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Paychex (NASDAQ:PAYX)

Q4 2013 Earnings Call

June 27, 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

Glenn Greene - Oppenheimer & Co. Inc., Research Division

Sara Gubins - BofA Merrill Lynch, Research Division

Bryan Keane - Deutsche Bank AG, Research Division

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

David Togut - Evercore Partners Inc., Research Division

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

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

Georgios Mihalos - Crédit Suisse AG, Research Division

Ashwin Shirvaikar - Citigroup Inc, Research Division

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

Paul Condra

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

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

Rod Bourgeois - Sanford C. Bernstein & Co., LLC., Research Division

John T. Williams - UBS Investment Bank, Research Division

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

Matthew Lipton - Morgan Stanley, Research Division

Operator

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

I would now like to introduce President and Chief Executive Officer, Mr. Martin Mucci.

Martin Mucci

Great, thank you. And thank you for joining us for a discussion of the Paychex's fiscal 2013 year-end earnings. Joining me today is Efrain Rivera, our Chief Financial Officer.

Yesterday afternoon, after the market closed, we released our financial results for the fourth quarter and fiscal year ended May 31, 2013. We also filed an 8-K filing, which includes preliminary discussion and analysis of our results of operations and financial position. This preliminary discussion and analysis is not a complete management's discussion and analysis. Our complete MD&A will be included in our Form 10-K, which we expect to file by the end of July. These documents are available by accessing our Investor Relations page at www.paychex.com. This teleconference is being broadcast over the Internet as well and will be archived and available on the website for about 1 month.

On today's call, I will review the fourth quarter and fiscal 2013 highlights in our operations, sales and product development. And Efrain will review our fourth quarter and fiscal 2013 financial results in more detail and discuss our fiscal 2014 guidance. Then we'll open it up for your questions.

Let me start by saying I feel we had a strong fourth quarter and a solid financial performance for fiscal 2013 as a whole. Efrain will go into, again, more detail. However, I'd like to provide you with some of the highlights. Our checks per payroll have improved for 13 consecutive quarters. Growth in checks per payroll have been consistently positive this year. We did see some moderation in the rate of growth in the fourth quarter. Our execution in operations has been excellent, demonstrated by achievement of the highest client satisfaction scores in our history. It is our exceptional client service, along with our leading-edge technology, that really sets us apart at Paychex. The dedication of our employees has also resulted in our best year ever in client retention, exceeding 81% of our beginning payroll client base.

Over the past few years, we have increased our focus on sales execution and expansion opportunities, and we are pleased with the results for fiscal 2013. We opened new territories, focused on market segmentation in payroll as well as 401(k). We also increased our involvement in franchise and banking referral opportunities, creating new expanded relationships with Subway and Tim Hortons on the franchise side, as well as Citizens and Union Bank, to name a few on the banking side.

From a sales perspective, we had a strong fourth quarter. And we are particularly pleased with the new sales revenue generated from our core payroll sales, retirement services, HR outsourcing and SurePayroll teams.

Our client base in payroll finished the year at 570,000 payroll clients, an increase of approximately 1%. This growth is consistent with the prior year. Revenue per client was another positive factor in our payroll revenue growth.

From a technology perspective, we are integrating our leading technology and mobility platform with our world-class customer service through the Paychex Next Generation suite. This technology creates an integrated workforce management tool for our mid-market clients by bringing together the services those clients need, including our small and mid-market payroll products and various human resource and employee benefit management services. We have been positioning Paychex to capture the opportunity arising from an increase in shift to the online SaaS solutions. We have market-leading SaaS solutions leveraging the latest technologies and continue to invest heavily in product development relating to our SaaS and online capabilities in mobile applications.

Our recent acquisitions of ExpenseWire and mystaffingpro.com have SaaS-oriented business models. And in addition, our SurePayroll product continues to do well, with strong sales and revenue growth.

We enhanced our online and mobile offerings during the fiscal year by adding greater value and convenience for our clients. We introduced a best-in-class online report center and builder in the fall and most recently added flexible spending account in health and benefit employee and employer information to our mobility apps. And we will continue to add more capabilities in the future.

In retirement services, we have also experienced success in driving more sales to our approach to enhance our relationship with financial advisors.

As we move into fiscal 2014, health care reform is one of our most important initiatives. This legislation has far-reaching impacts to businesses across the country. And we will see changes in the way businesses handle not only insurance, but also payroll reporting, administration, monitoring and employee benefit offerings.

We are excited about the opportunity to assist our clients as they navigate the complexity of health care reform by providing them with information and support, as well as new, comprehensive solutions for their businesses and their employees.

Our new Paychex Employer Shared Responsibility Service makes it easier for business owners to determine if the employer shared responsibility provision applies to them and what actions they may need to take. We also offer our new Employer Shared Responsibility Complete Analysis and Monitoring Services for those clients who want a more robust solution as well.

The Paychex Benefit Account products will allow employers to offer flexible spending accounts, health savings accounts, health reimbursement arrangements on a single platform, with 1 debit card for their flexibility. And we will give employers access to a Paychex Private Exchange in conjunction with this product. We have launched the new health care reform section on our website designated to provide answers, information and solutions that will help our clients and employers who need to prepare and take action on health care reform.

In summary, I am very proud of the efforts of all of our employees at Paychex on behalf of our clients and our shareholders. We have a solid leadership team that is clearly focused on sales and service execution, technology innovation and product expansion to drive our plans in fiscal 2014.

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 with the customary legal disclosures. You should be aware that certain written and oral statements made by us constitute forward-looking statements within the meaning of the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995.

As Marty indicated, Paychex delivered solid results in fiscal 2013 with improving metrics. Here's some of the key highlights for the quarter and fiscal 2013. I'll provide greater detail in certain areas and wrap with a review of our 2014 outlook.

Total service revenue grew 6% for the fourth quarter and 5% for the fiscal year. Interest on funds held for clients decreased 7% for the fourth quarter and 6% for the fiscal year to $10 million and $41 million, respectively. This result was a byproduct of the low interest rate environment that prevailed during the year and was partially offset by increase in average investment balances.

Expenses increased by 5% in the fourth quarter and 3% for the fiscal year. We continue to invest at a higher rate in leading-edge technology. For the full year period, this was partially offset by increased productivity within operations. Operating margin was 35.1% for the fourth quarter and 37.8% for fiscal 2013. Operating income, net of certain items, increased 9% to $202 million for the fourth quarter and 7% to $864 million for fiscal 2013.

In the fourth quarter, we increased our tax provision for the settlement of a state income tax matter for the fiscal years 2004 to 2011. This additional provision reduced earnings per share by approximately $0.04 per share for both the fourth quarter and the fiscal year. We do not expect this to have an impact on our effective tax rate going forward.

Net income growth, due to factors just discussed, was flat at $124 million for the fourth quarter and grew 4% to $569 million for the fiscal year. Diluted earnings per share were again flat at $0.34 per share for the fourth quarter, including the tax matter we just discussed, and increased 3% to $1.56 per share for fiscal 2013, including the effect of the increased tax provision.

Payroll revenue. Payroll service revenue increased 4% for the fourth quarter and 2% for the fiscal year. We benefited from increases in checks per payroll and revenue per check. Checks per payroll increased about 1% for the fourth quarter and 1.6% for the fiscal year, moderating from their respective prior year periods. Revenue per check was positively impacted by price increases, partially offset by discounting. We have been experiencing positive growth in revenue per check through the pricing of our core products and related ancillary.

Fiscal 2013 payroll growth was modestly affected by events from earlier quarters, including the impact of Hurricane Sandy and 1 less payroll processing day overall due to the leap year in the prior year.

HRS. HRS revenue increased 13% to $193 million for the fourth quarter and 10% to $746 million for the fiscal year. HRS revenue growth reflects favorable trends in client growth and price increases. Some highlights of the contributions to HRS revenue growth include: Retirement services revenue, which benefited from growth in clients, price increases and an increase in the average asset value of retirement services client employees' funds.

Paychex's HR Solutions revenue was positively impacted by growth in client and client employees and price increases. The rate of growth was tempered by lower average client employees within our PEO. During the second half of fiscal 2013, our PEO business stabilized and improved as the year progressed.

Insurance services revenue continues to improve as a result of growth in health and benefit services applicants, though at moderating rates, and higher revenue from other insurance policies. Growth also resulted from increases in premiums in workers' compensation insurance services. We expect that health care reform will impact our insurance service revenue in the form of rate pressure. However, we see a number of opportunities in assisting our clients in navigating the complexities of the Health Care Act.

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

Now let's look at investments and income. We maintain a fairly conservative investment policy. As you know, our goal is to protect principal and optimize liquidity. On the short-term side, our primary investment vehicles are high-quality variable rate demand notes, VRDNs, and bank demand deposit accounts. In our longer-term portfolio, we invest primarily in high credit quality municipal bonds.

The interest rate environment remained at historically low levels for much of the year, despite the recent uptick. Our combined portfolios have earned an average return of 0.9% for the fourth quarter compared to 1% for the same period last year and 1% for fiscal 2013 compared to 1.1% for the same period last year.

Our average rate of return was also impacted by our allocation of investments to a greater percentage in tax-exempt securities within the short-term portfolio.

Investment income decreased 20% to $1 million for the fourth quarter and increased 4% to $7 million for the fiscal year. The increase for the quarter was due to lower average interest rates earned. This was due to a change in mix in the corporate portfolio, with more invested in short-term securities compared to the prior year.

I would now walk you through our -- the highlights of our financial position. It remains strong. Cash and total corporate investments totaled $875 million as of May 31, 2013, and of course, we had no debt.

Funds held for clients as of May 31 were $4.1 billion compared to $4.5 billion as of the same period last year. Funds held for clients vary widely on a day-to-day basis and averaged $3.7 billion for the fiscal year, 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 $35 million as of May 31, compared to $60 million in the prior period. The decline in net unrealized gain position was driven by the recent uptick in market yields.

Total stockholders' equity was $1.8 billion as of the end of the year, reflecting $477 million in dividends paid during the fiscal year. Return on equity was 34%.

Cash flows from operations were $675 million for the fiscal year, a modest decrease compared to the prior year. The decrease was driven mainly by fluctuations in operating assets and liabilities, partially offset by higher net income adjusted for noncash items. Fluctuations in our operating assets and liabilities between periods were primarily related to the timing of collections from clients and payments for compensation, PEO payroll, income tax and other liabilities. Settlement of the state tax matter had a related effect on our federal tax liability, which had an impact on accrued income taxes at fiscal year end.

Now turning to 2014 guidance. I'd like to remind you that our outlook for fiscal year ending May 31, 2014 is based on our current view of economic and interest rate conditions continuing without significant changes. Our guidance is as follows: Payroll services revenue projected to increase in the range of 3% to 4% compared to fiscal 2013. This projected growth rate is based on anticipated client base growth and increases in revenue per check. HRS revenue is expected to be in the range of 9% to 10% in line with recent experience. Total service revenue expected to increase in the range of 5% to 6%. Interest on funds held for clients is expected to decrease in the range of 7% to 9%. Based on projected rates, we will revisit this assumption during the year.

Operating income, net of certain items, as a percent of service revenue is expected to be approximately 38% for fiscal 2014. Investment income net is projected to increase in the range of 0% to 5%. And net income is expected to increase in the range of 8% to 9%. This growth assumes and incorporates the impact of the settlement of the state income tax matter in fiscal 2013.

The effective tax rate for fiscal 2014 is expected to be in the range of 36% to 37%, as we don't expect the state income tax matter to impact our future effective income tax rate.

As you know, we don't provide guidance on a quarterly basis. However, we do anticipate that payroll revenue growth in the first quarter of 2014 will be at the low end of our full year guidance due to timing of payroll processing in that quarter. From an earnings perspective, we anticipate that the first half and the second half earnings in fiscal 2014 will be comparable.

Martin Mucci

Okay. Thank you, Efrain. And we'll now open up the meeting to your questions. Stacy?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Glenn Greene of Oppenheimer.

Glenn Greene - Oppenheimer & Co. Inc., Research Division

I wonder if you could first start with the underlying assumptions you had for payroll services growth going into '14, kind of thinking through sort of the net customer growth, revenue per check, maybe some of the ancillary whatnot. Maybe just sort of help us walk through the high level thinking to get to the 3% to 4%.

Efrain Rivera

Yes. So as you know, we ended the year at 2%. And so we're expecting that to improve. We see pricing a little bit better than we had this year. We expect net client growth to improve a bit. And we expect checks per payroll to moderate from where we are. So in the quarter, we saw moderation. We think that we're reaching -- we're moving down in terms of what we expect the contribution for checks per payroll to include, and we expect some modest upticks both on client growth and on pricing.

Glenn Greene - Oppenheimer & Co. Inc., Research Division

And on the pricing, is it kind of reasonable to think that the net pricing was kind of in the 1%, 2% range, and you're kind of suggesting a little bit of an uptick going into '14? Is that the right way to think about it?

Efrain Rivera

That's probably a little bit low, Glenn. I think we're more towards the 2% range. And we're expecting it to tick up a bit from there.

Glenn Greene - Oppenheimer & Co. Inc., Research Division

And then just one more, and I'll jump back in the queue. But I'm sort of thinking through the 570,000 customers, which you grew directionally close to 1%. Is there any way to sort of parse how much of that was SurePayroll customer growth versus the core payroll growth?

Efrain Rivera

Well, core payroll growth was modest. We have about 5 different customer bases in there. Some were up. Some were down. Core was modestly up. Sure was up. And then there were some other older platforms that were down.

Glenn Greene - Oppenheimer & Co. Inc., Research Division

Was Sure kind of like what it's been doing, mid-teens or so kind of growth?

Efrain Rivera

Double digit, yes.

Operator

Our next question comes from Sara Gubins of Bank of America.

Sara Gubins - BofA Merrill Lynch, Research Division

Of your payroll services clients, I'm wondering if you could parse out the clients that have around 10 employees or fewer. Did that grow slower or faster than your overall business?

Efrain Rivera

I don't think it changed that dramatically. What I will say, Sara, is if you look at sales now in the back half of the year versus the first half, we saw an uptick in the size of core clients. So I don't think it's enough yet to affect the base as a whole. But we did see an increase that was notable in terms of size of clients.

Martin Mucci

Yes. And what we think of as the small market, kind of the under 50, but really under 20, I think you could say.

Sara Gubins - BofA Merrill Lynch, Research Division

Okay. And then on the margin front, it looks like next year you're expecting less margin leverage in operating income as a percent of service revenue than you got in fiscal '13. Is that fair? And can you talk a little bit about why?

Efrain Rivera

No, I don't think it's fair. So we always go through this discussion around how precisely we're going to guide. So let me just review what has happened, right? So if you look at what happened over the past 2 years, and actually I would go back 3 years. We were at 36.3%, 37.1% and 37.8%. So when we guided last year, we guided in similar fashion. We expected to be north of 38%, but we don't expect it to reach 39%. So we said approximately 38%. So we do expect some margin. I wouldn't book precisely the amount that we got this year. But we'll -- we're going to continue during the year to produce some leverage. So the approximately 38% just simply is to say, we didn't want to call it closer to 39%.

Martin Mucci

Yes, we're always looking -- as we have said in past calls, we're always looking for additional margin and different additional leverage as we grow so.

Operator

Our next question comes from Bryan Keane of Deutsche Bank.

Bryan Keane - Deutsche Bank AG, Research Division

I wanted to ask about HR Services revenue. It increased 13% for the fourth quarter. So it looked like it had pretty good momentum, although the guidance tempers that a little bit back down to 9% to 10%. So I just want to make sure I understand that.

Efrain Rivera

Yes, Brian. We had -- if you look at what happened particularly in the back half of the year, and Marty mentioned early, we had really good sales results in the second half of the year. We had a really strong back half in the PEO and really good sales performance and very good retention performance. Part of what our guidance incorporates is, we don't see it being quite that strong in next year. But we are exiting the year with very good momentum on the HRS side.

Bryan Keane - Deutsche Bank AG, Research Division

Okay. And that's just -- it's not quite as strong just because of the pipeline you see through the sales channel or I just...

Efrain Rivera

That's it. And we were rebounding off an easy compare, so the combination of both of those.

Martin Mucci

Yes, I think we -- as Efrain said, we are real pleased with where the sales are. We're just -- one quarter doesn't always make a year. So as we see a strong quarter, we're very pleased. But when we look at the whole year, we'll be very consistent in that range that we gave, I think, for the year. But we are pleased with the second half of the year and particularly the fourth quarter on PEO sales, HR outsourcing in general, ASO, 401(k). All had a really good fourth quarter in the sales front.

Bryan Keane - Deutsche Bank AG, Research Division

Okay. And I was a little surprised that checks per payroll only increased 0.9% But it sounds like you expect -- do you expect that to be at similar levels and just any high-level thoughts on why that seems to be moderating, even though I guess people are hoping for a stronger economy?

Efrain Rivera

Yes. I think we've been expecting moderation. And I think when we look at the data, we're realizing that quarter ends when they end. The day can sometimes influence that number. I'll just say that going into the beginning of the year looks like we're a little bit stronger than that. But the trend is definitely towards moderation, and that's what we're assuming for next year.

Bryan Keane - Deutsche Bank AG, Research Division

Okay, last question for me. I know we talked about new client growth being about 1% to 3%. It sounds like you expect that to get a little bit better this year. I'm just curious what gives you that confidence because it's been around that 1%, 0.5% for the last couple of years.

Martin Mucci

Yes. I think a couple of things. I think, one, as we stated, the sales in the small market into the second half of the year are stronger. We came out of the fourth quarter strong. So we feel like that's a good signal. I think when you look at some of the economic indicators, housing starts are up, prices are up on housing. I think housing is a really important measure for us because we have a lot of jobs around that. A lot of contracting roofers, et cetera, around that. All of that is positive. And so we're feeling like we're coming off the end of the year with some momentum and that that will certainly help us. We also came out with the best client retention in our history this year on the core -- on the payroll side. And so we feel very good about the retention work that we're doing. And you put that with the sales, we think that the client growth is going to start to pick up.

Bryan Keane - Deutsche Bank AG, Research Division

What did retention actually end up at?

Martin Mucci

I think we said over 81%, which is a historic best.

Operator

Our next question comes from Joseph Foresi of Janney Montgomery Scott.

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

I wonder if I could ask a question just on the interest rate side of things. I know it affects your business. And I'm wondering if you could answer in 2 ways. First of all, what are you thinking, not just 1 year out, but maybe 2 or 3 years out from the actual impact to the numbers? And then the second part, have you seen any changes? You mentioned construction. But if interest rates should slow the -- or a tick up in interest rates should slow the pace of investments, are you seeing any changes on the demand front? So I guess interest rates from a numerical perspective within the model and then on the demand front?

Efrain Rivera

Yes, Joe. So 2 things on that. And I saw a couple of notes on this that I wanted to clarify. In a typical year, we're repricing 20% to 25% of the portfolio. And so we will see the benefit of longer -- the higher rates, I should say, in our longer-term portfolio as we go through the year if we stay at current rate level. And I just want to caution, we've seen spikes above 2% before only to have them come down again. But if we continue at these levels, we'll get some benefit, some upticks. Some people were asking why we didn't call out a higher number on our portfolio. We need to see when we invest, whether these interest rates prevail. I believe they will.

With respect to the impact of interest rates on our clients at this point, it's really kind of early to tell. Marty said we've been seeing some uptick on the clients in the construction industry. So that's a positive. It remains to be seen whether a bump of this magnitude, which is still modest by historical standards, will really have a dampening effect on businesses and business formation.

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

Okay. And then just one last quick question for me. On the margin side, you've obviously been clear on the earlier questions about what you're expecting for margins. But I think the historical thought process there was that you're gaining efficiencies in the business and then reinvesting that on the technology front. Can you just give us some idea of where you stand with that schedule and what could be the potential delta in the upcoming years as oppose to the past on the margin front?

Martin Mucci

Well, I think -- yes, we've continued to invest -- and as you said, we've taken the efficiencies much from the field operations in the centralized service operations that we've gained and poured them back into the technology. And we really feel good about that. It's really come to fruition the last 2 years, in particular on all of the products that we rolled out, and the success we've had on the technology front. I think that where we used to talk about maybe the 100 to 200 basis point range, we've been much more in the 50 to 100 basis point range is where we've talked about. Always looking for leverage. Always will be part of our DNA to look for it. But we certainly understood that we had to pour more back into technology. And we'll continue to do that, although it is at a decelerating rate now. We're getting to a level of technology spend where I don't think you'll see as big of an increase in that. But I think when you look at our leverage, it will -- we'll continue to look for the 50 to 100 basis points as we grow. As we grow more, now you got to kind of -- I'm sure Efrain would tell you. If you put that into a different perspective, when interest rates go up, that's a very different equation. This is more on the flat interest rate and no movement in the interest rates.

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

Fair enough. So 50 to 100 is the new normal, excluding interest rates? Just so we're clear.

Martin Mucci

Right. Yes.

Operator

Our next question comes from David Togut of Evercore Partners.

David Togut - Evercore Partners Inc., Research Division

Marty, you highlighted the major new product enhancements that have been made recently, particularly on the mobile front. Of those enhancements, which do you believe most differentiate you from your primary national competitor?

Martin Mucci

Yes. I think on the mobility front, the biggest thing is we went after making sure that -- one, that any device you use was optimized. So whether you're on an iPad or whether you're on a tablet or whether you're on a phone, that the screen is optimized. And I think we were ahead of the game on that one. We were a little behind in getting to the mobility. But when we went -- when we got to it 1 year or so ago, 1.5 years ago, we were optimizing, first of all, the device. Second, we focused very much on information to the client. So as opposed to necessarily on the phone, allowing for payroll, you actually -- to do your payroll, which we didn't find much research that said a lot of people were doing that, either from our general research or at looking at SurePayroll's experience. What we found is they want to get to the information and how do they get to it in the easiest possible way with fewest clicks, for example. And that's what we focused on. So if you look at our application on the iPhone, for example, you can get to your employer or employee information very easily. And we're continuing to add to that in a very thorough, but yet easy way to get -- to access the information. It will allow you to do payroll -- to actually do the payroll on the device in the August timeframe this year, but we found it was more important for the simplicity and amount of information. And I think we're the only ones that give the health and benefit information to the detail that we have in the industry, I think. So we really feel it's a leader out there.

David Togut - Evercore Partners Inc., Research Division

And in terms of product enhancements, what's next from Paychex?

Martin Mucci

Well, I think the most exciting thing for us is the health care reform. We're very excited about the opportunity to help our clients navigate through one of the biggest changes in their business in years, whether they're small or large, because they're going to have to react somehow in most cases to help their employees or comply with the law, if they're over the 50. And we're really excited about the products that we'll be rolling out in the fall that not only help them take the information and use it to determine whether they have to comply and how they comply and help them comply. But also then to help them even get to an exchange, if they want to go that way, to combine a lot of complicated health spending, health reimbursement and accounts -- and health spending accounts that can kind of come all, combine to 1 debit card. So that's probably the -- I mean, we're excited about all our products. But I think the response to health care reform that the team has done here is really extraordinary. And I think it's going to be ahead of the game in the fall.

David Togut - Evercore Partners Inc., Research Division

And when do you expect the new health care reform product to become material to revenue or earnings for Paychex?

Martin Mucci

Well, it's hard to say because we're just starting out. I think there's going to be so much confusion over it. But I think when you get into the second half of fiscal '14 and then you get into the kind of the second half of the calendar year, which is early '15, I think it starts to pick up speed, and frankly from there on in. Because I think there'll still be changes. People will be catching up with everything from a client perspective. I would say the next calendar year and into the following one.

David Togut - Evercore Partners Inc., Research Division

Got it. And just finally, did you quantify year-over-year bookings growth for the May quarter?

Efrain Rivera

No, we didn't. We don't do it on a quarterly basis.

Martin Mucci

Yes, but we felt good about -- as Efrain said, the second half was stronger than the first. And we really felt -- and not just in one area. The small payroll side was good, the 401(k) was strong in par and in our new business revenue and so was HR outsourcing and SurePayroll.

David Togut - Evercore Partners Inc., Research Division

Did bookings growth improve from the February quarter?

Efrain Rivera

It was comparable, both were very good.

Operator

Our next question comes from Paul Thomas of Goldman Sachs.

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

Following up on the health care reform, you mentioned you expect some rate pressure in insurance from reform. But it sounds like there might be some opportunities. I mean, are you thinking about it as a net positive or net negative at this point within your FY '14 guidance?

Efrain Rivera

It's net positive, Paul. So referring back to the previous question, it's tough to peg when some of these initiatives will become material to growth because we're walking through it the first time. But we think it's definitely a net plus. When we call out rate pressure, what we're describing there specifically is, we see a migration from smaller clients to larger clients in our base health and benefits business. We see rates there coming under some pressure for that segment of the market. But that is going to be dwarfed by other opportunities within the market that really extend across the entirety of our client base. So the products that Marty just mentioned, we think, will have the potential to be an important contributor in the future.

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

Okay. And have you seen any change in client behavior yet? I think last quarter you talked about you hadn't seen much yet because it's still ways off. But it sounds like you're getting products ready for the change. And what are you seeing on the client side?

Martin Mucci

What we're seeing at this stage is a lot of request for information. So it's getting us in front of clients. But I don't think they're -- they're not making -- one of -- well, first of all, the products aren't there yet. But I don't think they're making their decisions yet. I think the summer and the fall is really where it's going to hit as they get into benefit enrollment. That's where they're going to really feel it. At this stage, they're still gathering information. But the information gathering has ticked up, but not in anything necessarily in making decisions.

Operator

Our next question comes from Jason Kupferberg of Jefferies.

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

So I just wanted to follow up on the question that I had initially asked last quarter, as far as the longer-term guidance for core payroll revenue growth, the mid-single-digit figure that you had given last summer. And at the time, you had said that that seemed too high. And now obviously, we're into fiscal '14. We have the guidance for this year. It's still below mid-single digits. So is now the right time to kind of give us a reset on that longer-term guidance? I mean, where do you guys think, over that 3-year forecast period, you'll actually come out in core payroll?

Efrain Rivera

Yes, hey, Jason, so when you go back to the presentation, there were 2 parts of it. One was the long term thought process, which was contrasted by the next section of the presentation, which was 2013 through 2015. So in 2013 through '15, this is what we said specifically. Organic client base growth was going to be 1% to 3%, pricing would be 2% to 4% and checks would be 0% to 1%. That's what we said about 2013 to '15. To get to mid-single digits, and I think that we've been saying this pretty consistently, you need a slightly different environment in terms of new business formation than the one we have. If you look at the data that we've got at this point, based on the most recent BLS data, which has a lag, basically shows no growth whatsoever in new business formation. Now we're not using that as an excuse. We think that we can grow the business. We need a little bit better environment to kind of push us solidly into the mid-single-digits category. But we think as a long-term proposition, meaning beyond the 2015 range, that's not a unreasonable expectation or target to set. Now, will we make it? It depends on those 3: organic client base growth, pricing and checks. We think at this point, there's a path to get there.

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

Okay, just it gets pushed out a bit because of the macro, it sounds like.

Efrain Rivera

Yes, yes.

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

All right. Now I was also curious if there's been any changes in your win rate in terms of going after new clients as opposed to renewals. The reason I ask is, obviously the retention is trending very well at record levels, yet the total client base is only up about 1% in aggregate over the last 2 years. So anything you can share there?

Martin Mucci

Yes, I think it's pretty consistent. I think that we focused a lot on revenue this year with the sales team in the last fiscal year. And so we did a really good job of driving higher revenue per client. And they focused a lot on that. I think, frankly, that took a little bit of the focus off of units, of selling every client. So it's a little bit of hard to tell in the numbers when we compare year-to-year. But I think we're doing pretty well. I think from a -- like when you look at from a revenue, new business revenue standpoint, some of our old favorites in CPA referrals, bank referrals are trending up. So I'd say overall, it's probably about the same. And I think we definitely will see an uptick this year as we did in the fourth quarter. I think when we did some incentives more toward balance of unit and revenue, we saw the fourth quarter really pick up, so.

Efrain Rivera

But one other thing I'd add to what Marty said is that, if we look at it from a revenue retention standpoint, we typically don't give that number, we're at historic highs, above our client retention rate. So we've got a number of things working in our favor. And Marty's just reiterated, I think we put a lot more emphasis on revenue per client. We saw, as the year exited, that we were selling a little bit bigger client. That probably affected units a bit. And we probably need to be a little bit more balanced next year.

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

Okay. And then just lastly, on the float. I mean, I think based on investor conversations we've had since the last night, it seems like there was a little disappointment that the float income is going to be down more in fiscal '14, a little bit more than it was in fiscal '13. So can you just clarify which part of the yield curve actually matters most to your float income right now, based on the current composition of portfolio and the historical rule of thumb, in terms of the 25 bps change in short-term rates impacting EPS by a little north of $0.01 over the forward 12 months, does that still hold based on your current duration in the rate environment?

Efrain Rivera

Yes. So, I guess, Jason, let me answer that in 2 ways. So we're a little bit north of 50% on the portfolio as a whole. And on average, we're about $4 billion. We're north, I'd say, of 50% in terms of our long-term portfolio. We're about a little over 3 in terms of duration. The impact of higher rates will be seen in that portfolio, we just did not going to reprice immediately. So -- and as you can imagine, we've got a group of treasury professionals who are trying to figure this out. In a rising rate environment, you go longer, do you say intermediate? So we're figuring that part out of it. The -- with respect to the shorter-term portfolio, we're getting 8 to 10 basis points on a little bit under $2 billion worth of client funds. So the immediate impact would be much more -- would be felt much more quickly on a short-term rate boost, which we haven't seen, which may be the long-term augers are the short-term rate boost. But I think the 25 bps and $0.01 is about right, that's about the right number. So I would just caution that if you don't see it right away, it's simply because as we were putting our plan together, we made an assumption about rates that probably was a bit conservative in this environment. We'll see as we go through the year. If rates continue to rise, we should have a bit of upside on the client funds portfolio.

Operator

Our next question comes from George Mihalos of Credit Suisse.

Georgios Mihalos - Crédit Suisse AG, Research Division

A question on the client retention. I noticed it's -- or you mentioned it's at historical highs at over 81%. Looking into fiscal '14, is that sustainable? And kind of what's the retention assumption that you built in for the year?

Martin Mucci

Well, I think we never look to go backward. So I think -- we certainly feel it's sustainable, and we're always trying to improve it. I think we've done a really good job with -- first of all, I think the quality of the products and the service is very important to clients. I think the pricing is right, and I think we've done a really good job on maximizing both of those things, really, the combined performance and the pricing. So yes, I think it is. And we would expect -- always expect from our team a little bit better performance. So now, how far can it go when you have losses, and if sales pick up again, everyone knows it is more sales pick up, new businesses -- more businesses start. If we have that kind of pickup, it may cause some losses because you have more businesses starting up. But I think you could expect -- we certainly expect that it's going to be the same or a little better.

Georgios Mihalos - Crédit Suisse AG, Research Division

Okay. But the net new client growth for next year, that's going to be much more a function of new sales coming through for '14 relative to '13. That's a fair way to look at it?

Martin Mucci

That's a fair way to look at it, yes.

Georgios Mihalos - Crédit Suisse AG, Research Division

Okay. And then just last question for me. I think you had mentioned about feeling more comfortable about pricing heading into the year. Is that just a function of being able to bundle more products or is there something else going on in the environment related to pricing?

Martin Mucci

No, I think it's just -- I think we found a good place where -- and we've always said that the competitive environment is about the same, and I don't think it has changed much. I think we've got very strong products that compete very effectively, and I think our pricing is a good place. I think, as Efrain said earlier, we don't give out the pricing exactly, but I think you can kind of guess in the range that we're in, we feel that that price will hold, as it has in the past. And when you see the pricing that we've done in the past and record retention, we certainly feel good about the level of pricing that we're doing. So I think there's no big change there, except that I think we're able to hold the price well. And I think the environment is going to get any -- is get nothing but better from an overall environment -- business environment.

Operator

Our next question comes from Ashwin Shirvaikar from Citi.

Ashwin Shirvaikar - Citigroup Inc, Research Division

So I guess, just a bit curious why you didn't do a buyback? If you addressed it, I might have missed it.

Efrain Rivera

Yes, so authorization lasts through the end of next year. We wanted to see where we ended up from a share count perspective. We'll buy back to offset dilution, and then we'll see where the stock settles out in terms of price and buy when we think market conditions are right. I guess I wouldn't say anything more direct than that.

Ashwin Shirvaikar - Citigroup Inc, Research Division

Okay, understood. And then on -- what trends are you seeing with regards to new business creation? And within sort of the new businesses that do get created that commerce have a conversation with you, are you seeing maybe a greater tendency to use SurePayroll or maybe a disaggregated product, or is it conversation sort of bundled product?

Efrain Rivera

With respect to the environment, it's -- one of the things that if you went back 2 years and asked what our assumption was, we would've simply thought that the environment was going to bounce back in terms of business formation more quickly than it has. It simply hasn't, thus far, as we can tell. With respect to businesses, preferring SurePayroll versus core payroll, it's really more attitudinal than it is its size. So we see 7-person payroll companies that want an outsourced solution, fully outsourced solution, and we see a lot of 7-person payrolls that prefer the SurePayroll credit. It really depends on the type of customer and what their interest is in terms of the way they want to process payroll. One thing that I'd mentioned to a number of you that I think is important, we don't constrain the customer or tell them that one solution is better when they search on the web. If you go on the web, you'll see both solutions pop up, and SurePayroll competes against our core product in the same payroll services ecosystem. We think we want to get the customer, then we're going to offer them a range of additional services that, whether they're on SurePayroll or not, they would be interested in. So it's really more attitudinal than anything else.

Ashwin Shirvaikar - Citigroup Inc, Research Division

Okay, understood. And then just a clarification on the file incented (k) [ph] client count. Does that exclude or include SurePayroll? Just want to make sure.

Efrain Rivera

Includes.

Ashwin Shirvaikar - Citigroup Inc, Research Division

It includes, right?

Efrain Rivera

It does.

Ashwin Shirvaikar - Citigroup Inc, Research Division

And so do you break that out? I think this question may have been asked before.

Efrain Rivera

No, we don't. And part of the reason for that is there's a number of client bases within our client base. To get -- to provide an accurate perspective, we'd have to give you 4 or 5 client bases that are in there. And at that point, we're giving you proprietary information that we just -- we're not going to do.

Ashwin Shirvaikar - Citigroup Inc, Research Division

Right. No, but I was just thinking because they are very different business models. And one of the things I was trying to potentially back into was as the SaaS-based solution sort of increases in size relative to the total, what kind of relative margin assumptions should we be making over time? Is there a margin improvement that you're seeing in that business? To what extent, things like that?

Efrain Rivera

Yes, well, I think it's still very early stage. There may come a point at which we decide to split it out because it's material to our results. Right now, it's not, Ashwin. And it would -- at current rates, we have a long way to go before it becomes that.

Operator

Our next question comes from Jim MacDonald of First Analysis.

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

I'd like to go back a couple of questions on healthcare. Could you give me your thinking on setting up a private exchange, kind of how it will work and what type of customer you expect might use it?

Martin Mucci

Yes, I think on the private exchange side, what -- it'll be, for us, it's going to be a partnership. We haven't announced who that is yet, but we'll have a partnership that -- what we're trying to do is help the small client, in particular, who wants to provide health insurance to their employees. They don't necessarily have to, but they want to provide an opportunity for them by giving them, let's say, a pretax -- let's say, I want to give you just $200 a month toward -- in insurance toward paying your insurance. And you're a small business, I want to help my employees, I give them a pretax amount and they can go and give them away to go to an exchange and help buy that product. So what we'll get more there is a share of the kind of what the carrier is giving, which carrier they go to. And it will be multiple carriers that the exchange uses, obviously, insurance carriers. We'll get a piece of that carrier commission and then probably some administrative fees as well. And so what you got is a small business who doesn't have to provide the insurance under the law, but wants to help their clients -- wants to help their employees and wants to give them a pretax option as well. So we can give the pretax process and we can help them kind of channel their employee to an exchange to help them select what's the best plan for them.

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

So do you think your effective brokerage commission will be similar on the exchange versus your traditional methods?

Martin Mucci

I think it would probably be a little bit less because there's a middle person there in the exchange that'll take a piece of that as well. That's not quite worked out yet, but I think you can expect that it'd be slightly less because there's someone in the middle that's going to work the exchange.

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

And just one more follow-up. You talked about the expecting rate pressure. Any kind of general views of kind of their price increases, healthcare price increases you're expecting to see next year?

Efrain Rivera

Well, it's interesting. When we speak about rate pressure, Jim, we're really referring to commissions that we receive, not to the rate increases we're going to see for insurers. What we have seen so far is that there's going to be fairly sizable insurance increases, price increases.

Martin Mucci

Coming from all carriers and all clients.

Efrain Rivera

Yes, all carriers.

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

And that's sort of where I was going. So how do you expect that to impact you when everyone is getting large increases?

Efrain Rivera

Well, here's the answer to that, and it requires us to think a little bit about the PEO. So when we go to a client, we've got 2 options. We can go in an ASO model and sell them a one-off insurance policy based on their particular characteristics. They may be good or bad, depending on their history and their -- the type of business they have. Or the same person can go in and sell them a PEO alternative. We think the PEO is going to be favored, at least for a period of time, because the PEO will be able to underwrite those risks and they will have an advantage, we think, early on versus the exchanges. So it could be a potential win for the PEO. But we need to walk through that to get a better sense of that.

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

And just a quick follow-up, sorry. So will you be taking more risk view or just be passing along insurance rates of the PEO, you'll be taking on more self-insurance there?

Efrain Rivera

There's a number of different models. We haven't finalized that. You can -- we could do both. So haven't finalized that. And you can just -- you can be sure that if we go down that route, we bound that risk pretty tight with, yes.

Operator

Our next question is from Paul Condra of BMO.

Paul Condra

I have just basically, kind of a basic question. This is probably best for Efrain, but the funds held for client balance were up in the fourth quarter -- or sorry, dropped a bit and I'm just curious, what makes that move -- just if you compare it to the third quarter, what kind of makes it...

Efrain Rivera

Yes, what we basically -- Paul, it really just depends on literally, the day on which we close, how much in client funds we are -- the day we close the quarter, how much in funds we're holding. And how much in funds we're holding depends on how much we're remitting in -- it could be anything from payroll to income taxes. So it varies so widely that there's really kind of no rule of thumb that says if it's a Thursday, it's this, and if it's a Friday, it's that. But basically, what's happening is where are we in the stage of remitting the different funds to the end recipients.

Paul Condra

Okay, that's clear enough. And then I don't know if you can shed any light on this, but when you look at your client base, and I'm just trying to figure out what percent of the other are just doing the core payroll, and then how far you are long in getting them to add additional services and how that penetration is looking?

Efrain Rivera

Sure. Yes, well, we disclosed a fair amount of that information. And I think if you take HRS in the aggregate, the penetration into the base from a client perspective is less than 10%. So we -- and we've got that pretty detailed in the MD&A, and I think it's also in the press release. So you can get a sense of that. We're still in the early stages of product penetration into the rest of the base.

Operator

Our next question comes from Tim McHugh of William Blair & Company.

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

First, I want to -- first of all, I want to ask a quick question on a comment you made. I thought you said EPS earnings would be fairly even in the first half versus the second half?

Efrain Rivera

Yes.

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

Are we talking growth rates or on an absolute basis?

Efrain Rivera

On an absolute basis.

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

Okay. Can you elaborate on why -- is there something about the expense growth throughout the year? Because that's unusual relative to your...

Efrain Rivera

No, not really, Tim. I guess what I'm saying is -- let me just make it explicit. So I'm saying it's, let's say your assessment is that we're going to be at $1.69. We're saying the first half, split it down the middle, that's what the year looks like at this point. So just gives some more color on what the quarters end up looking like. This year was -- I'm contrasting that, Tim, to 2 years ago. If you look at it, we were heavily front-end loaded 2 years ago. And this year, we return to kind of a more normal distribution.

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

Okay. And if we think about the client -- the interest income from client funds, if it's -- are you expecting the balances could grow roughly in line with payroll growth? Is that a fair assumption as we think for this one?

Efrain Rivera

Yes, I think so. So last year, we grew about, I think the final number is 4%, 5%. It will grow with that number.

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

Okay. And then last -- quick one for me. Just you mentioned the revenue -- I'm sorry, the checks per client moderating a bit in the fourth quarter. Can you talk at all about, I mean, the reason for that? Was there any -- is there a conclusion as to -- is it reflective of actual hiring trends or just mix, or a return to...

Martin Mucci

I think it's not mix. I think, Tim, what we saw was a little bit lower check growth in larger clients and a little bit faster growth in smaller clients. When the mix came out, it ended up at about 1%. I caution until we've had a couple more quarters -- we get a lot of volatility that -- this year, if you remember. So we went from 2%, first quarter, 1.2%, 2.3%, 0.9%. So we just saw some volatility in the numbers that may have been a result of mix issues and also kind of where we ended a particular quarter. So we'll get a better beat on where we're at next quarter. I do think the trend is down though. I mean, the trend is moderating downward.

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

It doesn't change -- you actually sound a little more positive on the macro because of construction than before, though. Is that...

Efrain Rivera

I think we're a little bit more positive on the macro because at some point, you have to stop using the macro as an excuse and you just got -- get down to business with growing. We don't think the environment is that much better. We think that it's good for the businesses that are, in business, they seem to be within our base. They seem to be healthy and doing well. We'd like a better environment in terms of business formation, but at this point, we're not going to keep banging that drum.

Martin Mucci

Yes. I think what we've seen -- we haven't seen the new business starts reflect the things that you can see coming -- that appear to be coming, which is the new housing starts and so forth. We think that we'll start to catch up and it'll start to pick up a little bit. But remember that sometimes that new business is starting as opposed to others hiring. And so there's a mix in there. But I think, as Efrain said, we want to look at a couple of quarters of this because it has bounced around quite a bit this year. So the fact is it's still up 13 quarters in a row, which we've never really seen before, so that's still very positive. The hiring is just more gradual, but continuous. And we expect it to moderate. This might have been a little quicker than we thought, but again, as Efrain said, I think there's timing in there and mix and other things, and we watch that for 1 quarter or 2.

Operator

Our next question comes from Mark Marcon of R.W. Baird.

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

I'm wondering, what are the plans for sales force growth for this coming year?

Martin Mucci

There was a -- there's a slight increase. We did a pretty good expansion last year in the 2% to 3% for more territories, and also went after different teams on franchises, banking and so forth. So I think we feel pretty good about where they were. We did some adjustments. But it was, I would say, it's below 3%, so within the 2% range.

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

Okay. So basically, just slightly below what the rate of expansion from last year?

Martin Mucci

Yes.

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

Okay, great. And then I'm a little confused with regards to the new sales commentary from the perspective that, in the press release, we cite how well we did with the small businesses. But yet, it sounds like the average size of a client actually ended up increasing.

Efrain Rivera

Yes. So, Mark, the commentary there is just to say that within core, as we went through the year, the average size of clients sold as we got into fourth quarter was a little bit higher than we began in the year. It actually was higher.

Martin Mucci

50 in them.

Efrain Rivera

Yes, but it's in the 50 and understates that we were talking about.

Martin Mucci

Yes. So this might be the difference between looking at it, Mark. Small, to us, when we talk about small, we're talking about core and that's under 50. What we did see is we saw -- as we said earlier, the revenue go up, focus on revenue and a little bit larger client. But that's the difference between going after the under 10s, let's say, and the under 20s. And that brought us up a little bit.

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

And does that include the commentary around SurePayroll?

Efrain Rivera

Yes, it does.

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

So even with...

Efrain Rivera

So I'm sorry, I apologize, Mark. No, that's primarily core.

Martin Mucci

Yes, that's our core Paychex.

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

That's within -- okay, so within core Paychex, we ended up seeing a bit of an increase. But if you include SurePayroll into the mix, then the average client size probably went down since SurePayroll was growing at a faster rate.

Efrain Rivera

We'll disclose that. We didn't -- we haven't looked at...

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

Is there anything wrong that I'm seeing with the logic?

Efrain Rivera

There's no material difference, Mark. There's no material difference because at this point, they don't influence the client base so much, yes.

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

Okay. And with regards to the revenue of the clients, the annualized contract value of the clients that you signed, it sounds like that did increase more than the 0.5% to 1% kind of unit increase that we ended up seeing.

Efrain Rivera

That's correct, yes.

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

Okay. So that's going all right. And then with regards to kind of more of the mid market, and particularly with regards to the new platform that's coming out, in terms of your Next Generation platform for the mid market, when is that coming out? When -- how much of an impact should that have?

Martin Mucci

Yes. I think we're already seeing some -- we've already rolled out some of that, but some major changes come out in the next 6 months, frankly in the next few months, and then, again, in the December -- November, December timeframe. So I think it's just -- we're continuing to roll out releases about every 5, 6 months. And the biggest impact there will come in the next month or so, and then in the last part of the calendar year. So that will -- that's when more product and functionality is on that application, on the Paychex Next Generation application. And -- but we're also, of course, acquiring other products that kind of roll in and support that team. The ExpenseWire, the mystaffingpro, those SaaS-based solutions also support the existing application and the existing client base, as well as new ones. So we expect to see a lot of opportunity for the mid market space this year.

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

Right. And then with regards to healthcare reform, any -- of your 570,000 clients, any rough approximation with regards to how many would be in that, say, 45 and above range? Because even companies that are below the limit probably are going to be sensitive to where they need to be.

Efrain Rivera

Yes. The way we look at it, Mark, is we think it's really around the 30-employee mark that you start to worry about the Act. And you're probably a quarter or more of the base at that point.

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

Okay. And why do you think it's going to be next -- second half of the fiscal year, when it's going to kick in in terms of having an impact when the reality of the situation is that the deadline goes into effect on January 1, and you would think that some companies would start shifting to whatever new platforms they needed ahead of time?

Martin Mucci

Yes. I guess I would just say when you think about the absolute -- one, to make a final decision is it's going to happen for a lot of companies with January 1, when they change their -- when the requirements go into effect. I think a lot of companies, particularly small and midsize businesses, don't make a decision on that until the October, November timeframe when they get into benefit enrollment. They're starting now to ask for a lot of information about it, and I think that's going to heat up over the summer. And then I think we'll start to see a lot of activity in the September, October, November timeframe. And when you start to think, "When does that really start to have any impact on us," that's more into the first half of next calendar year. That's past January.

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

Yes, that's when the revenue rolls in. But in terms of the sales and the sales pipeline, that would actually be in the fall and...

Martin Mucci

Yes. Yes, I think that would start more in the fall as they get into benefit enrollment. Yes, I'm just -- I -- the question was more about when do we start to see an impact. I think we'll see an impact in sales. We're starting to see activity now and more in the fall, and then I think it'll start to have an impact. But our revenue and you think of the revenue per client, that's going to take a while to make an impact. That will start more in '14.

Operator

Our next question comes from Rod Bourgeois of Bernstein.

Rod Bourgeois - Sanford C. Bernstein & Co., LLC., Research Division

So you saw better bookings activity last quarter. It seems like that continued into the May quarter as well. And you just posted 6.1% revenue growth for the May quarter. So it seems that the overall revenue growth trends are, I guess what I would say, is slowly improving. That said, your guidance for fiscal '14 is 5% to 6%. In some years, you've added some buffer into the guidance. So really, my question here is, is it feasible that your revenue growth could actually improve some from the 6.1% pace as we progress through fiscal '14? If it has the ability to do that, what would be the likely source of upside? Or are you feeling right now that that north of 6% growth for fiscal '14 is just unlikely?

Efrain Rivera

I think it's unlikely. I think you could see 1 quarter or 2 where we went above that, Rod. I just think we're being -- we're going to be cautious about it. I think the likely source would be strong results from healthcare. That's where we think upside could come. It's a little bit tough to call it at this point. So we got, as Marty mentioned, a number of products out there. We think not only are they -- some of those products applicable to the 30 and above segment of the base, but also, frankly, below 30. But we need to get 1 quarter or 2 under our belt to get a sense of what opportunity is there. Internally, we would love to see more and hope that we do. It's tough to plan on it at this point.

Martin Mucci

Yes, yes. In this economic environment, as Efrain went over a lot of the numbers, that new business starts still aren't really picking up. So we're feeling, honestly, pretty good about the growth in the sales we're seeing in this kind of environment. We're always pushing on every different piece we can to push it even higher, and maybe there's some opportunity, but we feel the guidance is pretty solid where it is.

Efrain Rivera

And one other thing I'd say, Rod, is I called out, so I hope everyone was listening still on, that in the first quarter, in particular due to timing, we start the quarter -- the year again a little slowly and then build. So that has a little bit of impact on the year as a whole.

Rod Bourgeois - Sanford C. Bernstein & Co., LLC., Research Division

Got it, okay. And you've added some conservatism, it seems, in your interest rate assumption as you give the float guidance.

Efrain Rivera

That's correct.

Rod Bourgeois - Sanford C. Bernstein & Co., LLC., Research Division

And that makes a lot of sense because I know we had head fakes before on the interest rates. But if you were to take that conservatism out, is that the difference between 0% float income growth next year and then the growth that you guided -- to the negative growth that you guided to? Or how sensitive is your outlook to the conservatism assumption that you've made?

Efrain Rivera

Okay, that was a really great question, which deserves some thought. Yes, you're pretty close.

Operator

Our next question comes from John Williams of UBS.

John T. Williams - UBS Investment Bank, Research Division

So 2 quick questions. First was, related to the payout ratio, looks like it's sort of trended in the mid-80s for the last year or 2. And is that a level that you're still comfortable with or do you expect that might trend a little bit differently over the next few years as we sort of see some sort of recovery in the small business environment?

Efrain Rivera

Yes, I think we're comfortable in that 80% range. I think that off of the full year EPS, which was $1.56, when you look at it, we were up in the 84% range. But on a more normalized basis, if we -- you can take out the tax effects, we were down in the lower 80s. But we're comfortable in that range. And we -- and the reason for that is that we have pretty predictable cash flows and predictable results.

John T. Williams - UBS Investment Bank, Research Division

I guess the logic we'll follow on to that is just that if -- just capital allocation related, if the fundamentals don't get back to a point that you guys would consider to be robust at any point soon, would you consider potentially adding some debt to the capital structure or getting a little bit more aggressive on buybacks to do that? Is that something that would potentially be completely ruled out?

Efrain Rivera

I wouldn't completely rule it out. So -- and I don't think we have a religious objection to having debt. It just would have to be for the right reasons. And I think, John, we have to couple that with the fact that we -- we're not seeing anything from a pipeline perspective relating to acquisitions that we thought was good. The opposite is true. There's-- there are interesting opportunities out there that we continue to evaluate, very disciplined in the price we'll pay. So we'd have to get to a point where we just didn't even see opportunities for acquisition. And right now, we think there's some attractive opportunities out there, but we're patient and we're disciplined in the terms of the way we approach it.

John T. Williams - UBS Investment Bank, Research Division

Okay. Just one quick follow-up. I know you guys usually put this in the Q or the K, but just as it relates to rate sensitivity, just an update on where you stand. You said 25 bps. I'm sure the medium is about $0.02 in the past and basically, the duration, 3 years. Are those still pretty close to where...

Efrain Rivera

Yes, 25 bps on the short end is going to get you about $5 million. So yes, that's about $0.01, actually, after you -- a little bit -- $0.015, to be precise.

John T. Williams - UBS Investment Bank, Research Division

Okay. And 3 years on the duration?

Efrain Rivera

Yes. We'll be probably a little north of that, maybe 3, 2 or so.

Operator

Our next question comes from Tien-Tsin Huang of JPMC.

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

I guess on the referral bank question, I think, Marty, you mentioned Citizens and Union Bank, a little bit bigger than usual. I'm curious if that's replacing an incumbent or is this a new product referral for them?

Martin Mucci

Some was -- some were new, some we're keeping and some we're taking a little bit more -- some were shared, and so we've done a number of these now. So there are some that are new. We haven't -- I didn't list them all. We picked some that were new, some that we kept and some that we -- they were sharing before and we got it.

Efrain Rivera

And one of those was a displacement of our good friend.

Martin Mucci

Yes.

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

All right, good. Because I know that's an important -- could be an important channel. So that -- my next question then was just on the gross client adds. Any sort of change in -- or surprise in how those clients are being sourced? For example, are they coming from different channels or is it just your sales force being more productive? Just trying to understand the change -- any change in dynamic there.

Martin Mucci

No, I think we're still doing a really good job with GPAs [ph]. We've reached our kind of -- we're in the 10th year now of our referral relationship with the CPAs where they refer us. That's been going on for 10 years. That continues very strong. I think you're going to see the banks have picked up already and will continue to pick up. Web search is obviously picking up some. And I think the only thing that was a little bit slower was current clients. And I think a lot of that is because there wasn't the new business growth. When you trace that back, it's really that a current client didn't necessarily open up a second location or a third location. And so that hurt us a little bit. But the activity of the sales force is very good, and I think most of the dynamics are pretty much running the same.

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

Okay. I just wanted to make sure. Just 2 quick clarifications, I hope. Just the Insurance Services clients, up 1% in the 8-K filing. I think you mentioned PEO, Efrain. Can you just elaborate again what exactly drove that?

Efrain Rivera

Yes, so 2 separate ideas. The insurance clients really are separate from the PEO. So I think there was probably some offset between those 2 numbers. But I think more importantly, Tien-Tsin, what happened was that as the year started, we made a conscious decision to go upstream because we knew that in the under 10 space, that was most likely to be affected by healthcare reform. We pivoted upstream, paid the price, to some extent, on a number of clients. Applications were up, you saw 8%, so we've got good results. We like the platform for being a little bit more upmarket than we were 1 year or 2 ago.

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

Understood. So it was just a change in direction. Okay, I got it. This is the last clarification at the -- I don't know if you mentioned this, the acquisition of what was HR Services and mystaffingpro, how meaningful was that in terms of size?

Martin Mucci

It's pretty small to start, but we think they have a fantastic product that has won a lot of awards from a SaaS-based model for talent acquisition. And I think it fits in really well with our mid market plans. And so it's really small to start, but I think it's going to take off for us and help us with not only new sales, but retention in the mid market space.

Operator

Our last question comes from Matt Lipton of Autonomous Research.

Matthew Lipton - Morgan Stanley, Research Division

Mine is just a really simple clarification as well. I was hoping you might be able to give us a little more granularity on the offsets to core payroll revenue? You called out Hurricane Sandy and the leap year. I guess just thinking about -- you said pricing earlier, in response to an earlier question, was above 1%, 2% client growth and checks were both positive. So when you add all these up, you could envision revenue being -- coming in more than 4%?

Efrain Rivera

Yes.

Matthew Lipton - Morgan Stanley, Research Division

So am I thinking about it the wrong way or were those just really material headwinds?

Efrain Rivera

Yes, I think you are in the sense that if you called out -- if you normalized the year, the growth rate would not have been that high. We called out Hurricane Sandy. We called out the extra day, the extra leap year. We didn't necessarily talk about in the press release, again, the fact that the frequency of payroll costs in Q1 was down from the prior year. One thing to be aware of is that client base growth. If we say it's 1%, we don't get 1% growth necessarily in the year because that is -- that's got a weighted average effect. You start at 0, you end at 1. You get some fraction of that. And then checks, in particular, typically, if we've got a 1% or 2% check number, it -- the contribution to revenue is going to be typically 50% or less of that. So you have to kind of weigh those to kind of get to the right number.

Martin Mucci

Is that the last question, Stacy?

Operator

Yes, sir. There are no further questions.

Martin Mucci

All right, thank you. At this point, we will close the call. If you're interested in replaying the webcast for this conference call, it will be archived until about July 29. Thank you for your interest in Paychex and your participation in this call. We look forward to talking to you next quarter.

Efrain Rivera

Have a great summer.

Operator

This concludes today's presentation. Thank you for your participation. You may now disconnect.

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