Martin Mucci - Chief Executive Officer, President, Director and Chairman of Executive Committee Efrain Rivera - Chief Financial Officer, Senior Vice President and Treasurer.

Glenn T. Fodor - Autonomous Research LLP David Togut - Evercore Partners Inc., Research Division Rod Bourgeois - Sanford C.

Bernstein & Co., LLC., Research Division Jason Kupferberg - Jefferies LLC, Research Division Kartik Mehta - Northcoast Research Timothy McHugh - William Blair & Company L.L.C., Research Division Jeffrey Rossetti - Janney Montgomery Scott LLC, Research Division Paul B.

Thomas - Goldman Sachs Group Inc., Research Division Sara Gubins - BofA Merrill Lynch, Research Division Ashwin Shirvaikar - Citigroup Inc, Research Division David M. Grossman - Stifel, Nicolaus & Co., Inc., Research Division Bryan Keane - Deutsche Bank AG, Research Division Georgios Mihalos - Crédit Suisse AG, Research Division Jeffrey M.

Silber - BMO Capital Markets U.S. James R. MacDonald - First Analysis Securities Corporation, Research Division Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division.

Welcome, and thank you for standing by. [Operator Instructions] Today's conference is being recorded. I'd like to turn the meeting over to President Martin Mucci and Chief Executive Officer. Sir, you may begin..

Thank you. Good morning, and thank you for joining us for our discussion of the Paychex first quarter fiscal 2014 earnings release. Joining me today is Efrain Rivera, our Chief Financial Officer.

Yesterday afternoon, after the market closed, we released our financial results for the first quarter ended August 31, 2013, and filed our Form 10-Q, which provides additional discussion and analysis for the results for the quarter. These documents are available by accessing our Investor Relations page at paychex.com.

This teleconference is being broadcast over the Internet and will be archived and available on our website for approximately one month. On today's call, I will review the highlights for the first quarter in our operations, sales and product development areas. Efrain will review our first quarter financial results and discuss our full year guidance.

And then we'll open it up for your questions. We are off to a solid start in fiscal 2014. We made good progress toward our growth goals, with positive sales momentum, new product enhancements and geographic expansion. Additionally, our client satisfaction and client retention remain at record-high levels.

Efrain will go into more detail on the financial results and comparisons. However, I'd like to provide you with some of the highlights for the quarter. Payroll revenue met our expectations, with growth exceeding 2% due to the increases in both checks per payroll and revenue per check.

HRS revenue grew double digits for the first quarter as we continue to experience great success in selling 401(k), and HR outsourcing and other value-added solutions to our clients. Total service revenue grew 5%. Checks per payroll has improved for 14 consecutive quarters.

First quarter growth was 1.6%, consistent with the growth rate experienced for the full year fiscal 2013. Our execution in service operations has continued to be excellent, demonstrated by our exceptionally strong client satisfaction results that are consistent with the record levels we achieved in fiscal '13.

We believe that the industry-leading client service that we provide, combined with our innovative technology, sets us apart from the competition. The dedication of our employees has resulted in client retention that also remains at record levels.

From a sales perspective, we saw very positive momentum during the first quarter, particularly in our core payroll, SurePayroll and HR service areas. We continue to grow revenue per unit as well.

We recently announced that we are expanding our payroll and HRS offerings into South America through a joint venture arrangement in Brazil, a significant market with a growing economy. There have also been recent regulatory changes in Brazil, which we -- which present an opportunity for outsourcing payroll and HR services.

In addition, yesterday we announced that we have acquired a payroll provider in Germany, allowing us to further expand our payroll operations in that market. This acquisition will increase our revenue, client base and product offerings in Germany and help us capture a greater share of the payroll market in that country. Our operations outside the U.S.

do remain a small piece of our overall business, but we're excited to expand our international presence. From a technology perspective, continued investment in our SaaS solutions and mobility offerings position us for long-term growth.

We have market-leading SaaS solutions, leveraging the latest technologies, and continue to invest significantly in online capabilities, as well as our mobile applications. We recently updated our smartphone apps, giving clients the ability to start, edit and submit payroll on the go.

This, combined with the cleanest and fastest access to all of your information, whether you are an employee or employer, with 1 to 2 clicks, provides our clients with the best mobility app in our marketplace. We are excited that we have reached the milestone of over 100,000 downloads of our mobile app.

Our SurePayroll product, which also is a SaaS solution, continues to do well with strong double-digit sales and revenue growth. In fiscal 2014, health care reform is one of our most important initiatives, as this legislation is expected to have far-reaching effects on businesses and employees.

During the first quarter, we launched new comprehensive solutions to help with certain mandates under health care reform.

These new solutions include our Paychex Employer Shared Responsibility Service, designed to make it easier for business owners to determine if the employer shared responsibility provision applies to them and the actions they may need to take.

We also offer our new ESR Complete Analysis and Monitoring Services for those clients who want a more robust solution.

The Paychex Benefit Account product allows employers to offer FSAs, HSAs and HRAs on a single platform with one debit card for their flexibility, and we will give employers access to the Paychex Private Exchange in conjunction with this product.

We have also launched a new health care reform section on our website, designed to provide information and ways to navigate to employer solutions with regard to health care reform. In summary, we are off to a solid start for sales, service, product strength and financial performance for our fiscal 2014.

And I appreciate the great work of our Paychex employee team. I will now turn the call over to Efrain Rivera, our Chief Financial Officer, to review our financial results in more detail.

Efrain?.

Thanks, Marty. Let me start with our standard legal disclosure. Refer to our press release that includes a discussion of forward-looking statements and related risk factors. As Marty indicated, first quarter results for fiscal '14 met our expectations and represented a solid start to the year. Here are some of the key highlights for the quarter.

I will provide greater detail in certain areas and wrap with a review of our '14 outlook. Total service revenue grew 5% to $598 million. Interest on funds held for clients declined 1% for the first quarter to $10 million.

The result was a byproduct of the low, albeit improving, interest rate environment, offset by a 7% increase in average investment balances. Expenses increased 4% for the quarter, primarily in compensation-related costs.

We continue to invest at a higher rate in product development and supporting technology and experience higher sales-related costs attributable to solid sales execution in the first quarter and sales force initiatives that began in fiscal 2013. Operating margin was 41% for the first quarter.

Operating income net of certain items increased 8% to $245 million for the quarter. Typically, our first quarter reflects the highest operating income net of certain items as a percentage of total revenue in a given fiscal year.

We expect operating margin for the full year to be approximately 38% as we continue planned investments during the balance of the fiscal year. Net income increased 6% to $163 million for the first quarter. And diluted earnings per share increased 5% to $0.44 per share for the quarter. Turning to payroll service revenue.

It increased 2% in the first quarter to $395 million. We benefited from increases in checks per payroll and revenue per check, as Marty already mentioned. Our checks per payroll metric continued to grow, increasing 1.6% compared to the same period last year.

This was an improvement over growth of 0.9% or approximately 1% experienced for the fourth quarter of fiscal 2013, a quarter that we think was impacted by timing. Revenue per check grew modestly as a result of price increases partially offset by discounting. And finally, timing of processing in the first quarter slightly impacted our growth rate.

On the HRS revenue side, it increased 11% to $203 million for the first quarter. This increases -- increase reflects client growth in our retirement services, HR solutions and eServices products and price increases. Retirement services revenue also benefited from an increase in average asset value of participant funds.

Insurance services revenue growth reflected an increase in the number of health and benefits applicants and higher premiums in workers' compensation insurance services. With respect to investments and income, our goal is to produce -- to protect principal and optimize liquidity. We focus on ensuring we can meet all of our cash commitments to clients.

On the short-term side, the primary investment vehicle is high-quality VRDNs and bank demand deposit accounts. In our longer -- portfolio, we invest primarily in high-credit-quality municipal bonds. Interest rates still remain low even though they're improving a bit.

Combined portfolios have earned an average of -- rate of return of 1% for the first quarter compared to 1.2% for the same period last year.

Average balances for interest on funds held for clients increased during the first quarter, primarily driven by the expiration of payroll tax cuts on December 31, 2012, which resulted in higher social security withholdings, favorable trends in checks per payroll and also client growth.

Investment income decreased due to lower average interest rates earned, partially offset by an increase in average investment balance resulting from the investment of cash generated from operations. I'll now review the highlights of our financial position.

It remains strong, with cash and total corporate investments of $925 million as of August 31, 2013, and no debt. This quarter, we entered into a new $500 million credit facility. It's intended to finance the working capital needs of the company. Funds held for clients as of August 31, 2013, were $3.9 billion compared to $4.1 billion as of May 31, 2013.

As you know, funds held for clients vary widely on a day-to-day basis and averaged $3.5 billion for the quarter, a year-over-year increase of 7%.

Total available-for-sale investments, including corporate investments and funds held for clients, reflected net unrealized losses of $8 million as of August 31, 2013, compared with net unrealized gains of $35 million as of the end of last fiscal year. This change to an unrealized loss position is due to recent increases in market rates of interest.

Total stockholders' equity was $1.7 billion as of August 31, reflecting $128 million in dividends paid during the first quarter and $84 million of shares repurchased. Our return on equity for the past 12 months was 34%. Cash flows from operations were $267 million for the first quarter, a 23% increase compared to the prior year.

The increase was primarily driven by higher net income and some timing, related to working capital items. During fiscal 2013, the board authorized the repurchase of up to $350 million of our common stock, with the authorization expiring at the end of fiscal 2014.

During the first quarter of fiscal 2014, we repurchased 2.1 million shares for approximately $84 million. We have reaffirmed our guidance for fiscal 2014 from what was presented to you in June. I'd like to remind you that our outlook is based on our current view of economic and interest rate conditions continuing with no significant changes.

Payroll service revenue growth, 3% to 4%, based on anticipated client base growth and modest increases in revenue per check. HRS revenue growth expected to be in line with recent experience, in the range of 9% to 10%. Total service revenue anticipated to be in the range of 5% to 6%. Net income growth is anticipated to be in the range of 8% to 9%.

Growth rate -- this growth rate is impacted in the fourth quarter, as in the fourth quarter of last year we recognized an additional tax provision for the settlement of a state tax issue, which impacted our diluted earnings per share by $0.04. Operating margin for the year is expected to continue to be approximately 38%.

This is lower than what we experienced in the first quarter. But as I previously mentioned, our first quarter tends to be our highest-margin quarter of the year.

We don't expect the expense leveraging result realized in the first quarter to continue quite at the extent [ph] throughout fiscal 2014 as we continue planned investments in technology innovation. Guidance for the other ranges, for interest on funds held and investment income, remain unchanged. I'll now turn it back to Marty..

We will now open the meeting for any questions or comments that you may have.

Operator?.

[Operator Instructions] Our first question comes from Glenn Fodor, Autonomous Research..

Just on the stock buyback in the quarter, you bought back a little over $80 million. Last quarter, you indicated that you would buy back to offset dilution. Your share count typically doesn't increase that much, and this slug of buyback, which you just did, basically offsets last year's 2 million share increase year-over-year.

So as we think about this remaining $200 million or more, that's a lot more than you need to offset dilution. So I just want to see what your thoughts are around that.

And also, the question is why buy back stock at a relatively high multiple when, clearly, investors prefer dividends -- prefer a higher dividend yield?.

Yes. Glenn, thanks. Actually, our share count has been creeping up, so we're just trying to keep it more in line with what we've seen recently. I'd say we were in the market buying, last quarter. We do it opportunistically based on where we see the price settling.

We won't -- we aren't necessarily committed to using the entire $350 million to purchase shares this quarter, but we'll look opportunistically to buy. I think with respect to the dividend, we had a nice increase there, 6% last -- in July we announced. We feel pretty comfortable with where we are with respect to dividend increase.

So we'll look at opportunities to buy back based on what happens with respect to share price as we go through the year..

Okay. And then just a final question on Brazil, just on the entry strategy. Just curious why enter the market by partnering with a portfolio company rather than an existing player with local expertise? The release referenced that this is a large CPA-based market.

So was there just not an opportunity to partner with a broad CPA organization for referrals?.

No, I think the best opportunity was to partner with Semco. They were somebody who has helped other companies get started in Brazil. They have great connections there, great experience, very well respected. And we thought that the best way for us to get there, and get in there the quickest and most successfully, was with someone like Semco.

So as we looked at various partnerships, they were certainly the best, and I think we'll move the quickest with them as well..

Does that preclude you just going off and signing your own referral agreements with perhaps a CPA organization? Or is everything you do going to be through them?.

No, it's a partnership. They'll help us get started in there because of the connections and experience, but we're already working with CPAs in that area directly. We'll be running it day-to-day, and we'll be working with CPA and the CPA community to get the referrals and everything.

That's already started actually, as we gear up for a first quarter calendar start..

The next question is from David Togut of Evercore Partners..

Marty, you highlighted improving sales execution in the quarter in core payroll and HR services.

Can you quantify year-over-year bookings growth in the August quarter so we can gauge the financial impact of what you signed in the quarter?.

No, we -- Dave, we don't give that much -- we've never given that much specific on the sales. I will tell you though that we've now seen at least 3 quarters now, and of course, we get an extra month in here that -- since we released the quarter. We feel very good about the sales execution, particularly in those markets.

I mean, they're -- we're really seeing some nice sales growth, and we don't typically quantify it. We talk a little bit about the selling season after the January quarter. But we do feel very good, and it's very consistent. So even though small business starts haven't quite picked up as much, our execution on the sales side is going very well..

To what do you attribute the improved bookings? I mean, is it just execution? Is it new products? I mean, what are the drivers of higher bookings?.

I think it's a combination, and I think the execution is very good. We've got some new leadership in there over the last couple of years. I think we've gotten some very good training programs underway. And I think the product execution has been good. The mobility platform is completely solid now and has been out there.

We've been introducing a number of other products and so forth. So I think it's product innovation, I think it's execution by the sales team. And I think, businesses -- I think that CP -- like the CPA relationships, the referrals are picking up again.

And so where new business starts haven't quite -- they're still a little sluggish, the CPA referrals have really started to pick up again very strongly. And we're doing well against regional competitors in particular..

I see. And just on that vein, Marty, you've indicated you have a next-generation suite of products coming out in the November, December time frame. There's a little discussion of that in your 10-Q, particularly in integrated workforce management solution.

Can you give us some more details about what you have coming up in November, December in terms of new products and what's the actual advance over your existing product functionality today?.

Yes, sure. I think the -- what we've seen that we released in kind of the June, July time frame and then in the -- coming up in the November, December time frame, it's much more about, I would say, integration. Particularly for the mid-market space, the over 50, you're going to see much better integration of the product set.

So we have a complete set of products, time and attendance online, HR administration, benefit enrollment, expense management and so forth. But I think here you're -- what you're going to see is much more integration of that.

We've had single sign-on, but you're going to have a cleaner look and feel and integration between the products, including one of the key things for employers, which is the ability to update all of their employee information and do edits on that information. That will come even easier than it is today.

So I think that what we feel is we're making this -- we have a full product suite, but the integration, the look and the feel and the use of the product by the client will be even better than it ever has been..

Got it. Just a quick final question for me. You probably saw ADP had a high-profile Innovation Day yesterday, some new products focused on the mid-market. I don't know if you had any reaction to that in terms of what they're introducing relative to your existing product set.

How should we think about competitive dynamic, particularly in the mid-market?.

Well, I think, obviously, they have been a good competitor. They continue to be a good competitor. I think we're very much head to head in this mid-market and -- with some others, and I think we have a very competitive suite of products. We'll get even better in the fall time frame, and we kind of just keep introducing things.

I've never felt better, frankly, about our innovation in our product suite than I have over the last few years, as we've introduced all of our mobility, a full suite that's out there now, including doing all the payroll online.

And certainly, all of our online products, our SaaS-based product set, I feel very good and very competitive with everything that they're offering..

The next question is from Rod Bourgeois with Bernstein..

So is your net price increase year-to-year tracking at less than 1% growth?.

No, it's not..

So is it right at 1%?.

It's above 1%, for sure. It's in the range we've said, 2% to 4%..

Okay. All right.

And so can you give us an update on the growth in the client base and whether you can get that on track to grow positively in fiscal '14?.

Yes. It's -- I'd say what we always say at this time, Rod. So if I stop here and tell you where our client base is, it's grown from end of year, and we think we're on track to get to where we need to be.

I caveat that always, that the selling season, because it represents so much -- a large portion of our sales, is going to dictate whether we get net client growth. But we're off to a good start, and we feel pretty good.

To the extent that you're wondering why growth was 2.4% versus a higher number, that really has to do with the calendar and the amount of processing days in Q1 of this year..

Okay. All right.

But do you think with the bookings performance that you've had in recent months, you actually are in a position to post some organic client base growth in fiscal '14?.

Yes, we're expecting. That's what we're working against, yes..

Okay.

And can you quantify that target? I mean, is it positive 1% or positive 3%? I mean what's the goal there?.

The range is 1% to 3%. We hope to be higher rather than lower, but we think it will be positive..

Okay, great. And then finally, just on the margin front, you had some decent year-to-year margin expansion, x float. And I guess I'm wondering, as the year wears on, will your spending pace go up as the fiscal year wears on.

Or can you sustain this level of year-to-year margin expansion?.

Yes. So I think, certainly, over the last 3 years, what you've seen is that we start a little bit slower in terms of ramping spending in the year, and then by the time we get to fourth quarter, then our spending goes up. So I think we'll follow the same pace this year. We're not intending to leverage the same way we did this quarter in future quarters.

So our margin guidance, we feel pretty comfortable about where we're at..

Next question from Jason Kupferberg, Jefferies..

So not to split hairs on the core payroll growth, but like you mentioned 2.4%, a little below the full year guidance range of 3% to 4% rather than kind of being around the low end of 3%. And I think that's what you guys were looking for last quarter.

So was there some delta versus your expectations when all things -- when things where all said and done? And can you talk about the acceleration, the drivers of the acceleration that you'll need to get to the full year range? Because the year-over-year comparisons do get a little bit tougher each successive quarter, the rest of the year..

Yes. So from an expectation standpoint, it was about where we expected. Look, 0.1% would have rounded us up to 3%. It really -- now we're really splitting hairs. We knew that we were going to end up with 1 less processing day in the quarter, which is what's driving that low number.

It will normalize as we go through the year, and that's really kind of what's driving the lower payroll revenue number. Obviously, as we sit here, we have 4 months of results that we know. We feel pretty comfortable at least through next quarter, if not a bit beyond that, that we're going to be in the range on payroll service revenue..

Yes. We feel good about the price increase and how that's holding. We feel good about the sales performance and -- now for 3 or 4 quarters actually. And we're feeling consistent that we'll certainly be in our guidance range, and we feel very good about that at this stage..

Okay.

I mean, is the -- would you encourage folks to think about the lower end of the guidance being more likely, just given where you're starting at here in Q1? Or has your view on where you might fall in the range not changed at all because you don't have any year-over-year processing day headwinds the rest of the fiscal year?.

Yes. I think we're in the middle of that range. I don't think we're ready to say it's at the low end of the range. Actually, if anything, Jason, I think we are -- we've got 4 months of sales results and feel pretty good about where we're at..

Okay.

And can you give us some insight into how much leeway your salespeople have out in the field when it comes to making pricing and discounting decisions, either signing up new clients or doing renewals of existing customers and whether or not any of those policies have changed materially over the last year or so?.

No. They really haven't changed. We've always given them some flexibility. We don't say how much, for competitive reasons, but they've always had the same level of flexibility.

And I think the one thing that we've seen over the last -- this is the second year now, second fiscal year, is definitely an increase in the revenue per client that they're selling, though. And so we feel very good about their managing. They're incented to sell for the most revenue they can.

That's how they're paid, is a percentage of the revenue that they sell. So they certainly have an incentive to sell -- to get the most revenue for the sale. But at the same time, they have flexibility to discount within reason, and that has not changed. But in fact, I think the results have gotten even better.

I think it's just better execution from the sales force..

And then just a last housekeeping item.

Is there any material amount of revenue or costs built into the fiscal '14 guidance for the Brazil joint venture or the Germany acquisition?.

No, not really. Brazil will be really, really negligible this year. We're really just getting ramped up. We'll have a little bit of additional revenue from Germany, but it will be pretty immaterial to our results..

Next question from Kartik Mehta, Northcoast Research..

Marty, you talked a little bit about the health care stuff in your opening remarks. And I'm just wondering, as these new ACA rules are coming down, how -- what you would expect for Paychex in terms of maybe opportunities or challenges over the next 12 months as this law goes into effect..

Yes. I think the opportunity is that we -- the good thing is we have the products out. We got them out early.

We have very -- a complete -- everything, from the shared responsibility kind of report to a better -- to a more full, complete monitoring service right to the full exchange to be able to help clients, with a combined card that you can put everything on the one card and -- FSA, HSA and HRAs and then even get to an exchange.

So I think the opportunity is good, and I think that we were well ahead on this one to get the products out in front of clients. I think the only negative is that with all the confusion and then the delay of the employer side of it, I think people are still really kind of up in the air as to what to do, particularly small business.

And I think that will start to clear out a little bit here, the next few months it looks like, as the exchanges have now opened up, at least signing up for the exchanges today. And I think that, that will clear up. So I think it's a nice opportunity.

We have not baked a lot in, into our forecast, for that because we just think it's a little bit too early to know what it's worth.

But I feel really good from a product standpoint, also from a training standpoint of our sales teams and the fact that it gives a lot of good opportunity for us to just go in and talk to the clients and prospects about it. So good opportunity, still a little bit early to tell how much it's really going to be worth to us..

And then, Marty, as far as discounting is concerned, if you look to discounting this selling season versus last selling season, any change or is it about the same in terms of what you're having to do?.

I would say roughly it's about the same. But if anything, we've seen the revenue on the sales go up per client. So I think, if anything, maybe it's dropped a little bit. We were getting stronger on the price increase that we did.

So I would say that the discounting is the same or even slightly less, given the revenue per client that we're seeing coming in on the sales..

And just one last question, Efrain, for you. On the float, you had -- we had 7% increase in the balance this quarter.

Would you anticipate for the full year a similar type of increase? Or do you think it moderates a little bit for the full year?.

No, it moderates in the back half, Kartik, because we're still anniversary-ing the repeal of the -- or the expiration of the payroll tax credit. So in the back half of the year, it will normalize and then we'll be back to more kind of an inflation plus 1 kind of range, maybe 3% or so.

In other words, so we won't have the benefit of that expiring payroll tax that occurred in January..

Next question from Tim McHugh, William Blair..

Efrain, first, I want to ask, just to clarify on the processing day topic. If my recollection is correct, we had fewer processing days in the year-ago quarter as well. So is it one less than even you had in the year-ago quarter? Or is it one less....

Compared to last year, we had one less day in this quarter..

Okay. And it's as simple as we think about the impact of 90 calendar days and 1-day impact? Or how should we. . ..

Yes. I think that's roughly it, Tim, yes. So just to clarify a little bit. So you have the days, but there was one less business day in this quarter, and it will normalize through the year..

Okay.

And is there a particular -- do you know when we would catch that back up?.

I think, looking at the quarter, it looks like in Q3..

Okay. All right. And then, I guess, just I had a high level, I guess. Can you talk about international expansion? So you've done Brazil and now you've announced Germany, a small acquisition there.

Are you more aggressively going to be pursuing international expansion? And I guess, just to be direct, address the skeptic, the skeptical argument would be that, that's a sign you're less confident about the U.S. growth..

Yes. I'd like to address that one because it's not the case at all. The growth internationally is something that we started to take a look at, actually, a couple of years ago. We're trying to push growth always. And so we decided -- Germany, we've been doing well in Germany, but we had not put a lot of attention on it, in my opinion.

And so we felt that there was opportunity to really grow there, so we went off looking for acquisitions and other ways to grow.

We added sales reps there to our existing operation and then look -- and continue to look for acquisition opportunities there because we're there, we already have a good presence, good reputation and we're trying to grow that.

Then we said, "Look, what other countries do we think would be the best to go into to add to our growth?" And Brazil, with it's going 5 million to 6 million businesses, small businesses, and some changing regulatory environment, which are going to require more electronic filing and more difficulty for small business to do things themselves, decided that, that was the place to go and went off with Semco to start that operation in the next few months here.

And then, we're looking at other countries as well. But it's really not at all about thinking that the U.S. market is behind. We feel -- actually, I probably never felt better, certainly in the last 3 years, about our sales execution, our product set and the level of client service and retention that we have. So we feel good about the U.S. market.

We've added sales reps over the last couple of years, and we target them at different growth opportunities, including, like we said, the franchise environment, where we picked up Subway's recommendations [ph] and Tim Hortons. We've gone after bank channel much stronger.

So it's really just a chance to go at growth in every different way that we possibly can..

And on the international front, you talked about you're looking at other countries.

What's your strategy or approach going to be? Are you going to pick 2, 3, 4 and really focus on trying to make those work? Or are you looking to have a number of these markets start to ramp up all at once, so I guess, you can maybe have a bigger geographic presence in Europe or something like that?.

Yes. Our approach, Tim, would be much more about going for fewer and getting a stronger hold in those countries.

So expand Germany because we already had a hold there and really, take a bigger market share there; go after Brazil because of the big opportunity we think there, and growing, and the regulatory changes; and probably another country that we're looking at.

And it could be just payroll products or it could be actually an expansion of the product set that gets us into that country. But it would be fewer countries with more presence would be the way we'd go. We think it's more efficient and certainly, has a better level of success and margin for us..

Great. And then last, just on the Germany acquisition, can you give us any sense of the size of that in terms of, like.....

It's pretty modest, Tim. So we won't disclose the actual amount of sale. But it certainly increases our footprint..

Yes. I think if you look at it from a size of clients and revenue, it's significant from where we are today, but it's still a small piece of our overall revenues and so forth. But it gives us a nice pickup in the Berlin area, where we were more in Hamburg and some of the other cities.

We now have every major city in Germany, and I think we'll really get the name known well..

Next question from Joseph Foresi, Janney..

This is Jeff Rossetti in for Joe. Marty, just a follow-up on the health care rollout that you mentioned.

Are you still targeting a material impact in the second half of calendar 2014?.

I don't know if I'd say it's material. We didn't really bake much in for the guidance and so forth because we just didn't know how it was all going to play out.

So I would say we're expecting it to start to pick up steam this quarter a little bit, but I don't think it's going to have a significant revenue impact, knowing the size of our clients and what we charge and so forth, until next year.

I think we'll start to see some pickup, and we'll be able to give you, I think, a lot better feel for it at the end of the second quarter and into the third..

Okay. And just on your sales force growth and win rate, just wanted to see if there was any kind of deviation from what you last talked about, maybe you're tracking about 2% sales force growth. I just want to see if maybe you could talk about if there was any change on the win rate side across the 4 or 5 client bases you have..

Yes. I'd say it's still pretty consistent. The 2% to 3% kind of growth in sales force is certainly consistent. And the win rate, the competitive environment, I think, is very similar. I think it's competitive, but we haven't really seen the win-loss rate change much -- too much at all.

But I think what we're seeing is a lot more activity in presentations starting to pick up, and therefore, when you're winning even the same amount at more presentations, you're obviously starting to pick up some wins there..

Next question from Paul Thomas, Goldman Sachs..

So you were talking about the improved momentum that you're seeing.

Could you talk a little more about interest in the online channels? Have you seen any increase in search activity, or meaningful increase, in the last quarters or seeing a little more positive sentiment from small businesses?.

Yes. I think we are seeing -- while I don't think new business starts have -- they are still a little sluggish.

I do think in certain areas of the country, where -- I've talked about this before, where housing is starting to pick up, home sales and building of new houses are starting to pick up, that's giving us a little bit uptick in new business starts there.

Online, we're certainly -- search is becoming a bigger part of our referrals, and I think we've done a really good job on our website of attracting the search and then capitalizing on it from a sales perspective. And then, if your question was also online interest, just online for our online payroll's certainly picked up interest as well.

Now with our model, clients have a dedicated payroll specialist but they can go online to do -- to make changes, to do their payroll if they want, the next week go back to the specialist. They always have that specialist dedicated to them, though, to help them through it, answer questions, et cetera.

So we've seen a pickup in the online interest of all of our clients as well, as you'd probably expect..

Okay. Then on HRS, that was strong in the back half of last year, and that was a trend that you had talked about not continuing this year.

Is that your -- still your expectation? Or are you seeing a little more sustained momentum there?.

I think we're -- obviously, we feel very good about the 11% pickup in the first quarter over last year with HRS, our HR outsourcing and 401(k), et cetera. We're feeling good about it. One quarter doesn't make a year, so we're not ready to change guidance or anything because there's some tougher comparison there as well.

But we're certainly feeling very good. 401(k) continues to be very strong. We still lead in that marketplace. We have more 401(k)s than anyone else, new or existing, from our recordkeeping. Our work with financial advisers has been very successful. That was a group we really started last year.

And going after larger plans also has been very successful, so 401(k) doing well. And with all of the health care reform, the PEO side of the business, as well as ASO, but PEO picking up some steam, too. So I think we'll know more in the next quarter as we head into selling season, but it's -- all of it's going pretty well..

Okay. Maybe just one more for me. Thinking about growth in adjacent markets for Paychex, has there been any recent discussion around entering another space, like merchant acquiring, given the relationships you already have with small businesses? I guess at least one merchant acquirer found payroll interesting enough to buy a payroll company.

Have you guys given any more thought to that space recently?.

Yes. We've tested that out. Actually, I think I've mentioned it before, that we've been testing that. We're trying it at different ways to sell merchant processing with a partner and -- who do the actual processing, but we've been selling it because of the access. It's starting to pick up.

It's still small, and I would say we're having some success with it. But we're trialing it, and we'll have, I think, more evidence here in the next quarter or 2, trying it different ways.

Other markets, other adjacent things, we're certainly looking at, and I think you'll hear from us soon on some other things that we're looking at getting into, where we think we have such a great distribution model with our sales force, as well as our web work -- website work, that I think we've got some other adjacent products that we'll be able to introduce as well..

Next question from Sara Gubins, Bank of America Merrill Lynch..

You mentioned, in the selling season, seeing some pickup in revenue per client.

Is that being driven by taking on -- them taking on incremental services? Or is it really pure payroll service? And sort of secondarily, do you think it's being driven by any change in the size of new clients?.

I think size of client is not a significant change, Sara. But I would say that we've given the sales force now a range of products that they can sell as they go in, including, for example, time clocks, and that has been successful. So they have a range of products that they can talk to clients about.

And I think they've got the right incentives in place to drive higher revenue -- get the right revenue per unit..

Is there any way to distinguish between how much of that is helping as opposed to the price increases sticking?.

Price increases, I think we've given you the range so you'll be able to kind of see that flow through the P&L as we go through the year. It's partly some price increase, but really, it's more being able to capture higher revenue with clients because they've got a more complete bag of products they can sell..

Okay, great. In your prepared remarks, you mentioned expecting margins for the rest of the year not to see the same kind of leverage that you got in the first quarter, partial seasonality and then also partial investments that you're planning.

Could you give us a little bit more detail about the planned investments? And I'm wondering if that will continue past this fiscal year.

Or if it's still sort of the catch-up in technology that might then wind down?.

Well, I think I'll let Marty talk about the details of the technology a little bit more. But I think that through the balance of the year, this is probably one of our biggest years in terms of technology releases that we've had. So that investment is going to continue.

With respect to looking out beyond this year, it's tough, Sara, to call that precisely because, obviously, the market keeps changing. We understand that we need to continue to make investments, and we evaluate that year-to-year in terms of what we need to do to our product suite to remain at the leading edge.

And I would just say this, I don't -- I wouldn't characterize what we're doing now as playing catch-up. In important respects, we're ahead of competition, and we want to remain that way..

Yes. I think that the investment in the technology will continue. I think we've mentioned before that it kind of peaked out, so I don't think we'll see big increases in that continue. And our focus is always on balancing spending -- increased spending for growth opportunities.

We're trying to drive the top line growth, and we'll balance that with always trying to leverage. So I don't think you're going to see margins drop off. I don't think they're going to go up dramatically. But we're always looking to leverage the revenue dollar as we increase and maintain industry-leading margins out there for operating income.

That's certainly our goal..

Okay. And then just last quick question. On the last earnings call, you mentioned expecting first half and second half earnings to be fairly comparable on an absolute basis.

Is that still the case?.

I'd have to look kind of where we're at here, but we haven't changed the guidance. So I think you just have to adjust based on where we ended the quarter..

Next question from Ashwin Shirvaikar, Citi..

I guess my first question is, if I look at the payroll services growth on a sequential basis, obviously, the August quarter is the best growth you typically have due to pricing. But other than 2009, this is sort of the worst sequential growth in 10 years.

And actually, if I adjust for a day of processing, that overall conclusion is still not so much different.

So I'm kind of thinking, is that because of maybe a declining level of pricing power? Or is this a sign that maybe the end market is more penetrated or different in some way? If you can help me, particularly with the penetration and market size question..

Yes. I'd have to look at what you're looking at, Ashwin. So if I look at first quarter of last year, the sequential comparison between Q4 of the prior year and the first quarter last year would have been the worst sequential growth we've seen. We were only at less than 1%. So I'm not entirely certain your -- what numbers you're looking at.

Because we were at 1% a quarter ago -- a year ago quarter, and we're about 2.5% this year. So I'm not sure about the sequential growth. [indiscernible].

No, I'm looking at 1Q over 4Q revenues..

Without getting into kind of a long discussion on what the details of Q1 were, I think what you have to step back and look, because recurring revenue businesses like ours are sensitive to the amount of days and the kind of days in the processing period. And what we've been looking at is, last year, we had about 2% payroll growth.

There were a number of unusual factors in that -- in-year, not the least of which was Hurricane Sandy, and we're guiding to 3% to 4%. So I don't think the trajectory is downwards. Actually, this year the trajectory is upward, and we still feel comfortable that, that's where we're going..

Right. No, we could take that offline. I was looking at 1Q over 4Q, if you just see what revenues did because that partly takes into account the impact of days and so on. But we could take that offline.

I guess a follow-on question I'm trying to understand, is with regards to as you do more bundling of services, which really is the way to go, and you guys have shown traction on that, so what -- I mean, what actually happens, the economics of the client, where you get more bundling versus less bundling? How should we think of that? And what's the penetration of that bundled set offerings today, if there's a number you can give us?.

Yes. I think we've always had a lot of different bundles that we offer. And I guess what I would say is bundling has been very good for us, in the fact that we've continued to drive up the revenue per client, particularly in the last 2 years.

Now we had some pricing changes we made a few years ago in a bundle that lowered that price, and -- but we made adjustments to that 2 years ago, last year. And so the bundling has been good, and the bundles have driven the overall revenue up per client. So to us, the economics have been good.

You're selling a full suite of products, it's easier for the client, it's easier for the sale, and it's driven up the revenue per client on new sales. So we feel pretty good about it..

And we disclose a lot of our -- a lot of information in that respect. And you can see that our revenue per client has been going up, and it's driven by that approach, frankly, across all of the product sets that we sell..

Right.

I was trying to get more to the -- sort of the profit per client with regards to -- does that help delivery, if you have bundled offerings?.

The short answer is yes, it does help profit per client..

Okay, okay. And the last question I have is, as some of these products are showing traction, 401(k) obviously, health care you're expecting to do quite well this year, what should we look forward to.

I mean, are these more profitable than sort of any of the other core offerings that you have, where we can maybe see a step-up in core profitability, if you will?.

Yes. So I don't think, necessarily, it's going to drive margins up, not because the profitability or the margins on these products are different than core. They're actually comparable.

I make this point when I'm asked frequently that the profitability of HRS services, with the exception of insurance, is basically very close to what our payroll services profitability is. So it won't necessarily drive margins higher because the margin on these products is higher.

But what you will see, as you get higher revenue growth, you have more opportunity to leverage. And so from that standpoint, higher revenue growth or more rapid revenue growth is going to drive better opportunities for leverage..

Got it. Efrain, last question. And this one is on the -- on your response to the question that was asked earlier on the buyback. Should we sort of take away from your response that essentially you're trying to manage the shares outstanding.

Basically, it's not an indication of attractiveness or otherwise of the stock? This is -- basically, you're trying to manage to a share count number, right?.

We are. Obviously, I have a responsibility, Marty does, too, to make those investments wisely. So we take that responsibility seriously. But yes, I think that's the direction..

Yes, definitely. I think, at least dilution, we're trying to cover dilution, which is not something we've been that active in before. And it's because, really, the dilution wasn't that much. But share count, as Efrain mentioned earlier, has really -- has picked up some in the last year or so as the stock price went up.

So we're definitely looking with the board -- with what the board approved to manage at least dilution..

Our next question is from David Grossman, Stifel..

Just 2 really quick follow-up questions to topics I think that have already been addressed. The first one is, obviously, you've talked about some new products that will be more integrated, more seamless to the end user and that gets to the whole notion of bundling.

Can you give us any examples in terms of attach rates or something that would give us a better understanding of what the economics are when you're able to sell an integrated solution versus some of the single-point product sales that have typically happened over the last several years?.

Yes. I think when you look at -- this is really in the 50-plus space, where you see Time and Attendance online, our product that we've had for a number of years, HR administration, BeneTrac, our online benefit enrollment offering. And then now we've picked up ExpenseWire and mystaffingpro over -- in the recent past.

As you attach each one of those, obviously, the more revenue per client. Not only do you get more revenue per client and the margins are just as good, but the retention of the clients are better as well because it's stickier. You've got more arms and legs into it.

The biggest thing with a client is, "Okay, when I have these various products, how well do they integrate?" And so I think that from an economics -- from that standpoint, I guess a margin standpoint, it's better when we combine more things, and we've integrated the technologies more and more together.

So we have a single sign-on, where you sign on to one place and get on. But now we want to make them -- you'll see them looking more consistently. You'll see them being able to use more consistently. We'll have a single place for updating people information, client, employee information.

And so the attachment rate is obviously the strongest on the HR administration. In fact, I think we sell more HR administration. We lead with it, I guess I should say, as opposed to payroll, so the retention or the attachment there is very strong. The TLO, time and attendance online would be next. That attachment is probably just below the HR.

And in fact, most normally, we sell that bundle of time and attendance, HR administration and payroll combined together in the 50-plus market with pretty high attachment rates over -- I'd say, over 50%. It won't get to -- certainly, over 50% because that's what they're looking for, that full suite of services.

Under 50, we pretty much sell the whole bundle, and the attachment is there. So everything is attached. Obviously, the tax filing is close to 100%, and everything else is very close. We still have a lot of opportunity to sell add-ons.

Of course, workers' comp insurance and all of our health insurance, they're still very low attachment and penetration at this point, but we've got a big base to go after and a big opportunity..

So really, the increment for the bundle is more in the middle market right now than it is in the less than 50 market?.

It is for the technology increases and the products rolling out in the fall, the rest of them rolling out in the fall. That's more, I would say, targeted toward that 50-plus mid-market. We have the product set and pretty good attachment, but still lots of opportunity on the under 50 on the ancillary products..

Got it. And then, secondly, you talked a little bit about what you're doing in terms of some of your ACA-targeted solutions.

And maybe just a clarification, did you say that you are going to set up your own exchange or you're just going to have the bundled solution that can be used in conjunction with the exchanges that are out there?.

We have a bundled solution basically with the HSA, HRA and FSA together on one card that will help the client and the employee prioritize their payment. And it's tied -- we also can then help you get to an exchange through a partner. So it is -- but it is labeled, white label to Paychex exchange, but it's with a partner..

And who is the partner?.

I don't know if we've released that yet so I'll -- let me look at that and see whether we haven't released that yet. And I want to be sure that, that's comfortable with them -- from their standpoint. But they're a big player in that market that have exchanges out there..

Question from Bryan Keane, Deutsche Bank..

I got on a little bit late. I think most of the questions have probably been asked. But I just want to ask a question on the pickup in activity and the pickup in presentations.

What exactly do you think is driving that?.

I think, honestly, Brian, I think it's really good execution. We had some turnover issues a couple of years ago, and I think as you bring newer reps in, they're not -- they don't have the relationships built up with the CPAs, the current clients, et cetera. That has really matured, our turnover in the sales force has been dropping.

We're at a very good place right now, particularly year-to-date, on sales force turnover. As they build the relationships, the referrals come in. They're getting a lot more presentations in there.

I also think that certainly the product set, the mobility platform, having a great mobile platform out there now on the smartphones and everything has been very positive to get them in the door.

And health care reform has been a great opportunity to get in the door, start talking to prospects about health care reform and then that develops into a lead for more payroll and other products..

And that kind of leads into my next question. I was going to ask about strategy going into the big selling season.

Are there things that you're going to be doing differently or pushing differently this year versus other years in the past?.

I think it will be very similar. I think health care reform would be a little bit different from last year and trying to provide information to new clients and prospects that -- trying to help them navigate through all that. But other than that, I think we'll have very similar approaches. This is something we've been in for a long time.

So I think it will be a very similar approach. We know it's competitive. But between our current payroll specialists giving referrals, CPAs, banks and our web work and incentives and so forth, I think it will be a very typical, but I think a very successful, selling season..

Next question from George Mihalos from Crédit Suisse..

So just wanted to go back. Efrain, thanks for the color on the extra processing day and that headwind, I guess, anniversary-ing in the third quarter.

But as we look at 2Q now, is there any reason why we should not see a sequential increase in core payroll growth given the other variables that you spoke about?.

So I want to be careful because you had a negative in there, George. Let me just state a positive, we should see a sequential increase in Q2..

Okay, okay.

And you will see a further acceleration in the back half of the year despite seemingly tougher comps?.

Should be better in the back half of the year, yes..

Okay. And then just final question, just on SurePayroll, is there -- can you give us a sense of what growth rates you're seeing there? And I think in the past you've mentioned that firms with -- I believe the number was sub-7 employees seem to be flocking to the product.

Are we seeing any change in terms of the composition of firms with perhaps larger employee basis taking a look at it?.

No, it's still very -- been very similar, and they're doing very well both -- they're double-digit sales and revenue growth. And they've continued to really -- they continue to really hit that market, in particular.

Again, they are doing it through some great work in their marketing and their website because everything is inbound, is drawing the clients in. But they're still seeing kind of the same demographics of the client base, and they're performing and closing really well..

Next question from Jeff Silber, BMO Capital Markets..

I will just ask one quick one. Given the delay in tapering from the Fed, I'm just wondering if there's been any change in your investment philosophy and if you can just remind us what that is in terms of duration..

Yes. So we're about a little over 3, about 3.3 years in duration. I will say that interest rates have really bounced all over the place in terms of the intermediate municipal market. We've seen swings of 40, 50 basis points, 30, 40 basis points.

So we're a little bit cautious in terms of how we're investing and staying a little bit shorter than we otherwise would because we think interest rates are going to bump back up. But with the recent pronouncement by the Fed, they came back down. We think second half of the year, they'll bump back up.

So it's been pretty volatile in the intermediate-term municipal market. We're just approaching it somewhat cautiously in terms of extending..

Our next question from Jim MacDonald, First Analysis..

Two quick ones. You mentioned in your release that direct costs had an impact or else it sounds like HR would have had a higher growth rate.

Can you talk a little bit about that?.

Yes. So what happened there, Jim, is that we -- workers' comp costs in the PEO this quarter, compared to the other quarter, were up. That's partly due to growth in the PEO and so that impacted the growth rate a little bit, just the way we do the accounting..

Any impact? Was it 1% or 2% of growth? Or....

Yes. I can't call it specifically. In terms of HRS, it would have been about 0.5% or less..

Okay. And just another quick follow-up. So given the share repurchase, congratulations, by the way, for getting that going. What can we expect -- I mean, do we -- can we expect share count to stay -- do you expect share count to stay flat from here or down a little bit from here? Because it did bump up in this quarter..

It did bump up. I would say flattish. We don't want decline too much. If we can get it down a little bit more, we'll try to do that..

Our last question is from Mark Marcon, R.W. Baird..

Just a couple of quick questions from a short-term perspective and then a couple of longer-term questions.

With regards to the short-term questions, would you expect -- I mean, just given where things are now, that the effective yield on the float basically stays relatively flat, in terms of the way that you gave your guidance?.

Yes. I think so, Mark. Look, it's becoming increasingly difficult to call where interest rates are -- not that you have that much of a crystal ball to begin with, but hard to call where interest rates are going to be. So I would say that's our assumption right now..

Okay, great.

And then how could you expect the ACA trend up impacting just the core traditional PEO, not the ASO portion, but the PEO and then your health care insurance business?.

I think from the PEO standpoint, I think, Mark, it will be -- it's positive because small business employers are finding that with PEOs, generally, you might get a better health care increase because they can, obviously, combine themselves with the co-employer and have a better way to navigate through everything and get better premiums.

And so I think that's going to be very positive.

And then I think your other question was with just -- from an -- I guess it was from an ASO perspective?.

No, just for your health care insurance..

Health care insurance. I think it's just the fact that it has brought it to light. Everyone is concerned about it. Everyone's confused. It gives you an opportunity to get into the client and discuss with prospects various options that we can provide.

And having the experience and a good strong sales team out there in the health care side, health insurance side, I think it will give us some positive momentum. So I think both on the PEO and the health insurance we'll be very positive..

Yes. Mark, I think you also may be asking about what happens in the smaller portion of the market.

So on the lower end of the market we view many of those clients eventually gravitating into exchanges, but we still think there's an opportunity in the mid and upper portions of the market, which is the way we've directed our strategy over the last 18 months..

Okay.

So I mean, the low end might go away or might change, but the upper end is where you're really focused, so it's not going to impact your business?.

Right, yes..

Great. And then with regards to the operating margins x float, you gave that 38% target, which is consistent with what you said last time.

Does -- you would still expect to see some leverage almost every quarter through the balance of the year, and 38% is an approximation so it could be a little bit higher than 38.0%, correct?.

That's correct. As I said, when I had many of these calls, 38.4% is approximately 38%. 37.8% is between 37% and 38%. So we're not going to call it any finer than about 0.5 point if we felt it was going to be beyond that.

And obviously, if you look at our guidance last year and what we did, where we have opportunity to leverage, we'll take it and then move on. And we set a very high bar for ourselves in terms of how we spend. We don't need to spend, we won't spend. But at this point, 38% is as close as we're calling it..

That's what I thought, I just want to make sure.

And then, finally, when we think about SurePayroll and then think about -- and then maybe separately, international, how should we think about that over the next couple of years in terms of the contribution?.

Well, international remains small as far as an overall view of everything, but it's giving us growth. And we think, long term, it has great potential, and that's why we went after it. But we knew it's a longer-term play. But we certainly feel very good about the opportunities that we're in now and are looking at.

And then, on SurePayroll, obviously, if they can continue to grow double digits like they have been. I think it really got us into a market that we wanted to get into. It's online. It's that smaller end. And I think they continue to execute very well, same management team leading it and doing a really nice job.

And I think that, that certainly will get more sizable to us..

Are they driving a lot of the core payroll growth at this point?.

No, they're not..

No..

Absolutely not, no. They're too small, Mark. They're just way too small to do that..

And we are showing no further questions..

All right. At this point, we will close the meeting. If you are interested in replaying the webcast of this conference call, it will be archived until approximately November 1. Our Annual Meeting of Stockholders will be held on October 16 at 10:00 a.m. in Rochester, New York. That meeting will also be broadcast over the Internet.

I thank you for the time that you're taking to participate in this call and for your interest in Paychex. Thank you very much. Have a great day..

Thank you for participating in today's conference. You may now disconnect..