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Paychex (NASDAQ:PAYX)

Q3 2013 Earnings Call

March 28, 2013 10:30 am ET

Executives

Martin Mucci - Chief Executive Officer, President, Director and Chairman of Executive Committee

Efrain Rivera - Chief Financial Officer, Senior Vice President and Treasurer

Analysts

David Togut - Evercore Partners Inc., Research Division

Jason Kupferberg - Jefferies & Company, Inc., Research Division

Paul B. Thomas - Goldman Sachs Group Inc., Research Division

Kartik Mehta - Northcoast Research

James R. MacDonald - First Analysis Securities Corporation, Research Division

Sara Gubins - BofA Merrill Lynch, Research Division

Ashish Sabadra - Deutsche Bank AG, Research Division

Joseph D. Foresi - Janney Montgomery Scott LLC, Research Division

Ashwin Shirvaikar - Citigroup Inc, Research Division

David M. Grossman - Stifel, Nicolaus & Co., Inc., Research Division

Timothy McHugh - William Blair & Company L.L.C., Research Division

Georgios Mihalos - Crédit Suisse AG, Research Division

Tien-Tsin T. Huang - JP Morgan Chase & Co, Research Division

Gary E. Bisbee - Barclays Capital, Research Division

Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division

Paul Condra

Operator

Welcome, and thank you for standing by. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time.

I would like to introduce your host for the call today, Mr. Martin Mucci, President and Chief Executive Officer. Sir, you may begin.

Martin Mucci

Thank you, Sherry. Thank you for joining us for our discussion of Paychex's third quarter fiscal 2013 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 third quarter ending February 28, 2013, and filed our Form 10-Q, which provides additional discussion and analysis of 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 1 month.

On today's call, I will review the highlights for the third quarter in our operations, sales and product development areas, and Efrain will review our third quarter financial results and discuss our full year guidance. And then we'll open it up for your questions.

Our results for the third quarter of fiscal 2013 reflect continued solid progress. We are focused on driving growth in revenue and profits, with industry-leading service and technology solutions given to our clients and their employees. Our client base, checks per payroll and client retention demonstrate continued positive growth. Efrain will go into more detail on the financial results and the comparisons. However, I'd like to provide you a few highlights from the quarter.

Payroll revenue grew by 2% due to the increases in both checks per payroll and revenue per check. This growth rate is up from the first half of the fiscal year. HRS revenue grew double-digit for the third quarter as we continue to experience success in selling 401(k) and HR outsourcing and other value-added solutions to our clients. Total service revenue grew 4%.

Checks per payroll has improved for 12 consecutive quarters and was stronger than anticipated. Third quarter growth was about 2.3% compared to 1.8% for the prior year third quarter. Checks per payroll was positively impacted by a higher calendar year-end bonus payment activity. Execution in operations remained solid, as evidenced by the exceptionally strong client satisfaction results. It is our exceptional client service, along with our technology, that sets us apart. The dedication of our employees has resulted in client retention that remains at record levels and through the first 9 months, have us on track for another strong year of retention and possibly our best ever. In addition, the operations team did a great job for our clients with year-end processing and the distribution of our W-2s and year-end reporting that ended ahead of schedule.

Our third quarter is our peak selling season, and we put a lot of focus throughout the year on sales execution. We added new territories, focused on market segmentation in both payroll, as well as 401(k) and other areas and got involved in more franchise and banking opportunities. We had a good momentum going into our selling season, and we are pleased with our selling results. We are particularly pleased with the increase in new sales revenue generated from our core payroll sales team and SurePayroll and the strong sales in our retirement services and HR solutions, including our PEO business.

In addition, we have seen core sales force turnover remain at lower, more historic levels. We expect to continue to see additional penetration of our products and services within our client base, with the goal of increasing our share of revenue from our clients.

From a technology perspective, progress continues on integrating our leading technology and mobility platform with our world-class customer service through the Paychex next-generation suite of products. From a mobility platform, we have continued to add more capabilities, including flexible spending account information and including employer and employee health and benefit insurance information, being just released tomorrow, that keeps our product as the most thorough and client-friendly mobility app for information in the marketplace.

We have been positioning Paychex to capture the opportunity from the shift to online and SaaS solutions. We have market-leading SaaS solutions leveraging the latest technologies and continue to invest heavily in our SaaS and online capabilities and mobile applications. Our recent acquisitions have all been SaaS-oriented business models, and all of our core clients are on SaaS platform. And we are continuing to build out our platform to accommodate even more functionality for our mid-market clients. Our SurePayroll product, which is also a SaaS solution, continues to do well with strong sales and revenue growth.

In summary, year-to-date fiscal 2013 reflects continued progress in growth metrics, and we are very appreciative of the efforts and results of our leadership team and the employees at Paychex across the country and in Germany.

I will now turn the call over to Efrain Rivera, our Chief Financial Officer, to review our financial results in more detail. Efrain?

Efrain Rivera

Thanks, Marty. Let me start out with our standard legal disclosure. Certain written and oral statements made by us constitute forward-looking statements, and I'd just say that you refer to our press release for the discussion of forward-looking statements and related risk factors.

As Marty indicated, third quarter results for fiscal 2013 represented good progress. Here's some of the key highlights for the quarter and 9 months. I will provide greater detail in certain areas and then wrap with a review of our 2013 outlook.

Total service revenue grew 4% for both the third quarter and for the 9 months. Interest on funds held for clients was flat for the third quarter and decreased 6% for the 9 months to $11 million and $31 million, respectively. This result was a byproduct of the low interest rate environment, offset by an increase in average investment balances. Expenses increased moderately, 3% for both the third quarter and for the 9 months.

We continue to invest at a higher rate in product development and supporting technology, but this was partially offset by increased productivity within operations, which allowed us to maintain our solid operating margins. Note that recent business acquisitions had immaterial impact on quarterly revenue growth and expense growth.

Operating margin was 36.8% for the third quarter and 40.5% for the 9 months. Operating income net of certain items increased 7% to $214 million for the third quarter and 6% to $662 million for the 9 months. We expect operating margin for the full year to be in the range of 37% to 38%.

Net income increased 7% to $145 million for the third quarter and 5% to $446 million for the 9 months. Diluted earnings per share increased 8% to $0.40 per share for the third quarter and $0.04 (sic) [4%] to $1.22 per share for the 9 months.

Let me talk a little bit more about payroll revenue. It increased 2% for the third quarter and 1% for the 9 months. We benefited from increases in checks per payroll and revenue per check. As Marty already mentioned, our checks per payroll metric continued to improve and was stronger than anticipated, increasing 2.3% compared to the same period last year. This result was partially due to higher calendar year-end bonus payment activity during the quarter. Revenue per check grew modestly as a result of price increases, partially offset by discounting. Payroll growth was tempered by 1 less payroll processing day in the quarter due to the leap year in the prior year. The impact of this 1 processing day on payroll revenue growth is approximately 0.5%. As we've said on past calls, payroll revenue is expected to be stronger in the fourth quarter.

HRS. HRS revenue increased 10% to $189 million for the third quarter and 10% to $553 million for the 9 months. HRS revenue growth reflects favorable trends in client growth and price increase. Some highlights of contributions to HRS revenue growth include the following: Retirement services revenue benefited from client growth, price increases and an increase in the average asset value of retirement services client employees' funds. This was partially offset by the impact from a shift in the mix of assets within these funds to investments earning lower fees from external fund managers.

Paychex HR Solutions was positively impacted by growth in both clients and client employees and price increases. The rate of growth was tempered by fewer client employees on average within our PEO compared to the quarter ago. However, we've seen an improvement in both new sales and client retention in the PEO during our peak selling season, and both PEO clients and client employees were higher at the end of the third quarter compared to a year ago.

Insurance services revenue benefited from growth in the number of applicants, though at moderating levels, while workers' comp insurance delivered increases in both clients and premiums. We expect that health care reform will impact our insurance revenue -- services revenue moderately going forward.

Our eServices revenues were positively impacted by client growth and price increases, particularly as we continue to focus on adding SaaS-based solutions.

HRS service revenue quarterly growth can vary due to the volume of clients and basis points earned on Retirement Services client employees' funds. Basis points fee revenue changes are due to fluctuations in the financial market and the asset value of funds invested. PEO net service revenue, as we mentioned previously, also exhibits greater variability between quarters due to a number of factors, including changes in workers' comp claims experienced.

Turning to our investment portfolio. We maintain a fairly conservative investment policy, as you all know. Our goal is to protect principal and optimize liquidity. Our priority has been and will continue to be, as we continually say, to ensure that we can meet all of our cash commitments to clients. On the short-term side, the primary investment vehicle is high-quality variable rate demand notes and FDIC-insured deposit accounts.

In our longer-term portfolio, we continue to invest primarily in high credit quality municipal bonds. The interest rate environment remains constrained. Our combined portfolios have earned in average a rate of return of about 1% for the third quarter compared to 1.1% for the same period last year and 1.1% for the 9 months compared to 1.2% for the same period last year.

Interest on funds held for clients was flat for the third quarter and decreased 6% for the 9 months to $11 million and $31 million, respectively. The decrease was driven by the decline in the average rate of return, which was offset by increases in average balances of 6% and 4% for the quarter and 9 months, respectively.

The average rate of return was also impacted by our allocation of investments to a greater percentage in tax-exempt securities within our short-term portfolio. As our interest on funds held for clients and corporate investment income are reported before taxes, the return appears lower on average with a greater mix of tax-exempt investments.

The increase in average investment balances was primarily driven by the expiration of the payroll tax cut holiday, which resulted in higher Social Security withholdings, favorable trends in checks per payroll and wage inflation.

Our investment income decreased 11% to $1 million for the third quarter and increased 13% to $5 million for the 9 months. The decrease for the quarter was due to lower average interest rates earned and lower average investment balances as a result of the accelerated dividend payment to shareholders in December 2012. The increase for the 9 months was mainly due to higher average investment balances resulting from investing the cash generated from operations.

I'll now walk you through highlights of our financial position. It remains strong with cash and total corporate investments of $798 million as of February 28, and we continue to have no debt. Funds held for clients as of February 28 were $5.6 billion compared to $4.5 billion as of May 31, 2012. Funds held for clients vary widely on a day-to-day basis and averaged $3.6 billion for the 9 months, a year-over-year increase of 4%. Our total available-for-sale investments, including corporate investments and funds held for clients, reflected net unrealized gains of $52 million as of February 28 compared with the net unrealized gains of $60 million as of May 31, 2012. Total stockholders' equity was $1.6 billion as of the end of the quarter, reflecting $477 million in dividends paid during the first 9 months. Our return on equity for the past 12 months was 35%.

Cash flows from operations were $606 million for the first 9 months, an 8% increase compared to the prior. The increase was driven by higher net income and timing related to changes in our operating assets and liabilities.

Now turning to guidance. We reaffirmed our guidance for fiscal 2013. I'd like to remind you that our outlook is based on current view of economic and interest rate conditions continuing with no significant changes. Payroll revenue growth, 2% to 3% based on anticipated client base growth and modest increases in revenue per check. We anticipate stronger revenue growth in our fourth quarter, consistent with our guidance provided in June 2012.

Our HRS revenue growth is expected to be in line with our historical experience, and total service revenue is anticipated to be at the low end of the range of 5% to 6%. We anticipate minimal impact from prior acquisitions, and our operating margin for the year is anticipated to be approximately 37% to 38%. This is slightly lower than the margin experienced in the first 9 months of fiscal 2013, as our margins are historically lower in the second half of the fiscal year due to more spending. We do anticipate a continued increase in the percentage of tax-exempt investments in our short-term portfolio. And investment income net of -- net growth is in a range of 0% to 5%, reflects the impact of anticipated lower investment rates and average cash balances.

And now I'll turn it back to Marty.

Martin Mucci

Thank you, Efrain. We will now open the meeting to questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question in queue comes from David Togut of Evercore Partners.

David Togut - Evercore Partners Inc., Research Division

Marty, you referred to strong bookings trends year-over-year in the third quarter. Can you quantify what the year-over-year bookings growth was in Q3, both for the payroll services business and the HR services business?

Martin Mucci

No. We don't -- David, we don't get that specific. But I will tell you that it's certainly the best new revenue we've seen in a number of years, new sales revenue on the core payroll side in particular and where we've put a lot of effort. So while we don't give the actual detailed number, we certainly were pleased with the new -- the level of the new business revenue that came in. And in comparison to the last 3 or 4 years, it certainly was very positive.

David Togut - Evercore Partners Inc., Research Division

I see. I believe for Q2, you indicated bookings were sort of flattish or down a little year-over-year. Did you actually see bookings growth year-over-year in Q3?

Martin Mucci

We certainly have seen growth, and I'd say they were fairly flat. We did see some improvement in Q2, but we certainly saw positive growth in the third quarter during our peak selling season, and we were pleased with it.

David Togut - Evercore Partners Inc., Research Division

Got it. And then, Efrain, OpEx was down year-over-year. It looks like you did have a restatement in the year-over-year operating expenses. But is declining operating expenses sustainable with revenue growing at about a 4% clip?

Efrain Rivera

I noticed in some of the notes, people were asking the same question, David. So here's our view. We think that the investments in technology should lead to increases in productivity. And Marty made the decision 4 or 5 years ago to start the acceleration of IT expense, and what you're seeing there is a result of a strategy, not a result of something opportunistic that we did in the quarter. So I can't guarantee it will be flat. Marty and I won't do that. But what we can guarantee is that we're committed to leveraging expenses, and that's what you saw in the quarter.

Martin Mucci

Yes, that's exactly right.

David Togut - Evercore Partners Inc., Research Division

I see. And just finally, can you bracket for us what the net price increase is year-to-date in payroll services once you've offset the discounting against the gross price increase?

Efrain Rivera

Yes. And what I've said, David, consistent is we were at the lower end of what we've talked about at the -- at our Investor Day in the summer, and that range was 2% to 4%. We're at the lower end of that range.

David Togut - Evercore Partners Inc., Research Division

Got it. And just finally, what would be your expected price increase for payroll services in fiscal 2014?

Efrain Rivera

We're going to be in that range, and we'll talk to you more about it on the next call.

Operator

And our next question in queue will come from Jason Kupferberg with Jefferies.

Jason Kupferberg - Jefferies & Company, Inc., Research Division

So I just wanted to build a little bit on the last question here. So with pricing kind of running at the lower end of the range, as you guys said, and when you roll that into revenue growth, you're running, I guess, 1% to 2% so far this fiscal year. I understand Q4 will accelerate to maybe 3% or so. You guys had talked about kind of a mid-single-digit guidance for the 3-year period, 2013 to 2015, last summer. I mean, is that something you still are very comfortable you can attain? And how much improvement do you need in terms of new business creation to actually get there?

Efrain Rivera

Yes. I think, Jason, to your point, yes, we talked about that as a target. I don't think we committed to saying we'd do that every year. What we need is unit growth and we need good price attainment, and you can never say you're comfortable about something. But we certainly think that within this period, that's something that we're targeting.

Jason Kupferberg - Jefferies & Company, Inc., Research Division

And I guess to your point, I mean that's kind of a CAGR target over that period, is that right?

Efrain Rivera

No. I don't view it, and I think it's going to be a little bit difficult given kind of we're starting at 2%. I think that's what we think is possible in this environment. And again, as I said, we need some unit growth, we need price to get there. So that's what we're executing against.

Jason Kupferberg - Jefferies & Company, Inc., Research Division

Okay. Okay, so it sounds more like mid-single digits is kind of aspirational at some point during that period, but not in aggregate over that period. Is that fair?

Efrain Rivera

Yes. It will be tough to do that in aggregate over that period.

Jason Kupferberg - Jefferies & Company, Inc., Research Division

Okay, understood. What percent of new businesses created that you guys have won, fiscal year-to-date, are choosing the SurePayroll product versus the full service offering? And has there been any material change in that mix over the past couple of years?

Efrain Rivera

There hasn't been a significant change in that mix. And what I'd say is that we have consciously been devising strategies, working on our strategies from a sales standpoint so that those lines get a little bit blurred. And SurePayroll's growing rapidly. And as Marty said, we also had growth in revenue in our core payroll business. So this was a quarter where we saw growth in both segments of the business.

Martin Mucci

Yes, remember that -- Jason, we still see that as they're getting their share of new business growth that are still wanting to do it themselves or be online only. And we're getting our share of new business growth that is coming to those who want to totally outsource. So it's not like we're seeing a shift between the 2. We're seeing there's opportunity for both, and I think we don't really see it as a kind of a total pie for us, that is now shifting to them or anything. Both -- SurePayroll is obviously doing well. There are smaller numbers to grow on, but they're seeing nice growth in their sales and revenue, and we're seeing nice growth in our revenue as well on the sales.

Jason Kupferberg - Jefferies & Company, Inc., Research Division

So in other words, not cannibalizing the core at this point?

Martin Mucci

Not really, we're not. No.

Efrain Rivera

No. One thing I should clarify, we just finished a marketing study on payroll services, pretty extensive study. There's no evidence whatsoever that an outsourcer goes back to a DIY solution. It just doesn't exist. So the issue's really kind of capture at the front end, not erosion of existing clients. So people select a solution and then tend to stay with it.

Jason Kupferberg - Jefferies & Company, Inc., Research Division

And just lastly on that point, can you just remind us what the average annual difference is in annual revenue between a SurePayroll customer and a client on the traditional full service platform?

Efrain Rivera

Yes. So SurePayroll is going to be around 1,800 and traditional core -- I'm sorry, 800. And a traditional payroll, I should say, traditional is a long way, our fully outsourced solution is going to start around 1,800.

Operator

Our next question will come from Paul Thomas with Goldman Sachs.

Paul B. Thomas - Goldman Sachs Group Inc., Research Division

Just continuing on the new sales for the quarter, any way to size or think about the incremental benefit from new market segmentation or the focus on franchise and banking channels?

Martin Mucci

Yes, I think this was -- this growth was more execution than those 2 channels. I think what we've done is we've put a lot of effort into that, and we're starting to see that pay off and getting some new bank agreements, referral agreements and picking up on some key franchises. But I think that's going to build over time. This has been -- in the selling season here that we're most pleased about, I think it's been execution. One, the turnover is back to the low 30% range, which we've been historically. The leadership team's in place, a lot of good things going on that Mark Bottini and the team have done. And so I think this has mostly been about execution, so we've had upside on the other things that we're doing.

Efrain Rivera

We're also seeing, Paul, some incremental productivity from the salespeople that we added. So that will start to become more annualized next year, but we've seen some good results there.

Paul B. Thomas - Goldman Sachs Group Inc., Research Division

Okay, it makes sense. And what's the sense at this point if the Affordable Care Act had any net positive or net negative impact on sales for the upcoming year? And was there any sense of increased caution on hiring or more demand for services to sort through the new rules?

Martin Mucci

I think it's been light right now, but I think it's going to pick up this year. We've done a lot of work. We're getting information out to not only the current client base but social media in what we can provide for our clients. Being a company that not only obviously longstanding in payroll but has health insurance and has been doing this now for 4 or 5 years, we can really provide, I think, some unique benefit to them. And we're getting that message out, and it's starting to, I think, get through to clients that they've got to do it. But I think there wasn't a lot of that in that first -- in this third quarter and peak selling season. I think you'll see more of that this year and because that's when it's really starting to hit them, is right now that they're going to have to do something. So we're expecting some -- certainly some support from that, that clients will just find this just too confusing and will look for outsourcer help.

Operator

And our next question will come from Kartik Mehta with Northcoast Research.

Kartik Mehta - Northcoast Research

Marty, I just wanted to understand, it seems like you're having success with new sales. It seems like some of the results you're seeing now are better than they have been in the last 3 or 4 years. Are you equating this to -- is this the economy getting better or is this that Paychex is just doing things a little bit differently and, as a result, you're seeing better results?

Martin Mucci

It's a great question. I think the economy is kind of slowly picking up. If you look at the checks per client continuing to be up. I think that's positive. The NFIB Indexes and things like that, the external measures are showing that it's slightly positive. I don't think there's -- we haven't seen a big surge in certainly in new business start-ups and growth that we still think there'll be. I think this has been a little bit more about execution, about getting turnover back down to historic levels, about training, about leadership. And so I think the market side of it will still be upside to us as that comes back. It's slowly coming back like you're seeing housing come back a little bit, prices going up, some construction being done in new homes. That will drive more new businesses, but that's still a slow tick. I think what we've seen is better execution and leadership.

Kartik Mehta - Northcoast Research

And then there's a lot of discussion about using mobile technology and having applications, mobile applications for customers. Is there an opportunity to monetize on that? Or is it right now you just need to have those so that you can be competitive in the market?

Martin Mucci

I think to start, you have to have them to be -- to compete in the market. They're kind of table stakes. And so we got into that a few years ago, as Efrain mentioned, the investment. And now that's really paying off. I think we have the best mobile app out there. We're introducing tomorrow, updating the iPhone app for health and benefit insurance information for employees and employers, really giving them a lot of information. I think it's a place where they can go for information and make it easy for them. It's not so much about doing their payroll as it is about gaining the information that they need when they need it. And so I think you need that to compete. I'm not sure that a client just goes to it just for that. And as we're seeing, it's more of a hybrid type of thing. It's going to a full-service outsourcer who knows what they're doing and will take care of things for them like the Affordable Care Act. But if I need information on my phone, on my tablet, I can get that as well. I can do it the way I want to do it, when I want to do it.

Kartik Mehta - Northcoast Research

And just one last question, Efrain, you're up to $800 million on the balance sheet, no debt. How do you use that cash? Are there acquisition opportunities potentially that you see for the business that can help accelerate the growth rate or is it about thinking about returning that capital back to shareholders?

Efrain Rivera

Yes. That's a good question. So we have the authorization. We said we'd buy opportunistically. The last quarter hasn't presented the opportunistic opportunities to do so, but we'll look to do that going forward. There's a lot of attractive opportunities out there, and we are very committed to not overpaying for opportunities simply for the sake of growth. We just are not going to do that. And so we evaluate almost every important opportunity that comes on the market, are competitive on most of them and pass where we don't think the numbers are right. We think one of those will land where we want to at some point, and we'll make the acquisition. In the meantime, what we've been doing is buying smaller acquisitions, smaller businesses that we think have both organic growth capability and can be easily integrated into our platform. So we did an acquisition in the expense management area and also in talent management. We think that, that in the short term is a good way to do it. But if a good opportunity comes up, we want to have the powder dry to be able to do that. So we're at $800 million, as I mentioned. And if we don't see opportunities for some period of time, then we'll look at ways to returning that to shareholders as we've mentioned in previous calls.

Operator

Our next question in queue comes from Jim MacDonald with First Analysis.

James R. MacDonald - First Analysis Securities Corporation, Research Division

Just going back to the new core payroll sales for one last time. It looked like you said that the revenues from those sales was strong. How about the client numbers from those sales or maybe you could talk about those 2?

Martin Mucci

Yes, we don't talk as much about units except kind of once a year and talk about the client base, and we didn't really want to get into that kind of detail. I will -- I think I will say more has been driven by revenue per unit. We've seen a nice revenue per unit, which is a nice execution thing on the sales side where they're selling more product in the higher end, more complete bundles. And we think that's a maturity of the sales force and the lower turnover. And there's been some unit activity, but we'll get into that more at the end of the year. So we talk about it once.

Efrain Rivera

Yes. And Jim, when we disclose, our anticipation is that we're going to see units up for the year.

James R. MacDonald - First Analysis Securities Corporation, Research Division

Great, that's helpful. And last quarter, you mentioned -- obviously there was Sandy, tropical storm Sandy impact last quarter, and you said there was going to be maybe some impact this quarter. Could you just talk about that, if there was any impact?

Efrain Rivera

It was pretty modest if we saw any at all. I would say that given where you saw the sequence of improvement on checks per payroll, you can see that the impact of Sandy was probably a bit higher than we had anticipated. So we had a nice rebound. I should say just for -- to provide a more -- a complete explanation of that number on checks per payroll, we think that if you take out the impact of more bonus checks at the end of the year, you're probably around that 2% growth rate, which we've been seeing for a number of quarters. And although we have said in the past that we expect that to moderate and we continue to do it, it simply hasn't moderated to the degree we expected.

Martin Mucci

So if you kind of adjusted Q2 for Sandy and adjusted the checks per client -- per payroll up and then in the third quarter, kind of drop the bonuses down, as Efrain said, I think you'd see continued pretty strong growth consistent now for 12 quarters in checks per payroll.

James R. MacDonald - First Analysis Securities Corporation, Research Division

And just following up on that, is there any major economic difference between bonus checks and regular checks?

Martin Mucci

No.

Efrain Rivera

No. There's no -- just no. I mean from our standpoint, it's revenue. Of course, it only occurs once a year at bonus time.

Martin Mucci

But no, I don't think it was that big of a pickup in revenue.

James R. MacDonald - First Analysis Securities Corporation, Research Division

Okay. Just a final one from me. You were talking about your progress in the SaaS area. Any more specifics you could talk about areas where you're really making progress?

Martin Mucci

Yes. I think, one, we don't talk about it a lot, but our clients are on a SaaS platform now. We moved our clients a couple of years ago over to -- for core payroll, this is -- over to core payroll. And so -- and then, of course, our mid-market product is hosted and more of that -- more of that platform, Paychex, what we call Paychex Next Generation platform, that the core clients are on, more of that functionality is rolling out basically every few months as we continue to build. And more of that functionality for the mid-market clients will come out this year, in fact, a significant amount. So we feel like we're very well positioned from a SaaS perspective. And even though a lot of our clients are still coming into us from a service model or outsourced service model, they can reach the SaaS platform to do their online reporting or even do their payroll if they want to do it this week or next week in addition to having their dedicated payroll specialist. In addition to that, the point is when we're doing acquisitions, all the acquisitions that we've done for product tuck-ins and so forth have all been SaaS-based models so that they can integrate into the platform, particularly for the mid-market space, which will become all focused on integration, on the integrated SaaS product that has not only the feature functionality but the integration and single sign-in, of which we have and will be adding to that functionality this year, this calendar year.

Operator

Our next question will come from Sara Gubins with Bank of America Merrill Lynch.

Sara Gubins - BofA Merrill Lynch, Research Division

I wanted to make sure that I understand. When I look at your payroll service revenue year-to-date, it's up 1.4%, but checks per payroll is up 1.8%. But you have been getting some pricing, so I'm just hoping to understand the difference between those 2.

Efrain Rivera

Yes, how do you get there. I think, Sara, the third piece of the leg, and I'm not going to reconcile it to the tenth because I can't do it on the call is that you have timing changes in between there. So in the first quarter, we talked about the frequency of payroll processing as impacting that quarter's growth. And then in this quarter, we have the extra processing day that impacted that growth. The other thing I would say is that checks per payroll don't -- so if we're up 1.8%, for example, or 2%, that doesn't equate to 1.8% or 2% of revenue. It equates to a fraction of that.

Sara Gubins - BofA Merrill Lynch, Research Division

Okay. And then separately on the investment balances, can you give us an update of the weighted average duration? I think it was at about 3 years last time...

Efrain Rivera

Yes, we're in the 3 to 3.1 time, I guess, duration.

Sara Gubins - BofA Merrill Lynch, Research Division

Okay. And do you expect that to continue to lengthen or is this about the right range?

Efrain Rivera

We're -- that's a tough question. And the reason is that what we're doing is 2 things: We're looking at -- we're trying to optimize for the right credit quality and the right value along the yield curve. And so I think we're not going to see it significantly increase from that. It could lengthen a little bit, that maybe, but then it will roll down as investments roll off. So I would say plus or minus 0.2%, that's probably where we want to be.

Sara Gubins - BofA Merrill Lynch, Research Division

Great. And then just one last question. For SurePayroll, when you are winning, who is it that you're winning against? Is it another SaaS provider? Is it -- I'm just wondering kind of what the source of the win is.

Martin Mucci

Yes. On SurePayroll, a lot of it would be search -- this is new businesses, searching on the Web for a provider. I would say the most -- the closest alternative to them that they'd look at would be Intuit payroll, probably the biggest one they went from. But a lot -- they're coming in -- we don't always know because they're coming in through a search engine and coming directly to us. It's not as much like a Paychex where there might be a head-to-head sales person in there knowing they're competing with somebody. This is all search engine. We're not calling out to the clients. They're searching for SurePayroll and coming in. And -- but we're very pleased with the work that they're doing to gather the clients in, to get the interest on the Web and then close those sales.

Operator

Our next question comes from Bryan Keane with Deutsche Bank.

Ashish Sabadra - Deutsche Bank AG, Research Division

This is Ashish calling on behalf of Bryan Keane. Just on the fourth quarter, you mentioned that the fourth quarter is going to be strong. But if my math is correct, the fourth quarter revenues would have to be up at least -- the services revenues would have to be up at least 7% to get to the low end of the guidance. And I was just wondering if you could provide some color on what would drive that acceleration in revenue growth.

Efrain Rivera

Yes. First, I think what we said previously, we just have easier compares compared to prior quarters. We had the elimination of a number of unusual things that happened in both first and third quarter, actually first, second and third quarter, and then you start to see more of the underlying revenue growth generated by the sales that we've had. The other thing is that although our payroll revenue tends to be fairly steady quarter-over-quarter, HRS bounces around a bit for some of the reasons that I mentioned earlier on the call. And it can be stronger in 1 quarter than another. We expect that it will be a bit stronger than it was in this quarter.

Ashish Sabadra - Deutsche Bank AG, Research Division

Okay. One quick question. You mentioned the insurance growth was moderating slightly. And so I just wanted to get some color there. Is the moderation just related to tougher comps? Or is there anything else going on there?

Efrain Rivera

No. No, I think the moderation there is really related to the fact that there have been some adjustments in terms of premiums paid under the Affordable Care Act on some segments of the business, coupled with the fact that we made a decision probably 18 months or so ago that our focus was going to be more on the higher end of the market rather than the lower end of the market. We think that, that transition has gone well, but it's going to impact growth in the short term.

Ashish Sabadra - Deutsche Bank AG, Research Division

Okay. And one final question on the competitive environment. Just how is the competitive environment during the key selling season from your large competitors, as well as the regional players, if you could just provide any color on the pricing environment, the competition?

Martin Mucci

Yes. I think the good news is we haven't seen much change in the competitive environment from a pricing standpoint or really activity. I think we've been very competitive with our large national competitor from a pricing standpoint in promotions, and we saw that did not change very much during the peak selling season. So we feel good about that. From a regional, the smaller players, I think that we've actually continued to do very well, not just in third quarter but through the year, because the technology strength is not there as much. So they don't have as many products or technology, and that may be starting to catch up. So we're winning a little bit more from regional competitors and I'd say winning about the same or maybe slightly better from the national competitor.

Ashish Sabadra - Deutsche Bank AG, Research Division

Okay. Actually one more real quick question. This is about the client growth coming from the selling season. You said that you expect it to be up for the year. I was just wondering if you can provide some color on when you look at the client growth and talk about outsourcing versus SaaS clients and how should we think about those for the year based on the selling season.

Martin Mucci

No, we don't -- well, we don't really give that much color on how we're doing exactly from each -- from which products and so forth. But I would say, as Efrain said, by the end of the year -- we give client growth once a year -- we'll see positive growth and we're pleased with that. It continues to grow even given still kind of a stodgy kind of economic environment where there are not as many new businesses starting. But we'll see positive client growth by the end of the year in total.

Efrain Rivera

And I'd say one other thing because I think there is a perception that there are sharp divisions on both of those. In our model of servicing clients, we can service clients across a broad spectrum of service needs, and that distinction is starting to become a little less important than it was 3 or 4 years ago.

Operator

And our next question in queue comes from Joseph Foresi with Janney Montgomery Scott.

Joseph D. Foresi - Janney Montgomery Scott LLC, Research Division

I wanted to ask just on client growth, can you give us the assumption that you're using for why that it becomes positive through the back half of the year. And is it fair to say, I mean, just backing into it mathematically, that growth -- client growth has been sort of flat to down over the last couple of quarters?

Efrain Rivera

Yes, we're not going to go into each of the quarterly growth numbers. That's why we do it on a year-to-year basis. And let me just say one time again, Joe, why we don't do that, because it is the case in many years that we've been up in the first half and then down in the back half. So really, we focus on it on an annual basis. And I think it's fair to say that the back half will be stronger than the first half.

Joseph D. Foresi - Janney Montgomery Scott LLC, Research Division

Okay. And in the assumption for the back half being stronger than the first half, maybe you could just walk us through sort of why you've -- is it macro-related? Is it the productivity in the sales force? Is it...

Efrain Rivera

I think, as Marty said, it's really more execution-driven and -- but many of the initiatives that the sales force -- the market has put in place and sales force really were geared around the selling season and reach their peak there, and we're seeing that result.

Joseph D. Foresi - Janney Montgomery Scott LLC, Research Division

Okay. Do you feel like that productivity is sustainable over the long term? Have we kind of stepped up to a higher level then on the productivity side?

Martin Mucci

Well, I certainly don't see any reason why it shouldn't. We're continuing to add product that is giving -- putting more in their bag to sell. I think that the -- with the turnover back down to the historic levels, you just add as you add more experience month-by-month to the team. They're selling and more productive. So I think the average tenure of our sales force, as that continues to increase now, will continue to help us out there. I don't think the economy is giving us a lot of wind behind us, but I think the execution certainly is in the leadership team and the sales force itself. So we expect it to continue to go up not by huge jumps, but continue to progressively improve.

Joseph D. Foresi - Janney Montgomery Scott LLC, Research Division

Okay. And would you characterize that as a split between market share gains versus sort of economic improvement? I mean, I'm just trying to get a full sense of -- I've given you 2 other questions…

Efrain Rivera

Yes. So Joe, if you look at what's happening in the new business starts area, so we've got a big announcement in June of last year. And you compare the same period through June of last year to the prior period, you had 2% growth in business starts. So it's pretty modest. There's some uptick going on, so there's an element of that. I think a lot of this is really about better execution and the job that Mark's done.

Martin Mucci

And which would be a little bit stronger winning rate, I think. Yes.

Joseph D. Foresi - Janney Montgomery Scott LLC, Research Division

Perfect. And then the last one. How are you measuring the productivity? I mean, maybe you could just walk us through sort of what you've put in place. I know that there's been some sales force adjustments and adjustments to comps and you've got -- you're obviously adding a new head there. But how are you measuring that productivity? And what has sort of, I guess, reenergized the sales force going out there and making these gains...

Martin Mucci

Yes, the biggest focus this year on the comp plan and on the direction in training and so forth and the efforts we put forth was on revenue per client. Really wanted to be sure that we were selling the full product set, we were getting the most revenue per client, sell the value of the products that we offer and less about just price. And I think that's really started to pay off. And so we certainly measure it on both a revenue -- it's primarily based on when you look at a sales rep, they're comped on revenue, the revenue that they're bringing in and that's net of all discounts and so forth. So it's the revenue they're bringing in and obviously, we also are looking for the unit productivity that they're bringing in. So -- but the biggest focus this year has been on revenue, and then you always find there's some sort of balance as we look at comp plans for the next year that we'll try to make.

Operator

Our next question in queue comes from Ashwin Shirvaikar with Citi.

Ashwin Shirvaikar - Citigroup Inc, Research Division

So my first question is really about net pricing. And you guys have said in the past, I guess, closer to 2%. I wanted to see if you can maybe disaggregate the impact of maybe competition versus the impact of bundling as you are successfully moving clients to bigger bundles. How do those factors sort of come in into the picture because 2%, up close to that, is sort of a historical low, isn't it?

Efrain Rivera

Well, so Ashwin, let me take a stab at this and then Marty can talk about it. Not really, because if you go back probably I want to say 5 years ago, we put a price increase and then didn't get it. So we've had years where we put in a price increase, didn't realize any of it, 0. So I would certainly say that 2% is at the low, low end. And again, just to make clear, we didn't say it was precisely 2%, but at the low end of the range. So what we did this year was we consciously priced at a level that we thought would yield net price at the lower end of the range and we wanted to see also impact on -- what impact that would have also on units. We wanted -- we thought the pricing environment was such that taking a higher price increase was not advisable. So as the year's gone on, maybe we will take a slightly different tack next year, but it's not reflective of our perception that we couldn't take a prior -- a larger increase. It was part of a strategy to see what the impact of pricing at different levels within that range would produce.

Martin Mucci

Yes. It's looking at the -- we're not going to obviously get into too detail on pricing from a competitive standpoint on a call like this. I think that it's -- I think that it's at the lower end, obviously, that is at the lower end but, as Efrain said, if you go back since the recession, it's been a lot more difficult on the net side, but we're still able to get a price increase and hold it and hold much of it. And then also, we've gotten a little more sophisticated I think in the way we price different clients for different packages and so forth. So that's probably the most detail I can give you.

Ashwin Shirvaikar - Citigroup Inc, Research Division

No, no. This is quite useful. Just to move on, one of the areas where you get -- you guys have obviously done a much better job than certainly we expected has been on the margin front. And as I look at the elements of cost, facilities expense and compensation and so on, so forth, should I sort of look at that facilities expense year-over-year being sort of negative 1% growth? That obviously I think has to do with some of the real estate actions you took, opportunistically, in the Rochester area maybe. At what point does that sort of taper off in terms of benefit? And how long can you keep compensation sort of flattish? Clearly, there's productivity here, but I just want to get an idea.

Efrain Rivera

Yes, fair enough, Ashwin. So I started the call by saying that the leverage on operating expense is a result of a strategy that says -- that Marty put in place 4 or 5 years ago that said we will redirect expenses into IT and find savings in operation in order to fund that. It is a bit inartfully described in our documents as facilities. But that basically encompasses all of the operating expenses with the exception of wages within a branch location. And so what we have done and what we have been doing over a period of years and now you're starting to see it a little bit more clearly is that, where possible, we continue to leverage that expense as our technology gets better and better. And what we are deliberately trying to do is to balance that service component with technology and manage the P&L in that process. That's what you're seeing. It is not opportunistic. We can't guarantee, again, as I said before, that we will be able to do that every quarter. But that is the direction that the entire organization is moving toward.

Martin Mucci

Yes, it's exactly what Efrain said. It's part of our DNA to continue to try to leverage our cost and especially as we drove more into the technology, we have to leverage our cost. And it's not just facilities. So I don't want to mislead you, it's operating cost. It's the entire operation and how do we drive more productivity, whether it be facilities, which is really a fairly small part of the overall cost of the labor, et cetera. How do we drive that through better technology that we give people to work with, just really try to drive that productivity a number of ways.

Efrain Rivera

And our operations people do a phenomenal job of this. Just is really, really great work.

Ashwin Shirvaikar - Citigroup Inc, Research Division

Got it. Now this is quite useful. I guess, would you then take a shot at what peak margins can look like for you guys based on all these actions?

Efrain Rivera

Yes. So Ashwin, we reached 41%, and that was probably our high point when we had $135 million worth of float income 5 years ago. Certainly, if float income improves, our margins will get up in the 40% range. Absent that, all I can say is I won't commit to a specific number but just say that every year, we're committed to leveraging in some form or another in ways that make sense for the business.

Operator

Our next question in queue will come from David Grossman with Stifel, Nicolaus.

David M. Grossman - Stifel, Nicolaus & Co., Inc., Research Division

I was wondering perhaps if we could go back to just the equation of revenue growth. Historically, it's been units or clients and pricing to get -- and retention to get some kind of growth rate. And now the pricing equation has become a little bit more complex because there are 3 dimensions to that, it sounds like: pricing, obviously checks, and then the bundling of incremental services to drive revenue per client. So with those changes in mind, can you perhaps give us some high-level thoughts of how to think about that going forward?

Efrain Rivera

Yes. Again, let me take a stab and then Marty can add. We need to drive unit growth, so I don't want any of the conversation that we've had to indicate that's not important. It is. But obviously, in an environment where in 2009, there were 728,000 business starts down from 851,000, the peak, the mid-decade and right now, we've only recovered to 784,000, you have to figure out how to get the growth. So we recognize that unit growth is going to be a bit more challenged. And so what we have focused on is a combination of both driving units and also driving revenue growth, as you mentioned, through bundling and also small things that we don't spend a lot of time talking about but other value-added services, particularly for core clients, like clocks, like other related services. So I would say, David, the way to think about it is, is a combination of more revenue per client and also unit growth, plus right now, it looks like we've got a little bit more staying power on checks per payroll than probably we thought 12 to 18 months ago. Now we still think it'll moderate, but it's simply been better than we anticipated.

Martin Mucci

Yes. It hasn't -- as Efrain had said, it hasn't changed all that much from the old days of looking at client growth price and ancillary growth. I think the ancillary growth is not just HRS products though. The point Efrain's making is even to the core clients, there's time clocks now that we sell, there's background checks, there's a number of other products, but you could kind of lump them all into probably that ancillary growth if you wanted to. And the client growth is the most difficult one right now, but driving up price and meeting price in the standpoint of not just a price increase, but more price for what you get, I guess, what you get out of the price increase is certainly one goal and the ancillary growth is the other when we don't have as much client growth as we liked from the old days, the 3% or so. So it's still pretty much the same pieces. It's just driving -- right now, the focus is on driving as much revenue you can per client that we sell. Obviously, selling more clients, but always driving as much revenue per client as we can sell with ancillaries and additional products and services we have, and then retaining those clients, which we're doing a really good job. We haven't talked that much about, but I think we're really on a path for an historic best in client retention, which certainly helps too. Because the longer you have the client, typically the more revenue you're getting out of them as discounts roll off and you sell them more products and services.

David M. Grossman - Stifel, Nicolaus & Co., Inc., Research Division

Right. So as we look at that payroll line then and we think about unit growth and whatever the revenue [ph] per client [indiscernible] and accustomed to this pricing, the straight pricing metric. Is it realistic to kind of think of the bundle of pricing and incremental services and some number that we could think of a target in terms of how the business is going to grow when you factor in whatever it is, 2% unit growth and then the rest comes from this bundle of pricing checks and other products?

Efrain Rivera

Look, I think we'll give more color on that when we get to Q4. I understand what you're saying. I think that price component is probably going to be a bundle of all of those -- of that additional revenue that we sell to clients in addition to the unit growth we assume. But we're -- it increasingly, will be more of a bundle of those services plus the price increase to create a revenue per unit lift.

David M. Grossman - Stifel, Nicolaus & Co., Inc., Research Division

Okay. Right. And just back to your comments, I think you mentioned that you were experimenting a little bit of pricing this year. And I understand the reluctance to give too much detail on what you did and what you're going to be doing going forward. But anything you can share with us on what you learn from that endeavor over the course of the year?

Efrain Rivera

Yes. What I'd say is that we have pretty sophisticated models around the price elasticity of demand, and we understand the price elasticity of demand better this year than we did last year. So we've just gone increasingly sophisticated with the algorithms we use and understand what the pricing in the base -- how the pricing in the base works. But the one other thing I don't want to leave a misimpression on that, we're on record to have-- we're on a pace to have greater than 81% client retention. So it's not just plugging something into a model, which is part of the -- part of the work we do and I think we do a very good job of it. It's also that we have tremendous service at the frontline that's driving that kind of retention because if you just -- if you don't have that part of the model solved, you can price anywhere you want. You won't retain the clients. So it's really important to realize that, we don't trumpet this nearly enough, but we have thousands of payroll specialists who are out there on the front lines meeting client needs every way in a very, very high way. And the stories that we get sometimes are just amazing, and that's part of the secret of our success.

Martin Mucci

Yes. So I think the bottom line on that when you think about what we're saying, we've seen good new business revenue sales. We've seen some best client retention and we're headed I think to an historic best, as Efrain said. I think that says that the sophistication, the pricing model, is working pretty well. We feel good about it. It's holding [indiscernible].

Operator

Our next question in queue comes from Tim McHugh with William Blair & Company.

Timothy McHugh - William Blair & Company L.L.C., Research Division

First, just want to ask about the PEO area. You talked about better client growth this year than certainly you saw last year. Can you give us any sort of sense for exactly I guess how much of an improvement -- I mean, is it back in line with historical levels or the rest of the HRS business and I guess trying to get a sense how much of an impact that could have on the HRS growth going forward for the next year or so?

Martin Mucci

Yes, it's still a fairly small component of the overall HRS revenue. But what we're pleased about, as you know, as we knew we had some bumpy times there with health insurance premiums in the business a few years ago now. And this time around, during an important selling season in benefit enrollment time, we think that a lot of nice work has been done there over the last year, really, 1.5 years to make us much more competitive. And not only -- and it proved itself not only in new sales that were up in the PEO significantly, but retention. Retention in the last 2 years have been a struggle because of the premiums. I think we've gotten that all calmed down and did really well, much better in retention than we expected. So I'd say, Tim, it's still a small part of HRS, but we're seeing it start to come back. And I do think that the Affordable Care Act and all that around health insurance will help drive those sales as well. So this is kind of, just to us, just the start of a positive momentum in the PEO that is finally kind of turned around and we feel it sustaining and actually will increase now with the Affordable Care Act.

Timothy McHugh - William Blair & Company L.L.C., Research Division

Okay, great. And Efrain, can you help us think through, you talked about impact of moving more into some municipal tax-exempt type of securities on the interest income. But the tax rate really, at least year-to-date, hasn't moved all that much. Can that start to have an impact where we can see the tax rate start to move down over the next couple of quarters or a year or 2?

Efrain Rivera

No. I don't think it's going to make a dramatic impact, and a part of that really, Tim, is just a mix effect. I'm not expecting to see a material increase in the amount of float income over the next year or so. And so as our -- where we're driving higher tax rates is from the mix of our operating income. So the proportion of float to operating is going to be at current levels or below, and so that tends to drive the tax rate up a little bit over time, not down. If I had a different interest rate environment, I'd give you a different answer. I don't -- unfortunately, we don't.

Operator

And our next question comes from George Mihalos with Crédit Suisse.

Georgios Mihalos - Crédit Suisse AG, Research Division

A couple of things. One, just looking at the commentary from the sale season and your success, it seems like, bundling solutions together. Should we be interpreting that you guys feel somewhat better about pricing as you're going to be heading into fiscal year '14?

Martin Mucci

Yes, I'd say so. I mean, we're very cautious about it, and I think the models which show it's not an economy that you're going to go necessarily to the high end of a range, but I think we feel pretty good about where we're going. Now we don't want to, again, I don't want to go too much farther on that, but I think we feel pretty good about continuing to give a price increase and hold it.

Georgios Mihalos - Crédit Suisse AG, Research Division

Yes, that's great. That's very helpful. And then just 2 other very, very quick questions. Can you just kind of ballpark for us or give us a sense of the growth rates for SurePayroll on a year-over-year basis? And then also you mentioned continuing your investment in IT and new solutions. Can you also give us a sense of the percentage increase in investment spend?

Efrain Rivera

Okay. In sequential order, double-digit, double-digit. [indiscernible].

Operator

Our next question will come from Tien-Tsin Huang with JPMC.

Tien-Tsin T. Huang - JP Morgan Chase & Co, Research Division

Yes, same -- follow-up to George's question around the investment spend. Double-digit, that's good to hear. Your expense growth obviously staying very good at 2% to 3%. How much more room is there to benefit incrementally from productivity and operations? I get that it's not opportunistic for sure, but I'm just curious how much more can you do to cover the big spending in product development?

Efrain Rivera

Look, I can't give a precise range. When we do our Q4 talk about guidance, we'll get a sense of that. The best I can say is that we will just continue to incrementally improve. There are always ways to find better productivity. That's something that is drummed into the DNA of the entire organization. We understand that. We're currently in the planning season, so I can say that, that mantra continues to be repeated. So we still think we have some opportunity. I can't commit to specifics about how much we'll do, but certainly it's our intent is to continue to do it going forward.

Martin Mucci

Yes, the focus is always continue to leverage the expenses, but to not sacrifice the initiatives we're doing for growth. So the technology spend, the spend to drive more sales, more referrals and things like that, we're still investing in those things. And it's a balance of, hey, we've got to come out of this with invest technology spend for our future growth, sales spend for our future growth and -- but still leveraging the expenses. That's exactly how we work through it.

Tien-Tsin T. Huang - JP Morgan Chase & Co, Research Division

Okay. Fair enough. Just a couple more quickly, I know it's getting close to lunch. The revenue per client maybe I'm thinking here could be a more important metric. So directionally, I mean there's a lot of moving pieces, right? You got the SurePayroll mix and then you've got higher attach rates on ancillary. What's the directional trend? And is there a lot more room to drive up core payroll revenue per client with all the ancillaries that you've added through the years?

Efrain Rivera

We have some opportunity to do that. I think, Tien-Tsin, I think one of the important things to remember here is that there are a lot of people in the market who appreciate good customer service and are willing to pay for it. And we think we deliver world-class service, and we think our clients appreciate that and are willing to pay for it. We also think there are other tuck-in products that over time aren't currently in the portfolio that we will add. And finally, the other thing I'd add is that there is a underestimation of the complexity of the ACA requirement that is going to cause people, even people who are probably in a SaaS-based environment, to think maybe outsourcing is the better option for $1,000 more because of the penalties for noncompliance. So we think all 3 of those are factors that probably could tend to push that higher. What the specific number is, I know we can't commit or say what that is at this point, but we think that it pushes towards a higher number.

Martin Mucci

Yes, I think we're in a very good place of balancing that world-class service with the technology now. A few years ago, 4 years ago, we were, I think, a little behind the curve on the technology, but the investments have paid off. And now with the rollout of product that we're doing all the time and the improvement in the SaaS model and the SaaS investments are really paying off, in that it's a very valuable balance of technology and a very competitive service and technology model together.

Tien-Tsin T. Huang - JP Morgan Chase & Co, Research Division

Yes, no, that makes sense. And it jibes with your high CSAT and retention metrics as well. I'll let you go on just one more question, and I think I ask every quarter and I apologize, but just on the acquisition pipeline, just I heard a little bit about talent management, things like that. But just any color on just the pipeline itself, is there more on the SaaS or the tangential markets or maybe the regional payrolls, is that something you're considering? I'm curious.

Martin Mucci

Well, it's definitely SaaS, I think, because we're looking to bring more in. I think it's not only the product tuck-ins, but it's also new product, new product and expanding, I think, our product set a little bit, not really want to go too far into that at this point until we do something, but and it's investments, also looking out in geography as well. We're really trying to increase the speed at which Germany grows, and I think we've put a renewed focus on that as well. So it's product, it's product tuck-ins, it's additional products, it's payroll certainly as well and it's geography. And we'll be able to tell you more about those as it happens. As Efrain mentioned earlier, we're very careful not to just put it on the top line and then impact the bottom line. So it takes us I think a little bit longer to balance and find the right opportunities. We don't just spend it just to stick it up there on top and not have an impact on the bottom. We look at very good value-based acquisitions.

Operator

And our next question comes from Gary Bisbee with Barclays.

Gary E. Bisbee - Barclays Capital, Research Division

I'll just ask you 2 quick ones. I think you said that you thought the health insurance business could be impacted somewhat by the Affordable Care Act next year. Could you give any more color on how much that would be and what impact?

Efrain Rivera

Yes. Not precisely. What we'll talk a little bit about, we've been growing upper teens to 20%. We expect that to slow down a little bit. And what the impact there really is in the 10 and below market where we think those people eventually were going to migrate into exchanges. There's also a little bit of pressure that's occurring with respect to brokerage fees that we expect to continue. And so the combination of those will cause growth rates. In the short term, they're moderate. We still think there's an important opportunity longer term, and we've transitioned, pivoted the sales force to look at more about market opportunities where we think there's still a lot of opportunity.

Gary E. Bisbee - Barclays Capital, Research Division

You still think you'd grow the business but just a slower rate or is it possible...

Efrain Rivera

Yes. That's...

Martin Mucci

Definitely, yes. There's a lot of opportunity here I think. And Efrain mentioned earlier, even in the payroll side, there's opportunity because I think it will drive more to outsource. But on the health insurance side, I think we're doing some things product-wise that I think are really positioning us well to capture that from a client perspective on the payroll side and the health insurance side. So on the short term, you have a little bit of pressure from commissions, from the carriers. In the longer term, I think more clients are going to come to someone looking for an expert to help them. And the combination of health insurance being done by us, by Paychex, and the payroll will make it much easier for clients than those who do it separately.

Gary E. Bisbee - Barclays Capital, Research Division

Great. And then the second question, the float being flattish with the growth offsetting the lower yield, is that a reasonable proxy? Or do you think it likely could start falling again as we move forward? I think the expectation is that...

Efrain Rivera

Yes. Yes, yes, yes. Look, we had some gains in the quarter, and we kept the guidance for the year, so I think we're at 8% to 6% -- that's down 6% to 8% I think I should put it that way. That's still good guidance, and then we'll talk more about where we think we'll end up next year. But we certainly don't face the headwinds that others do in this, unless rates continue to be -- to drop from where we are and get worse.

Operator

And our next question will come from Mark Marcon with R.W. Baird.

Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division

With regards to the profile of the clients, you were talking about this with regards to health insurance. But I'm wondering if you can talk a little bit about it with regards to on the core. What are the differences in terms of the profile of the new clients that you're signing now relative to maybe a few years ago, what percentage on new businesses? And how should we think about that going forward, particularly with the complexity of the Affordable Care Act impacting companies that are a little bit larger to a greater extent than the really small ones?

Martin Mucci

I think, Mark, I think generally, we're not seeing a big -- any significant differences in the new clients we're selling versus the clients that we have in the base. They're still very much in our sweet spot. I think on health insurance in particular, we have focused that we think there's a better opportunity for us to expand and do more selling in the 50 and above. Obviously, our mid-market payroll business is up there, and I think there's a lot of opportunity. What we found was we are selling a lot to the under 50 in the health insurance and that the even better retention and bigger opportunity might be in that over 50. So we focused some of the health insurance folks on that and have been going through a little bit of a transition on that. But as far as really payroll and core payroll in particular, we're not seeing much difference in new clients versus existing base.

Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division

And what percentage of the health insurance clients are typically in that smaller range out of the existing base?

Efrain Rivera

Yes, I don't think we get to that level of granularity. I think what we've said is that currently, our health care clients as a percentage of the base are under 5%. It's fairly, fairly small.

Martin Mucci

Yes, one thing, I don't want to mislead anybody to think that we're not going after that small market for health insurance as well, we are. It's just, obviously, if you look at under let's say 20 employees, probably 50% provide health care, somewhere in the 40% to 50% provide health care. So that's an opportunity there. If you look at over 50, it's more like 90%. So all we're saying is we're kind of adding a focus not -- we didn't take away from the low end though at the same time.

Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division

Right. And then you mentioned that the bonuses helped a little bit this quarter. Is there any quantification around that?

Efrain Rivera

Yes, what we saw, Mark, was that bonus dollars compared to, as well as we can quantify, were up about 20% this year, a little bit over 20%, over last year. So there was clearly a lot of bonus activity. And as Marty said, before we said, a more normalized rate of growth in checks per client would have been about 2%. So we saw roughly 0.3% or so in terms of checks. That's an estimate, so I don't want to -- don't want you to think that's anything more than that in our part because it's tough to say what's a check and what's a bonus check. But based on our analysis, it looks like a lot of people made some year-end bonus payments that didn't occur in prior years for obvious reasons.

Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division

Obviously, a positive sign with regards to the economy in terms of...

Efrain Rivera

Yes. Yes.

Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division

And in terms of the float yield, do you think we're basing at this point?

Efrain Rivera

We're what, I'm sorry?

Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division

Do you -- in terms of the effective yield on the float, do you think we're pretty close to basing in terms of that we've reached...

Efrain Rivera

I'm sorry, Mark, I didn't understand what you meant by basing. I get it now. We're pretty close, we're pretty close. We're getting close.

Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division

And we should start seeing continued improvements in terms of the overall float balances, no?

Efrain Rivera

Float balances or float income?

Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division

Float balances.

Efrain Rivera

Yes, float balances should over time go up. Yes, absolutely. So -- yes, I know where you're going. Look, I hope that, that increases. I think we'll still see down next year just because of the rolloff to some older investments, but we're getting close to the end of this cycle.

Operator

And our last question will come from Paul Condra with BMO.

Paul Condra

Just on the bonuses, I think you mentioned those have been up for obvious reasons. But to me, that means people trying to front-run the payroll tax increase. I'm wondering if you were thinking about it the same way.

Efrain Rivera

No. I think what they were trying to front-run was a perception that dividends were going to go up in all likelihood and capital gains. It seems like 6 years ago, but there was a lot of nervousness in December about cap gains and dividend rates going up, and so I think people got nervous about that and rates in general going up.

Martin Mucci

I think we did see some -- I think the overall bonus activity was more about an improved economy, and so more checks and so forth. I think to your point only, we saw more bonuses paid in December than January this year. And so it moved up a little bit. But I'm not sure the overall amount was trying to -- I think the overall amount is up though, which was a positive on the economy. But we did see it shift some to December versus January, obviously all still in the third quarter.

Efrain Rivera

Yes, I guess on the timing, the front-running comment was what I was referring to.

Paul Condra

Sure. Okay, great. And then just I don't know if you can kind of remind us just on the HR services the mix of those kind of main 4 business lines there and then maybe some comments on the mobile adoption or mobile usage and then I'll just end it there.

Efrain Rivera

Yes. So we don't disclose the exact percentages for each, but within the 3 lines of businesses that we have in HRS, the biggest is HR outsourcing, which is our ASO PEO solutions, and what we call HR Essentials; and for our second is our 401(k) recordkeeping and related business; and then third is insurance. And I'll let Marty talk about the...

Martin Mucci

Yes. And by the way, feeling good about all of them, particularly 401(k). And we didn't talk much about it on the call, but we shifted and expanded frankly our sales force in 401(k) toward the larger market, larger 401(k)s and that's done -- off to a great start. I think Efrain and I have mentioned it on previous calls, but just started that this fiscal year. So we see expansion on larger 401(k)s as well. And on the mobility question, yes, we're seeing a nice fast pickup in use of the mobility platform. And as we add more feature and functionality to it and more clients are -- we're pushing that more so clients are aware of it, that it's available and out there. And the feature functionality to the application just continues to expand. So we're seeing a nice pickup in that. And again, it's not really replacing. For us, it's this hybrid of balancing the service model that we have of the dedicated specialist who's all knowledgeable and can take care of everything for you with your ability to go in and do your payroll if you want online or just get information off your phone or tablet.

Operator

And we show no further questions.

Martin Mucci

Great. Well, thank you. Thanks, everyone, for hanging in. And we appreciate the interest in Paychex, and we're very excited about our future. At this point, we'll close the meeting. If you're interested in replaying the webcast of this conference call, it will be archived until the end of April, April 29. Thank you for your time and your participation in our third quarter press release call. Have a good weekend.

Operator

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

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Source: Paychex Management Discusses Q3 2013 Results - Earnings Call Transcript

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