any necessarily abnormal impact on the rates that we got themselves. I think, we got pretty fair renewals overall from the carriers and then we have our own self-insured plan. I think, we're performing pretty well there. And I don't think the carriers gave us anything that was that difficult. I think we just -- we have a little bit tighter underwriting standard that we wanted to put in place, or I guess tighter than what it -- at least what it was. And that had some impact on some clients. On the other hand, David, the nice thing about us is, we can take some of them over then to the insurance -- to the insurance agency and write them through the carriers as opposed to taking -- or some of the risk on ourselves. So, I don't think -- I think, in contrast, I don't think we saw anything -- I don't feel like we saw really anything that abnormal from the carriers and the renewals themselves, which bodes to me and for us I think it bodes well for the future. There was no abnormality there that should continue or anything.

Got it. And then, just going over to the mid-market, I know that has come up several times. But, if you just had to isolate one thing that's changed most that may have impacted the momentum in that business, what do you think that is? And do you think you're gaining share or you just think you're doing a better job of retaining your clients as they migrate into that kind of mid-market category?

Yes. I think the one thing is definitely the technology investment. I mean, look, we had a solid sales force and great sales leadership there and an operational and service performance, but I think the biggest change has been the technology investment over many years now. But it's really come to fruition the last few years in particular, as everything has come together, the mobile app, the HR administration, the data analytics, the artificial intelligence work, everything has come together now. We have a fully integrated solution for a mid-market that is very simple to use. And I think that is really shown in the sales performance, particularly this year, but we could start to see it the last half of last year and then the first half of this year. The sales performance is better and the retention as well. But, I really think it's the technology on top of good sales and operations leadership and performance. And just to think of it, I think, we are taking some share, but you do know -- as you know, that is a growing market for all players. And we just haven't gotten as much of our fair share in the last few years in my opinion, as we should have. And we had to get the technology really to all pulled together. We kept introducing good products, but now we pulled it together. And we also now have moved to say, hey, if you want a product integration, if you want something, if you have the best HR time and attendance that you think is better than ours, we'll build the product integration for you as well or we have the product integration already through APIs. And so, I think all of that has really helped. I think, the technology would be the number one biggest thing.

Right. And just, can you help size it for us, or just give us some context, so that we can think about how impactful it can be to the overall growth rate?

What do you mean in terms of revenue, David?

Yes.

Yes. So, mid-market revenue, if you look at it in terms of total payroll revenue, we give you a payroll, so I'm not giving you a number you can't figure out. It's been running about 25% or so of our overall payroll revenue. So, you can figure out Management Solutions. You know what percentage is Management Solutions. You can get a sense of that bucket within Management Solutions. So, if it accelerates, it's helpful. And I think that where it is helpful and I think there was a discussion earlier about this, if you see -- you see continued trends and over time, you see average client size go up, and that's positive, but also you have more opportunity to attach ancillaries, when you get those clients.

Your next question comes from the line of Mark Marcon with Baird.

Just a few follow-ups, first, just on the PEO side. When you talked about the carriers and what you're doing in terms of your own self insurance -- on the healthcare cost, what rate of increase are you typically seeing as you go into next year, for a like-for-like type plan?

Yes. I think, Mark, I would say, no one is giving you the exact increase. I would say, it's pretty competitive with the market; in some cases, it's a little bit below. So, part of following up on what Marty was saying, because we try to manage the book very conservatively, we ensure that we manage those losses tightly so that we can go out to market with rates that are competitive in the market.

All right. I appreciate that. And then with [Technical Difficulty] not sure if you're hearing that.

Yes.

A little bit there, Mark. Go ahead.

With regards to the percentage of the clients that you're selling -- what percentage of your PEO clients actually are taking your insurance where you are self insured for it?

Yes. So, I'll flip it around. We don't give the exact clients. But, if you look at PEO revenue, PEO revenue includes at-risk revenue of 35% to 40% in that revenue. And you can get to that because we give you a breakout for cost. So,, that gives you a sense. We don't break it out by specific clients.

Got it. And then, with regards to the mid-market, you're obviously doing really well there. In terms of the new sales, is there any change, Marty, in terms of the composition of who you're getting those new clients from or how we should think about that with regards to -- there is still some surprising number of companies out there with really old legacy systems versus some that have transitioned to newer systems? What does the composition look like in terms of the new sales that you're getting?

I think, it's been a combination of taking some from competitors. And I would say -- I think, it's probably this year, I would guess, it's run 50-50 on old legacy systems going to moving into a new platform, a software-as-a-service platform of ours and really moving up the technology, and then, probably the other half is more something they didn't like from a competitive standpoint. So, I think we're taking some from market share and then some from as the market expands itself. And that's probably roughly around half and half I'd say, at least this year to-date, kind of thing. Because you know that market, it does continue to expand and it's growing across, -- the market itself is growing of those who just see the need, particularly in this tight labor market, to have something that's going to help them hire and onboard with all of that, doing it paperlessly, then retaining them with integrated benefits on a mobile app and retirement plans. And so, they're seeing a need that they have to go up that it’s -- it definitely is more critical to them in a tight labor market to move on to a more modern system. And I think ours is appealing to a number of those prospects.

And then, two longer-term questions. One would basically be you started off the whole presentation basically by talking about some of the effectiveness that you're seeing in terms of your sales and marketing efforts coming through and sales -- SG&A actually ended up declining as a percentage of revenue, despite the strong sales growth. So, I'm wondering if you can talk a little bit about the longer term implications for the increased efficacy with regards to your sales efforts and what you're seeing there. That's the first question. And then, the second question is basically, how we should think about the effective yield for next year through a float balance and through duration?

Okay. Let me take the first one and then Efrain...

Yes. That's fine.

I think, Mark, the interesting thing is it's a sales and marketing kind of combined look and you're seeing is -- we've talked about, I think before a shift more toward marketing, many times they -- most people are buying or making their decision, they are 70% or 75% of the way through the decision before they ever talk to anyone. And they're looking for much more online approach there, being marketed to online, the way you market to them, the way you get leads, the way you nurture leads, and then the way you sell. And we're trialing a number of things that will make us even more efficient from that standpoint where you're spending marketing dollars, because a lot of the marketing is really the sales now. We certainly still have a lot of field reps that we count on that are building relationships and getting referrals in the field and talking to clients, but particularly the smallest clients who are starting up businesses are going online and looking to look demo and even buy online and we're preparing for all of that. So, I think we're looking for efficiency, but even more so, what's the best way to market and sell to a prospect or an existing client that's in business and try to be as efficient as we can. But, it's really looking at how is that shifting from web to -- from live person to web, telephonic to e-commerce and in positioning ourselves well for the future on that. And I think, we have a pretty good handle on it and we're trialing a number of things now that seem to be successful.

Great.

Hey, Mark, on the yield question, I'd say that the yield will go out this year, meaning this fiscal year is probably the yield that we have, we will plan for next year, given that apparently the Fed has decided that it wants to hold. We do have a little bit of play there in terms of float balances which have been increasing slowly. And we do have a little bit of play with duration. But for planning assumptions, that's what I would assume.

Just to be clear, Efrain, the yield -- the year on is basically the year is basically what we should plan on for next year, not the average for this year?

Yes. I think, it's going be slightly lower, but I'm just saying the back of the yield we have in the back half of the year is probably -- is the yield we go into next year with…

Got it.

And we have a little bit of play with duration. You saw this year -- this quarter duration was 3.1. We can extend it further, but it will depend a little bit on that or it will depend on the shape of the yield curve, how far we want to go out.

We have time for one final question, and that question comes from the line of Matt O'Neill with Autonomous Research. Matt O’Neill: Hi. Thanks guys for squeezing me. I know it's a long call. Most things have been asked and answered. I was just curious, has there been any noticeable evolution in the kind of lead-gen sources, maybe moving a little bit all way from the CPA channels and more towards the online channels? And sort of as a follow-up, if that's true, is that something that drives kind of more price-sensitive customers or not really any change on that side of it?

No, I think, Matt, it definitely has moved some. I mean, we still rely a lot on being out in the field and building those CPA relationships. They are good partners with us as well as current clients. But definitely, as I said, a lot of -- today, everybody is doing their research online, even if you're given a referral. In the old days, you just call us and today you're going online, you're searching our website. Our investments have been in the website and then being able to demo the product, whether it's -- you can demo it right on your mobile app if you download the mobile app. And so, it has been about how do you get those leads, and we put a lot of investment in that from a marketing standpoint, as well as how do you then nurture those leads, if they're not ready. That's different than it used to be. That's a whole nurturing piece that we have put in place for the last few years now, about how to get information to clients and make sure when they're ready, they come to us. And then, we're moving to more of an -- even in e-commerce, where you can buy online particularly with SurePayroll or other options, you can buy online. That also lowers some costs. It increases marketing costs, but sales costs come down and balance a lot of that out as you're selling either online or through telephonic means. And you're giving them more tools telephonically to help demo a product to a client and then sell it to them. So, we're definitely seeing that change and I think that will ship costs from marketing -- or from sales to marketing. They become all kind of one part of cost that you look at to be the most efficient. But, it really is about how you best sell to clients, and they are definitely searching, demoing and even thinking about or buying online, and we're into that already and we're looking -- we might -- we'll find ways to expand that as well. Matt O’Neill: Thanks for that. And again, happy holidays.

Yes. Thanks, Matt. Operator, so, I think that's the last question. Correct?

Yes. That's correct.

At this point, we will close the call. If you're interested in replaying the webcast of this conference call, it'll be archived for approximately 30 days. Thank you for taking the time to participate in our second quarter press release conference call and for your interest in Paychex. We appreciate it. We wish you all a happy holiday season. Thank you.

This does conclude today's conference call. You may now disconnect your lines.