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Paychex (NASDAQ:PAYX)

Q4 2011 Earnings Call

June 23, 2011 10:30 am ET

Executives

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

John Morphy - Vice President of Finance

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

Analysts

Vishnu Lekraj - Morningstar Inc.

Julio Quinteros - Goldman Sachs Group Inc.

David Togut - Evercore Partners Inc.

Christopher Mammone - Deutsche Bank AG

Kelly Flynn - Crédit Suisse AG

Nathan Rozof - Morgan Stanley

Jeffrey Meuler - Robert W. Baird & Co. Incorporated

Tien-Tsin Huang - JP Morgan Chase & Co

Rod Bourgeois - Sanford C. Bernstein & Co., Inc.

Kartik Mehta - Northcoast Research

Ashwin Shirvaikar - Citigroup Inc

Grant Keeney - Northcoast Research

Gary Bisbee - Barclays Capital

Timothy Willi - Wells Fargo Securities, LLC

David Grossman - Stifel, Nicolaus & Co., Inc.

James Macdonald - First Analysis Securities Corporation

James Kissane - BofA Merrill Lynch

Glenn Greene - Oppenheimer & Co. Inc.

Timothy McHugh - William Blair & Company L.L.C.

Operator

Good morning and thank you for standing by. [Operator Instructions] This conference is being recorded. [Operator Instructions] I would now like to turn the call over to Martin Mucci, CEO of Paychex. You may begin.

Martin Mucci

Thank you, Candy. Good morning, everyone, and thank you for joining us for our Fiscal 2011 Year End's Earnings Release Call. Also joining in the room here today with me is John Morphy, our longtime CFO; and Efrain Rivera, our new CFO effective June 1, 2011. About a month ago, John announced his desire to retire from Paychex. I would like to start by thanking John for providing such great financial leadership for Paychex over the last 15 years. During that time, John has seen tremendous growth here at Paychex. Revenue has grown from $300 million to over $2 billion today, and more importantly, profits have grown from $55 million to over $500 million in fiscal 2011.

Paychex is also well-known for the financial transparency in the filing of SEC documents on the same day as the press releases that John has been responsible for leading the path to that. John is also only the second CFO in Paychex's history, and I really want to thank him for his accomplishments and wish him and his family all the best in the future. He will be sorely missed and has really driven great integrity and financial performance here at Paychex.

We have been very fortunate to find a very capable replacement in Efrain Rivera, our newly appointed Senior Vice President, Chief Financial Officer and Treasurer. Efrain is a senior financial executive with more than 20 years of experience in finance and accounting and business leadership as well. He was mostly -- most recently the Vice President of Finance and Administration for Houghton College. Prior to that, he served as Vice President and Chief Financial Officer for Bausch & Lomb, headquartered here in Rochester. We are very pleased to have Efrain join Paychex. Efrain and John will be working together until the end of the calendar year, making sure there's a smooth transition. I appreciate John's help with that, and especially with our Wall Street relationships. They will be scheduling non-deal road shows with analysts and investors and starting toward probably the mid to end of the summer, they'll be getting out, being sure to get in front of everyone, certainly on this call and beyond.

I'd like to just take a few minutes before I start my comments to let Efrain introduce himself and give you a little bit of a background. Efrain?

Efrain Rivera

Hi, thanks, Marty. It's a pleasure to be with Paychex and to be with you this morning. As Marty indicated, Paychex, through John and his efforts, has set a very high bar for financial transparency and accuracy. There's a lot of best practice that occurs in Paychex and that is a company commitment. We'll continue to meet that and continue to operate in that way. I look forward to meeting you in the upcoming months.

I was fortunate in my career to manage the investment relations function at a very early point. I learned the value of looking at the company from an analyst perspective, and I look forward to having those discussions and that dialogue with you in the future. And now, I'm going to turn it back to Marty for his comments.

Martin Mucci

Thank you, Efrain. We are very focused on executing our plans to continue to be the leading provider of payroll and human resource and benefit outsourcing to really America's businesses. That's the small- and medium-sized business market. Our focus continues to be on driving growth in terms of clients and revenue and profits, while continuing to provide exceptional service and value to our clients and their employees. We are pleased with the financial performance for 2011. While John will go into more detail, I'd like to give you some highlights. Our checks per client, revenue per check and client retention all have demonstrated consistent improvement over the previous year. Checks per client have improved for each of the last 5 quarters and client retention for the last 7 quarters. And while still experiencing a slowly rebounding business environment, we did see some improvement in payroll sales over the latter part of the fiscal year. We have also enjoyed a 5% increase in the 401(k) client base even net of our ePlan acquisition.

While continuing our product development investment in what we call Paychex next generation, we are able to achieve strong operating margins through the continued increased productivity in our operations. We've completed 2 important acquisitions during 2011 to bolster our future growth opportunities. SurePayroll, with its over 30,000 clients, provides us with an entry into a new segment of the payroll online market, a segment positioned to grow as the 5 million small businesses who calculate their payroll manually move to the web. Paychex already has over 50,000 clients with online input available to them, but SurePayroll with its SaaS, software-as-a-service-based model, will offer another alternative for those clients looking to be -- to have more of a self-service alternative. Both companies offer quality service and from a client control standpoint, Paychex will now be able to offer a full range of outsourcing payroll alternatives. Clients who want more control have SurePayroll, where clients who want a high level of personal interaction with a dedicated payroll specialist have the Paychex model that we're known for.

ePlan Services was our other acquisition. It provides us with an opportunity to further penetrate the 401(k) market, where we have been a leader, and this will help us in the financial advisor marketplace, on one opportunity that we feel is growing more and more in the 401(k) business marketplace.

We are also pleased with the efforts of our employees on many fronts. Client satisfaction results continued to be at the highest levels in our history in both the core payroll and major market payroll markets. Our employees remain dedicated to our client satisfaction and being an essential partner with those clients and their employees.

We have recently been recognized for having the most new 401(k) plans sold for the eighth year in a row, and for the first time, recognized for having more 401(k) plans than anyone else in the industry. We service one in 10 401(k) plans in the U.S., and the assets are now valued at over $15 billion. Over 567,000 client employees, up 13%, utilize Paychex HR Solutions services with both a national PEO and an ASO model for HR outsourcing, and we've included -- including our new service alternative, which we started in the last fiscal year, called HR Essentials, which is telephonic support. We now service also over 100,000 insurance clients through our insurance agency and $1 billion in premiums.

During the first quarter call, I discussed -- we discussed the number of new score payroll sales initiatives that were planned to be implemented. All the initiatives have been completed, including the pricing and packaging enhancements and changes to our training programs to expand the knowledge and selling skills of our new sales representatives. We have also made a number of changes to bolster our field sales management team. We are fully staffed in all sales positions and have completed the deployment of the latest in technology to support our sales teams with new tablets and improve their efficiency and production. And they have moved to new compensation plans, which have been recently rolled out for the new fiscal year, that are designed with our sales leadership to attract and retain the best sales candidates, simplify the calculation in payment of commissions and focus on driving more revenue.

I have also continued -- I'm continuing the interviewing for a Senior Vice President of sales. As you know, I made a selection in the last few weeks, but for unforeseen reasons, that did not work out. However, that search continues very actively. The sales vice presidents in all of the payroll and HRS markets have reported to me since I took the position of CEO back September 30. And as you can see by the initiatives that we have now implemented, no one is standing still. We have made all of the changes that were on our list when I came into the job and I'm very proud of the vice presidents, all of which have over 20 years of experience, and the work that they have done to position us well for fiscal 2012.

We have also, as you know, added 2 other vice presidents in addition to Efrain in the CFO role. Andy Childs joined in February as the Head of Marketing, and Laurie Zaucha started as the Vice President of HR and Organizational Development, replacing Will Kuchta, who will be retiring in October. Both have added a significant amount to the team already in the short few months that they've been here and are fitting into the culture extremely well.

We have also recently announced that we have extended our long-standing strategic alliance with CPA2Biz, a subsidiary of the American Institute of CPAs through 2016. Paychex has been a flagship service offering of the AICPA Trusted Business Advisor Program for many years and remains the preferred payroll and retirement services provider for the AICPA members and their clients through this relationship. This is very important to us as the CPA community is a respected partner, and their support and stamp of approval is critical to the businesses that we both serve.

In summary, I'd like to tell you I'm very proud of the employees of Paychex and the work they have done. I'm extremely proud also of the leadership and how they have committed to making changes to get us back on a strong growth track for fiscal '12.

And I would now like to turn it over to John Morphy to review the financials in more detail. John?

John Morphy

Thank you, Marty and Efrain. Pleasure to be here today.

Yesterday afternoon after the market closed, we released our financial results for the fiscal year ended May 31, 2011. We have also filed our Form 8-K, which provides additional discussion and analysis of the results for the year. These are available by accessing our Investor Relations page at www.paychex.com. We expect to file a Form 10-K by the end of July. In addition, this teleconference is being broadcast over the Internet and will be archived and available on our website for approximately one month.

As Marty stated, we are very pleased with our financial results for fiscal 2011. We have experienced favorable trends throughout each quarter of the fiscal year, and here are some of the key highlights. Checks per client, the number of checks issued during the period divided by our average client base, represents our most meaningful barometer of how the economy is doing. Our checks per client reflect an increase of 2.1% for fiscal 2011. This compares to a decrease of 2.6% for fiscal 2010 and 2.9% for fiscal 2009. We have been very pleased with the strong results in checks per client we experienced this year, with increases of 1.2%, 2.5%, 2.8% and 2.0% for each sequential quarter. As we move into next year, we expect the growth percentage to be lower but remain positive. Over longer period of time, checks per client tends to be very stable.

Our payroll client loss rate for fiscal 2011 improved 2 percentage points from last year to 21% of our beginning client base. Our range of client loss rate over the past 10 years has been from 19% to 24% for our beginning-of-the-year client base. Our client losses in 2011 were 9% lower than for fiscal 2010. This is largely attributable to fewer clients going out of business or having no employees. Losses to other local and regional factors also showed good improvement during the year.

We acquired 2 online service providers this year, SurePayroll, an Internet-based payroll service; and ePlan, a provider of 401(k) services to the financial advisory market. Both of these acquisitions will expand our product offering and bolster future revenue growth. The financial results in these companies are included since the respective dates of acquisition, February 8, 2011, for SurePayroll and May 3, 2011, for ePlan and they were dilutive in the last fiscal quarter of 2011 by approximately $0.01.

The effect of these acquisitions on margin growth in the fourth quarter and looking forward into fiscal 2012, is expected to be approximately 1%. Most of the margin diminishment relates to the amortization of intangible assets capitalized in conjunction with the acquisitions.

Our payroll client base increased 5.2% to 564,000 clients. This increase was largely attributable to our acquisition of SurePayroll. Excluding SurePayroll, our client base would have declined 0.9%. Not exactly where we would like client growth to be, but an improvement over negative 3.2% and 3.1% at fiscal 2010 and '09. Most of the improvement related to fewer client losses, as new sales units were relatively flat for 2011 compared to 2010. This is mainly attributable to the lack of growth in new business starts. Although the sales environment has remained challenging, we saw a slight improvement in the latter half of the fiscal year. We also saw improvement in sales to clients who previously utilized local and regional competitors. Looking to fiscal 2012, we are expecting to move to the positive side of client growth before including SurePayroll clients, which are expected to experience higher client growth than the rest of our client base.

Our operating income net of certain items as a percentage of service revenue increased to 36.3% from 35.4% last year. The equity markets hit a low in March of 2009, with interest rates remaining low since then. The Federal funds rate has been a range of 0 to 25 basis points since December 2008. Our combined portfolios have earned an average rate of return of 1.3% for fiscal 2011, compared to 1.5% for fiscal 2010 and 2.1% for fiscal 2009. Assuming no changes to current rates, we expect our returns will be slightly lower in fiscal 2012, as more of the long-term portfolio matures and is invested at lower rates.

We continue to make significant investments in our business, some of which are as follows: double-digit growth in product development expenditures over the past few years. In fiscal 2010, we implemented an enhanced platform for our core payroll processing capability, which allows us to leverage efficiencies in our processes and provide excellent service to our clients. This enhanced platform has contributed to productivity gains in operations and thus, aided our operating margins. Over the next few years, we will expand this enhanced platform to additional service offerings. In fiscal 2011, we are further investing in our MMS platform to provide even better and more fully integrated solutions to our larger clients.

We also introduced new products to our clients. Paychex HR Essentials is a new ASO offering that provides support to our clients over the phone or online to manage employee-related topics. Paychex Smart Time time clocks, a self-contained system that offers small businesses an economical, easy-to-use time and attendance system that integrates with our payroll offering. The investments are producing results, some of which are as follows: our insurance services client base, which includes our workers compensation insurance and health and benefit services clients, grew 8% and now exceeds 100,000 clients serviced as of May 31, 2011. We believe insurance services is an area that continues to offer significant opportunities for future growth.

We're the premier supplier of 401(k) record-keeping services, as we have total assets in the plans surpassing $15 billion and 57,000 clients. We are now serving one in every 10 401(k) record-keeping plans in the U.S.

We continue to generate significant cash flow to support our business and have paid almost $450 million in dividends to our shareholders. This represents 87% of net income. Our cash flows historically exceed net income, which allows us to be comfortable with and committed to maintaining our current dividend level, even though the recent payoffs are substantial as a percent of net income.

I would like now to move on to the consolidated income statements. Payroll service revenue increased 2% for fiscal 2011 to $1.4 billion. This has benefited from the increase in check volume and improved revenue per check. Revenue per check increased as a result of improvements and discounting and our overall client base and price increases. This has been offset somewhat by a 1% decrease in client base, excluding SurePayroll as previously discussed.

Human Resource Services revenue increased 10% for fiscal 2011 to $597 million. If we exclude revenue in the prior year for Stromberg, which was sold on October of 2009, HRS would have grown 12% in fiscal 2011. The HRS revenue growth reflects modest improvements in economic conditions, client growth and price increases. Some additional highlights of contributions to HRS revenue growth are as follows: Paychex HR Solutions' client employees increased 13% to 567,000 employees as of the end of the fiscal year. We have seen positive results from increases in both clients and client employees. A new product offering, Paychex HR Essentials, contributed to this growth in clients and client employees. HRS revenue is positively impacted by growth in certain products that primarily support MMS clients.

Insurance services has continued to grow as both workers' compensation insurance and health and benefits services had higher revenue in fiscal 2011. Health and benefits services revenues continued its strong growth since inception, increasing 29% to $42 million, driven by an increase in the number of applicants.

The fourth quarter growth rates for HRS were lower than the full year, mainly due to PEO revenue and consistent with the expectations we disclosed last quarter. Our PEO revenue is more variable quarter to quarter than our other revenue streams due to normal fluctuations in their business conditions. Our guidance reflects 12% to 15% growth in HRS revenues, and we expect first quarter revenue growth to be within or very close to the annual guidance, so the lower-than-normal growth in HRS revenues in the last quarter will return to normal in the first quarter of the next fiscal.

Combined interest on funds held for clients and investment income decreased 9% for the year. Yields available on high-quality securities continued to remain low. Expenses increased 2% for fiscal 2011 largely due to personnel-related costs. Our reinstatement of salary increases and the 401(k) match contributed to this.

We also continued to invest in our product development and supporting technology. Our activity improvements in operations and lower headcount helped offset these impacts. Additionally, expenses for the acquired companies largely impacting the fourth quarter, negatively impacted our growth rate for expenses. We anticipate higher levels of amortization expense in fiscal 2012 related to the intangible assets acquired through SurePayroll and ePlan. Also during fiscal 2010, we have to remind you we recognized an expense charge of $19 million to increase our litigation reserve related to the Rapid Payroll litigation.

Operating income increased 8% to $786 million for fiscal 2011. Operating income net of certain items, which excludes interest on funds held for clients and the expense charge of fiscal 2010 to increase litigation reserve, increased 7% to $738 million. Operating income, net of certain items as a percentage of total service revenue, was 36.3% compared to 35.4% for the prior year. Net income and diluted earnings per share decreased 8% to $515 million and $1.42 per share.

Our investment strategy remains conservative, and we have not recognized or realized any impairment losses for our investments. Our investments have high credit quality with AAA and AA ratings and short-term securities with A-1/P-1 ratings. More than 95% of our portfolio is rated AA or better driven by the amounts that can be invested in any single issuer. Our priority has been and will continue to be to ensure we can meet all of our cash requirements to clients that took place as we transferred cash balances from their accounts.

Our financial position remains strong with cash and total corporate investments of $671 million as of the end of the year and no debt. Our cash flows from operations were $715 million for fiscal 2011, an increase of 17%, somewhat due to higher net income and the timing of working capital.

Funds held for clients as of May 31, 2011, were $3.6 billion compared to $3.5 billion as of May 31, 2010. Funds held for clients vary widely on a day-to-day basis and averaged $3.4 billion for the fiscal year, up 6% over 2010. In fiscal 2010, we have experienced higher average invested balances, primarily as a result of the increases in checks per client and increases in state unemployment insurance rates, partially offset by lingering economic impacts on our clients.

Our total available-for-sale investments including corporate investments and funds held for clients reflected net unrealized gains of $59 million as of May 31, 2011, compared with net unrealized gains of $67 million a year ago. The 3-year AAA municipal securities yield decreased to a low of 48 basis points at the end of our first quarter, rose to 110 basis points at the end of our third quarter and ended the year at 80 basis points at May 30, 2011.

Total stockholders' equity was $1.5 billion as of May 31, 2011, reflecting $449 million in dividends paid during fiscal '11. Our return on equity for the past 12 months was again very strong at 35%.

Our current outlook for fiscal 2012 is based upon current economic and interest rate conditions continuing with no significant changes.

Consistent with our policy regarding guidance, our projections do not anticipate or speculate on future changes to interest rates. We did include our anticipated results for SurePayroll and ePlan, which impacted service revenue by approximately 2% and have anticipated earnings dilution of approximately $0.01 per share, mainly due to amortization of acquired intangible assets. Our fiscal 2012 guidance is as follows: We project payroll service revenue increase in the range of 5% to 7% compared to fiscal 2011. HRS revenue growth is expected to be in the range of 12% to 15%. Total service revenue is expected to be in the range of 7% to 9%.

Interest on funds held for clients is expected to decrease in the range of 12% to 14% due to longer-term investments maturing and being reinvested at lower rates. Investment income net is projected to be in the range of flat to 2% growth. This is lower than what we normally experience due to cash outlays in the second half of fiscal 2011 for the business acquisitions.

Net income is expected to increase in the range of 5% to 7%. Operating income, net of certain items as a percentage of service revenue is expected to be in the range of 35% to 36%, and our effective tax rate is still expected to be approximately 35% in the fiscal 2012.

Interest on funds held for clients and investment income are expected to be impacted by the continued low interest rate environment. The average rate of return on a combined interest on funds held for clients and corporate investment portfolios is expected to be 1.2% for fiscal 2012. As of May 31, 2011, the long-term investment portfolio had an average yield to maturity of 2.6% and an average duration of 2.4 years. In the next 12 months, slightly more than 20% of the portfolio will mature and it's currently anticipated that these proceeds will be reinvested at a lower average interest rate of approximately 1%. Investment income is expected to benefit from ongoing investment of cash generated from operations.

Under normal financial market conditions, the impact to earnings from a 25 basis point decline in short-term interest rates will be in the range of $3.5 million to $4.0 million after taxes for a 12-month period. Such a basis point change may or may not be tied to the Federal funds rate. It is not possible to quantify the after-tax effect of a 25 basis point change in the current investment environment.

Purchases of property and equipment in fiscal 2012 are expected to be in the range of $90 million to $95 million. Fiscal 2012 depreciation expense is projected to be in the range of $75 million to $80 million, and the amortization of intangible assets for fiscal 2011 is expected to be in the range of $20 million to $25 million, up due to intangible assets acquired from SurePayroll and ePlan.

At this time, I will open the meeting up for questions, and we look forward to talking to you.

Question-and-Answer Session

Operator

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

David Togut - Evercore Partners Inc.

Could you quantify your pricing strategy for fiscal '12?

John Morphy

Basically, we're up about 3%. We expect most of it to stick. All the price increases we've put in on May 1, and that's now been billed and had no real significant responses from clients that would be a cause for concern. A year ago, we put a price increase in about 3% and we got a little more than 2.5% of it. Lost a little bit to discounting, but that compares very favorably to the year before when basically a 3% price increase was totally lost to discounting.

David Togut - Evercore Partners Inc.

I see. And then could you provide a little more granularity on the new sales performance in the fourth quarter of fiscal '11?

Martin Mucci

Yes, I think what we've seen -- I don't think we give out a lot of detail, but I think what we've seen is that there has been positive increase in units, particularly in the small business market, which is where we've seen the most impact from not having new business starts. So for the last 3 quarters, we've seen some positive. I mean it's been slight. I wouldn't say it's been significant, but we certainly have seen an improvement for the last 3 quarters of this, of the units in the small business environment over last year in total sales. The new business formations, sales from new brand-new businesses, is still pretty much flat to last year, so we're still waiting for that. But what that's telling you then is obviously sales from taking share, other sources are coming in, the new business starts are still pretty flat.

David Togut - Evercore Partners Inc.

And then what has been your head-to-head win rate against your principal national competitor in payroll services recently?

Martin Mucci

It's pretty flat year-over-year. So what we take from them and what they take from us has been pretty flat when you look at last year to this year. It has not seen any significant change at all.

David Togut - Evercore Partners Inc.

And just finally, given the earnings guidance you've given for fiscal '12, would you expect the dividend to move up in line with earnings growth?

John Morphy

That's basically a board decision. We're all pretty much in sync. I'm not sure what they'll do. They'll make a decision on that in the July meeting.

Martin Mucci

But we won't reduce it.

David Togut - Evercore Partners Inc.

Okay.

Operator

Our next question comes from Nathan Rozof of Morgan Stanley.

Nathan Rozof - Morgan Stanley

I wanted to ask you a little bit about the number of payroll clients. You mentioned, I think, in the prepared remarks, that you see the number of payroll clients trending up in fiscal '12. But can you give us a little bit more color on the pace of the trend over the near medium term? I mean, what's the amount of growth you expect in fiscal '12 and when can it kind of get back to the 3% to 4% range we saw before the downturn?

John Morphy

It's one of those things you got to wait till you see it. Obviously last year, we did negative one. And years ago, we had a plan to get to positive because now we work for this founder that a plan, if that's a negative, just you're not going to get one of those nor should we have one of those. Now fortunately last year, some weakness in that was offset by stronger revenue per check because we didn't discount as much in the checks per client. And we still expect to get them checks per client positive this year. In effect, the client base decline isn't as much. So we're not going into the wind anywhere as near as much as we were a year ago. So we're still optimistic, but a lot of it's going to depend on how much we can sell. Both the sales forces in-house are challenged on trying to get to positive client growth. I think there's a real good chance we'll get to positive client growth. I don't think it will get to 3% because I think this is something that's going to take a couple of years, but I think we're heading in the right direction. We felt real good going from a negative 3% last year to only negative 1%. SurePayroll helped us on this so we're very committed to it. At the same time, we need a little help from the economy. We're not sure what it will produce, but we're going to keep pushing and we're getting better and better at what we're doing on the sales front.

Martin Mucci

Yes, basically, having seen negative 3%, negative 3% then negative 1%, as John said, we're certainly pushing to get back to that 3% or 4% client growth. But it's going to take a little bit and a little help from the economy, but we certainly see it trending in the right place.

Nathan Rozof - Morgan Stanley

Okay. And then you mentioned that I think that you're expecting to see a little bit stronger growth from the SurePayroll and the other recent acquisitions versus the core business. Can you give us a little bit more color on what the delta is?

John Morphy

They have about 33,000 clients. They've better -- they've been growing 10% plus. When we bought them, we surely counted on them to keep that growth going. And that's a market we really haven't been in. We can help a little with the Google expense. Our name will help a little bit. So we're looking forward to that doing quite well.

Nathan Rozof - Morgan Stanley

Okay. And then, just last question and I'll let you go is, given that now you've got 2 platforms that you're adding your incremental new clients to, will that have any sort of impact on the operating margin leverage that you get from each new client or is SurePayroll still small enough that it won't have a huge impact?

Martin Mucci

Go ahead, John.

John Morphy

No, I don't expect that. We basically are running right now with 3 platforms, you could say. We have core, MMS and SurePayroll. Now the SurePayroll platform, the margins there are really designed to operate, offset the revenues lower in the pure Internet full-service client. We can get to the same margins by not having the same costs. Obviously, they're going to gain some advantages out of the knowledge we have in the payroll industry. We've got a couple of things in their platform we've got to change. We got to get onto their tax calculation, our tax calculation model as opposed to the one their basically branding. And the MMS platform gets stronger and stronger, but as the core platform improves, eventually, those 2 platforms will be merged. So you can see the leverage benefits. When you look at the income statement and you look at operating income percent after float, it's a little bit -- not really misleading, but what you can't quite see is we got some really good improvement in operations and invested some of that back into IT, both product and systems as we invested. Actually, our growth in IT expenses were over 10% the last couple of years. And the way we've been able to afford that yet not have significant increases in expenses is the margin improvement we're getting off the product. So I think we have to continue to invest through good times and bad times. We've been doing that. We've seen improved margins and we'll continue to see them. And as the MMS platform merges with core, we're going to get some more opportunities to leverage.

Nathan Rozof - Morgan Stanley

Great.

Operator

Our next question comes from Kartik Mehta from Northcoast Research.

Kartik Mehta - Northcoast Research

Marty, I wanted to ask a question, a follow-up question on the statement you made about client additions. And I wanted to see if you could tell me historically, were most -- how your clients have come from new business formations, from competition and just from people that used to do it by paper and pencil, where it was historically, where it compares now.

Martin Mucci

Well, it's been pretty consistent. I mean about 50% of the new sales come from new business formations, so brand new businesses. And of course, the rest is either doing it manually or from a competitor. And we break it kind of local competitor versus obviously, the main national competitor. It hasn't changed all that much so where we picked up some is obviously, in particular, from the local competitors, I think as our products -- as we moved on to the new platform a few years ago, the new products as well as the online interface got even stronger, and I think we've done better against them. I think with ADP, we've done about the same from last year, the year before, and it's the new business starts that are still a bit slow. Even that is flat as opposed to down, so we're positive on that. We just need to see more of the economy improvement.

Kartik Mehta - Northcoast Research

And so Marty, you and John both made a -- said that you're getting more clients from regional competitors or maybe losing less of. And I'm wondering why that is. Is that because of the new pricing structure you put in place or is there another reason for that?

Martin Mucci

I think there's probably 2. One is again, I think the sales force is doing a very good job in identifying the value of the national competitors, strength of the national competitor. There's been a lot of issues with small -- many of the small competitors that are not public companies, a number of them got out of business, et cetera, of the payroll companies and some take the funds and so forth. And I think that's always out there. I think sales has done a good job to sell the strength of what our company does and the value we bring. I think also the new platform, again, that we went to a few years ago, now, we converted all the clients. We're selling onto that platform. It's more robust. It's got a great online interface and I think that probably has helped sell it as well.

Kartik Mehta - Northcoast Research

And then just final question, Marty. I wanted to get your perspective on the economy. Obviously, there's a lot of talk about where we're headed over the next 6 months. And your checks per client look really strong. And I'm wondering if you could talk about what the trends were in May. Were they consistent with what you saw in March and April? And then just your overall perspective based on what you're seeing from your clients.

Martin Mucci

I think, Kartik, it's been very consistent over the last few quarters that the existing client base is certainly looking stronger. The checks per client, the revenue per check, the client retention, all of that is looking very positive for the current client base. And that's been very consistent now for a number of quarters. And the new formation is still, as we talked about, is still what we're not sure of. I mean I would say that it still looks like housing in general, it has some impact certainly on us because it's the landscapers and the restaurants and all of those that support housing. But I have to say that in certain pockets of the country, we're starting to see the sales pick up and even a little bit on new business, not a lot. So I would say current client base looks pretty strong and consistent. And new business formations, going by what we see, is that, that's still relatively flat, but obviously hoping that, that will start to turn pretty soon.

Kartik Mehta - Northcoast Research

You saw pretty consistent trends all throughout the quarter then. Would that be fair?

Martin Mucci

That's fair.

John Morphy

We have not [indiscernible] talked about ...

Kartik Mehta - Northcoast Research

I'm sorry, Marty?

Martin Mucci

Go ahead, John.

John Morphy

A lot of people talked about softening and I don't like looking at short-term results because you get calendar aberration. The calendar is not regular, but even having said that, we haven't seen anything that shows any real weakening, no. The thing is there's movement. It's moving up with a snail's pace, but we haven't got one statistic that's gone backward yet.

Operator

The next question comes from Tim McHugh of William Blair.

Timothy McHugh - William Blair & Company L.L.C.

Just want to ask, you mentioned a couple of things you're investing in. And obviously, you've been investing in the past year. I guess the guidance assumes a little faster expense growth. Is there any areas that are picking up, especially as we look towards fiscal '12, that you're going to accelerate or will drive the faster expense growth? Or you're just allowing for more sales commissions? Any more color on kind of the underlying assumptions there.

Martin Mucci

Okay, Tim, it's a little bit -- I'll give it a shot then have John talk. But I -- the investment -- the thing we're very proud of is over the last few years as we move the core payroll client base over to the new platform, we continued to invest. And so that platform, what we call Paychex next generation, we continue to invest in pretty aggressively for not only that small business space, but also for our mid-market space. And we see that continuing. And we're very proud of that. And we have releases about every 6 months, so it's not something that there's a big bang impact either. So we're starting to see additional feature functionality roll out. The other piece of that, I guess, was there is some additional expense from sales as we revamped the compensation and found different ways to pay, not only clarify the commission payments but also pay a little bit more upfront to get, we think, even a more qualified candidate and also retain them. And with the help of the sales vice presidents, I think we've come up with a very good plan. It did increase expense a little bit on the sales side, but not too bad. And then as we put the 401(k) match, some of the 401(k) match back in and that increased it. But overall, as John said, I think we drive a lot of productivity to fund those increases and maintain a very high margin.

John Morphy

Yes, I wouldn't say our philosophy changed at all. For most of the departments, you get 2 things. When you assume you're going to have another -- you're going to assume you have a good sales year, that bumps expense up. And the other area's on the acquisition. So really, if you look at the rest of the departments, other than investing in IT, pre [ph] and all the rest, they have little or no increases.

Timothy McHugh - William Blair & Company L.L.C.

Okay. And then, I want to ask about the investment or the client funds balance for 2012. Can we expect that to grow probably roughly in line with the payroll services growth? Or the state unemployment tax does not go up as much so we should expect slower growth next year?

John Morphy

I would expect slower growth. I would say it's somewhere between 3 and 5. And the function there is not as much client growth as it is wage inflation.

Timothy McHugh - William Blair & Company L.L.C.

Okay.

Operator

The next question comes from Glenn Greene from Oppenheimer.

Glenn Greene - Oppenheimer & Co. Inc.

I guess the first question is for you, John Morphy, on just sort of thinking about the revenue growth outlook for both HRS and payroll services. So maybe first on the payroll services, the 5% to 7% guide. And sort of maybe explain to me of why I'm thinking about this wrong. But if I think of starting with sort of negative 1% customer growth exiting this year, roll in 3 points of pricing and maybe 2 points of acquisition, I kind of get to 4% or so. How do I, and I know it's not a big deal, but sort of bridge the gap to the 5% to 7%?

John Morphy

You basically got minus one from clients because you got plus one from basically checks per client growth, is about what we're estimating. So it gets about neutral client growth. Let's say it's low single digits, the price is 3 and the acquisition is one. So that gets you between 5% and 7%. And our financial plan is -- when we give guidance, our plan will be pretty much right in the middle of those ranges. I think one of the things that's an advantage after the Sarbanes-Oxley, it's the thing -- there's 2 things in Sarbanes to me are the best. One is the requirement that you got to have a whistleblower line. But the second one is you got to have all the committee meetings before all press releases and year-end financial disclosure. And basically, we look at the guidance and the board approves the guidance. We have to show them what the plan looks like, what the sensitivities are, the high lows. So when you see us change guidance, that's going to be supported by a forecast that's very, on the same base we always prepare them. So pretty much, this guidance is pretty close to the middle of what we think it's going to be.

Glenn Greene - Oppenheimer & Co. Inc.

Okay. And then on the 12% to 15% HRS, which I guess at the low end is kind of close to what the organic was in fiscal '11 after Stromberg, were there any call-outs there or is it mainly...

John Morphy

The EDP [ph] signal, add 1% to that. And a lot of it depends on how things kind of go. I mean, we've done some good things over there. We did some good things on the human resource, the full outsourcing, introduced a new product that kind of was in between full commitment and not having to pay as much. But we're really reenergizing our insurance business. We've continued to do well but we knew we'd eventually would run up to the point where just simply getting broker or record transfers become a little more difficult. Kevin Hill, with a lot of insurance experience, has done a great job over there. We've kind of made a lot of changes. In an orderly fashion, we would get that going again. The insurance parts and property and casualty all continue to look good so we think we feel pretty comfortable on the 12% to 15%. And I think we'll be pretty close back to 12%, if not only slightly below it in the first quarter, so not too worried about the aberration in the fourth quarter. It was what we thought it would be. We talked about that last quarter. The PEO is just lumpy once in a while and it was lumpy up in the third and lumpy down in the fourth, which what we expected.

Glenn Greene - Oppenheimer & Co. Inc.

Is there any seasonality issues with PEO, seasonality issues we should be thinking about for '12?

John Morphy

The only seasonality we really get is in the third quarter, when that's the heavy selling season.

Glenn Greene - Oppenheimer & Co. Inc.

Okay. And then just a quick one for Marty. On the attrition, the 21 points of attrition, maybe just the composition of it relative, what portion was bankruptcy versus competitive, whatnot?

Martin Mucci

Yes. Well, that stays pretty consistent. It's around 60 -- about 2/3 come from out of business or can't pay or no employees. So pretty much regions that the business can't -- doesn't have a payroll anymore for one reason or another. And then you kind of take the other 1/3, only about 5 or less is for dissatisfaction or some sort of service issue. And that's always been in the 4% to 5% range. And then the rest pretty much is price or competition of some sort. It's been very consistent. Obviously, the out of business -- while the whole thing has dropped, the out of business has improved the most. But everything has stayed fairly consistent.

Glenn Greene - Oppenheimer & Co. Inc.

Okay, great.

Operator

Our next question comes from Ashwin Shirvaikar from Citi.

Ashwin Shirvaikar - Citigroup Inc

My first question is, Marty, from a strategic standpoint, you made 2 SaaS acquisitions. And going forward, is the idea to sort of build scale on these organically? Or do you look for more deals to -- do you need to broaden out the platform from a functional standpoint?

Martin Mucci

Well, I think both. I think we'll continue to look for more SaaS offerings that will fit our base. But I think that these are certainly 2 of the key ones for us to continue to market. The ePlan one, in particular, was more to attack that financial advisor market at 401(k), because we see the 401(k) market moving that way. SurePayroll was to really take advantage of what we thought was a very much a growing market of both doing it manually. We already have probably 20% of our clients including SurePayroll, I guess I'd say. If you included that in our client count, about 20% are on some sort of SaaS now. More than half of the major market's are on the SaaS model and we have our own online product that has a number of clients on it as well. So we see both organically, kind of within the company, growing more SaaS. And then acquisitions would certainly go that way as well that look attractive to us.

Ashwin Shirvaikar - Citigroup Inc

Okay. And in our past conversations, I guess you've mentioned that client referrals is not quite the source of growth that it used to be. Has that changed in the last quarter or so potentially with SurePayroll or with any of the other things you're doing?

Efrain Rivera

Well, the reason the client referral thing has changed is that basically, we still get a lot of client referrals. Where in the past, where some people would simply go looking for some advice, they go on the Internet and they buy. So the thing that's really replaced a lot of that is the Google opportunity.

Martin Mucci

Yes, that's increased as a percentage. We have -- the positive thing is we've seen uptick in ADP -- or I'm sorry, in CPA referrals from CPAs and those from banks as well. So we're seeing an increase in the referrals from banks and CPAs, where the current client is fairly flat right now. But Google leads the other piece of it, coming from off Google has definitely picked up. And we've invested more as a result of that, because it's a much more growing referral source.

Ashwin Shirvaikar - Citigroup Inc

Okay. So between that and the increase in SG&A as a percent of that, when do you think we should -- and I know this has been sort of asked before and it's a little difficult to predict, but should that necessarily be sort of translate into higher client growth here in the coming quarters?

John Morphy

Well, the client growth really takes place in the last half of the year. So now, hopefully it will be, but I can't tell you what will happen. I mean you're in the marketplace, you service your clients, we're doing a great job in retaining them, but that next thing that's going to move that over the goal line is going to have to be sales. And if you remember, our sales cycle is about 1.5 week on core. So for anybody to sit here and say that they can predict accurately what it's going to be 2 months now just isn't possible. Now the same time I say that, it doesn't mean that the year is very much exposed to what happens on this. We have talked about it before that the amount of revenue that's gained on sales especially in payroll in the first year, it's important but it doesn't alter the year very much, which is why since I've been here, it's been 15 years, we book within 1% of our revenue expectations on payroll revenue and actually the whole business, every year but 3. Two were recession years and then this year, when checks per client were stronger. So we missed client growth this year, but the revenue wasn't really missed, it was exceeded. So you got a lot of factors going on. So you want to sell as much as possible, but it's going to be what's it going to be. And we feel pretty good where we are in the year, and the bigger impact generally is on the following year but then we readjust, we look at expenses and we're committed to keep growing. We would have had margin expansion in this plan. We did have margin expansion in the plan. That was basically removed when we put the 2 acquisitions in, but we think those are good investments for revenue growth in the future and we feel good about it.

Ashwin Shirvaikar - Citigroup Inc

Okay.

Operator

Our next question comes from Julio Quinteros of Goldman Sachs.

Julio Quinteros - Goldman Sachs Group Inc.

Marty, really quickly on the -- just thinking about the longer-term prospects for bending the curve a little bit more, back to the old sort of normal growth rates on revenue growth, what would you say are the priorities right now in terms of being able to move that more favorably towards the sort of historical rates? Are we still thinking about 8% to 10% as a longer-term rate? Is that still sort of in plan for you guys as you think about longer-term opportunities? And what would be the important drivers for that?

Martin Mucci

Yes. The high end of single digits, I'd say, is certainly what we're targeting for in long-term revenue growth. And I think that the drivers are pretty much the same as they've been for us. You got to have the right product set. I'm very happy with what we've done on product investment. Even in tough times, the last few years, we've continued the investment very well. We're executing well on that. So not only are we changing a lot of the applications and rolling them out, releases every 6 months, but we're also creating things like our Smart Time clocks, the HR Essentials product to fit a niche there. Doing acquisitions is another part of it. We're very focused on that long-term growth. The officer team very much knows that we're kind of looking out 5 years and saying, this is where we want to be in 5 years and we need to drive this growth. And it has to be with net client growth. As we've seen in the past, we have to get that client growth back up and we have to have the right products and then drive more of the products into that current client base. We still have a nice opportunity, when you think about it, with even 57,000 401(k) clients to add even more 401(k) out there. And certainly, the HR outsourcing of both the ASO, the PEO and now the HR Essentials, fit very well in our client space and we see a lot of interest in that market increasing in that. So I think we've got a good product set. We're continuing to invest pretty heavily in that product set to be ready for the future and be extremely competitive. We're investing in new acquisitions that will fit our product set, and we're still looking at more of those. And we're also just -- how do we increase the very successful sales team that we've had in the past? How do we continue to market that to where they are driving even a higher closing rate? I mean, we've done pretty well in our closing rate even in tough times and we're always looking to drive that up. That's the new comp plan, the new training, making sure all the positions are filled, et cetera.

Julio Quinteros - Goldman Sachs Group Inc.

Got it. And then, John, I think you talked a little bit about the SurePayroll in terms of having that platform sort of exist next to the core and the MMS. Are there any other integration efforts to think about as it relates to SurePayroll over the -- as you guys think about it over the next year from an integration perspective?

Martin Mucci

Yes, I'll take that one, Julio. It's Marty. We're working -- we've actually got all the plans in place with SurePayroll already on how to move the back end into us, as John said, the tax filing, the tax calculation. And we're also have now built them into our technology, a planning road map. So not only are we just trying to integrate them into what we have, but take them to the next level as we move to the next level of our service platform. So that's the biggest integration that we have. And frankly, we feel that we've got that worked into the product plans and we'll have that done very much on schedule over the next 18 to 24 months. So other than that, there's not a lot to integrate. The MMS, as John mentioned earlier, the major market product really will be an expansion of our current application that we rolled out 2 years ago. So that will grow into the major market products. So we'll have not only the preview-based major market product we have now, but also grow the technology that we have in place to expand into one application for all markets.

Julio Quinteros - Goldman Sachs Group Inc.

And just the distinction between the sales approach in SurePayroll versus kind of the traditional business, is there a different approach in the way that you guys go after new sales in SurePayroll?

Martin Mucci

Yes, definitely. They come mostly through the web for SurePayroll. They're sold through a telephonic sales approach that they've been very successful at. Because basically, they set the client up as they're selling. They go in and help the client set up, it's all telephonic. But we have already -- are trialing an integration with our core sales force right now and started that where referrals from our core sales force will sell our product, but also be able to refer to SurePayroll product if there's a fit for that client. And they'll move those referrals right to SurePayroll in an automated sense and let SurePayroll telephonic sales close that. So we won't increase the cost a lot to the SurePayroll sale because they're a lower-revenue product, but we will gain the impact of the strong feet-on-the-street sales force that we have that's been very successful here at Paychex.

Julio Quinteros - Goldman Sachs Group Inc.

Got it. Great, guys.

Operator

Our next question comes from Jim Kissane from Bank of America.

James Kissane - BofA Merrill Lynch

And, Marty, can you give us an update on your mix of distribution? I mean, it does sound like it's changed over time in terms of what portion is from CPA referrals, what portion's from customer referrals, say online and then just regular direct sales.

Martin Mucci

Sure, Jim. It's -- actually, the part coming from -- the sales coming from new business starts has not changed all that much. It's always been pretty much 50%. I think what's changed is, as John mentioned, those that came in from current clients. They are coming in from -- probably current clients, but they're coming in through the web. They may -- the current client may refer to us or say, "Geez, I use Paychex, and they have great value and they've done a great job for me." And what you'll find now is new businesses hearing that, go right to the web, research us and then get the lead to us that way, which we quickly react to. So I think that what we're seeing from CPA referrals are pretty much the same, new business about the same. And then the current client is changing a little bit to where it's more web-based referral.

James Kissane - BofA Merrill Lynch

So are CPAs still on the 35%, 40% range? Is that ...

John Morphy

About 35%.

Martin Mucci

Off 35%. 30%, 35%.

James Kissane - BofA Merrill Lynch

Okay. And then, Marty, can you take a stab at, or maybe a long-term target for net client growth? I mean, you mentioned 3% earlier, but historically, Paychex was somewhat higher than that and you were kind of stuck in the 3% to 4% range. What's a reasonable long-term target in a more normalized environment?

John Morphy

I guess, Jim, it's going to be 3% to 4%. And I think that depends on what kind of a growth you get in the small business. The one thing I don't think you can change the opinion on it, I don't think penetration in this market's going to change. It can change a little bit on the SurePayroll side where those 5 million manual accounts are, but they're small. But pretty much, markets have the same level of penetration, so it grows about equal to what the world is growing.

Martin Mucci

Yes, we don't see a big change from those who want to outsource versus those who don't. And other than the -- and that's why we went after SurePayroll because they have such a great model for those that are manual today that will go to a web-based. And that's why we think there'll be more growth there.

James Kissane - BofA Merrill Lynch

And maybe the average client size in terms of number of employees for SurePayroll versus the traditional business?

John Morphy

A little bit smaller.

Martin Mucci

A little smaller.

James Kissane - BofA Merrill Lynch

Oh, just a little. Okay. And then just last question. Your targeted retention for F '12, and maybe you can give it on a unit basis and then on revenue basis?

John Morphy

Well, our revenue retention is -- you measure it at about 20, but on revenue, that was down around 15. Basically we -- the goal is to get -- the all-time debt was 19-something. And we're probably taking where we just finished this year and try to cut, get to the best there by about half. But you're cutting -- it's close to that, yes.

James Kissane - BofA Merrill Lynch

Okay.

Operator

Our next question comes from Jim McDonald of First Analysis.

James Macdonald - First Analysis Securities Corporation

Just a quick follow-up on the last one. Does the SurePayroll -- how does that affect your calculation of checks per client?

John Morphy

We won't put it in for the time being.

James Macdonald - First Analysis Securities Corporation

Okay. And...

John Morphy

Now, you have to understand, the checks per client, this is not a number we keep giving all the time. When the economy gets to a point where this information is meaningful, we give it. When we get to hopefully better times and it's not so meaningful, we stop. And the reason we stop is people start overreacting and looking at the number and it just winds up not being effective. So that could happen at some point, but in the current conditions, I'm sure we'll be giving it for a while.

James Macdonald - First Analysis Securities Corporation

Okay. And my next question is could you talk about sales force retention last year and how that's going, especially with all your new sales policies and new commission strategy?

Martin Mucci

Yes. Sales force retention was a little bit worse than normal than the average for us in the last fiscal year. It went up a bit. And we think that some of the changes -- just having an awful lot of change sometimes stirs that up. That, that was voluntary versus involuntary was roughly the same as it's been historically. But so we had a few more people leaving. I think one thing, the economy got a little bit better in some respects so there were more jobs, and as there were changes here that we were working on like the new comp plans for the last 4 or 5 months, I think people decided whether to make a change or not. We had some changes in leadership in the field at senior manager level, and I think that gets some people to change and do something different. I do feel that all the steps we've taken of the new management team, that is all in place now from a manager, front-line manager, second-level manager, all in place, very strong folks. In fact, we had them all together in Phoenix last week. And I think they're a very highly energized group who are very experienced and will do a great job. I think that's the biggest part of it. I think now that the comp plans we rolled out about a month ago started at this month for our fiscal year, and we got very positive feedback on the comp plans not only from hiring new, but from retaining the existing folks that are here. So I think a lot of good things are in place. It definitely was up a little bit, but I expect that to start trending back down here in the next couple of months.

James Macdonald - First Analysis Securities Corporation

And just one more quick one. A quarter ago, you gave us an 8% decline in client fund interest, and now it's quite a bit worse than that. Is that all due to softening interest rates here in the last couple of weeks?

John Morphy

No, we gave you a range. We don't think it's changed much from what we said it was.

James Macdonald - First Analysis Securities Corporation

Okay.

Operator

Our next question comes from Tien-Tsin Huang of JP Morgan.

Tien-Tsin Huang - JP Morgan Chase & Co

I guess just first on payroll revenue in the fourth quarter. It actually came in a little better than we expected. I'm curious how it came in versus your plan. Any surprises there?

John Morphy

No, pretty close. Revenue has been a little better than we expected throughout the year only because checks per client has stayed stronger than we thought they would. And we did a better job on pricing. We didn't have to do as much discounting.

Tien-Tsin Huang - JP Morgan Chase & Co

Okay, good. And then just the departure of the Head of Sales after a pretty short stint here, what's the back story? And how close are you to finding a replacement?

Martin Mucci

Yes. I've been very actively interviewing and I've got candidates. Actually had a candidate last week, have another one this week, tomorrow, very active in it. It's difficult to make sure you find the right person. That was an unfortunate circumstance that -- and I won't get much more into it than that. It's just I thought I had the right person, did not, and we dealt with it quickly and everybody -- and we moved on from there. So I expect very soon. I think the important thing to know is that the sales vice presidents are all very experienced, have been reporting to me for since I got the position, September 30, and have not let any grass grow on them. They have moved very quickly to get everything in place we needed to go. So they're very motivated, but I expect to fill it as quickly as I can. it's got to be the right fit from both an experience and a culture standpoint, and I certainly hope to fill it quickly.

Tien-Tsin Huang - JP Morgan Chase & Co

Understood. That makes sense. Does the person have to have a payroll background per se? Are you looking for any broad, through a tech sales or service sales person?

Martin Mucci

No, it does not, not necessarily. I mean that always helps, I think, to know the business, but anything, particularly in the small business environment, that knows selling to small businesses and as much as possible, one that's just well-experienced and is a great leader. Most important thing to me is not only the experience, but the cultural fit with the company, which has been around 40 years. And it's very important that we have a sales leader that will energize and inspire the sales organization that we have.

Tien-Tsin Huang - JP Morgan Chase & Co

For sure. Last one for me. Just thinking about the float portfolio, just skipping to fiscal '13, how much of the float portfolio comes up for reinvestment there? Is 20% still safe to assume again?

John Morphy

About 20%.

Tien-Tsin Huang - JP Morgan Chase & Co

Okay. Good to know.

Operator

Our next question comes from Kelly Flynn of Crédit Suisse.

Kelly Flynn - Crédit Suisse AG

Question relates to the checks per client. I think in the Q&A, someone asked you if the trend has been sort of stable year-over-year, and you said yes. But it looks like obviously since the last quarter, the growth is slower. And then you're guiding for next year, the 1% versus the close to 2% that you're seeing. Can you just give a little more detail on that? Is it just kind of an issue of comps getting harder? Or is comp -- anything you're seeing about the economy that's causing that?

John Morphy

One thing about the economy now, you got to go back. Remember checks per client if you go back to '95, it would be flat. Let's say with 15: 15, 15-1, 15-49. Yet 2002, it drops 4% like a rock. Next year, it drops from the 4%, but that was completely because we bought 80,000 clients with a smaller client size. And then you keep going, you go same number less the 4%. It moves along, moves along, moves along, moves along and you get to, I think it's 9 and 10. Now this time, the change didn't take place kind of coincidental with our calendar -- our fiscal with the calendar year, so it drops like a rock 5%. Hit me about 2, for 2.5 points in each year, okay? And this year, it got better. Normally, this statistic never gets better. It only stays where it is. But I think because there's been so few business starts, because we throw the whole thing in, that 2% plus is probably a little bit less than that. So generally, this thing stabilized. But we believe it's going to continue to stay reasonably good, and we think that will happen over the next 12 months, but the comparisons are harder and so really doesn't reflect any real change in conditions.

Kelly Flynn - Crédit Suisse AG

Okay, great. That was it.

Operator

Your next question comes from Rod Bourgeois of Bernstein. [Sanford C. Bernstein]

Rod Bourgeois - Sanford C. Bernstein & Co., Inc.

I wanted to inquire about the fiscal '12 margin outlook. You're guiding to some margin contraction. I just want to get your perspective on whether you're firmly expecting to return to margin expansion? And if so, when? And what's really the turning point in your business to allow that to happen?

John Morphy

Well first off, we have margin expansion this year until I put those 2 acquisitions in. When Marty and I went to the board with the budget, first off, it didn't have them in. These -- I'm going to use numbers that aren't in numbers so you can have an idea what probably happened. Let's say we're at 4. That meant the operating income without float had to go up 6 because we want 2 basis points. And then what happened is these acquisitions basically added about 1% in total to revenue growth and took out 1% on the operating income growth. So pretty much, it went from 4 and 6 to 5 and 5. And that's kind of what happened only obviously, the different number. So basically, we're not away from margin expansion. Now looking forward, I think we're continuing to still get margin expansion. That's a part of the culture. It's part of what you expect from us. And the only time that won't happen is when there's something that is unusual. Obviously, the recession hurt us and checks per client went down pretty dramatically, but we believe we're going to get back on that. So unless there is some acquisition, I think we'll be back to leveraging. But again, you might find a good acquisition. But if that accelerates revenue growth and at the same time, helps profit growth go up, I don't think anybody will be too sad about that. But we have not guided away from our desire to expand margins and our commitment to the board was we will continue to expand them, and we have to show the forecast to the plan separate of those to clearly indicate we were doing so.

Rod Bourgeois - Sanford C. Bernstein & Co., Inc.

Right. And then just to clarify, you don't need revenue growth to be higher than your fiscal '12 outlook to be able to have comfortable margin expansion. Is that the case?

John Morphy

No. We would have had it. We had -- those 2 acquisitions, when you buy them at the front end, you get hit pretty heavy with the amortization costs, which eventually go away or they diminish pretty fast. We had the expansion. It's not that we needed higher revenues or anything, we would have had our normal model.

Rod Bourgeois - Sanford C. Bernstein & Co., Inc.

Okay. And what's the main reason in fiscal '12? I mean, you mentioned some of the factors that are pressuring your expenses in fiscal '12. But what's the main reason in fiscal '12 that you're not expecting or guiding to margin expansion?

John Morphy

You're missing my point. I just -- we had margin expansion before I put the 2 acquisitions in. Meaning, we had to put extra 401(k) costs in, so the match went for a full 12 months versus 6, merit increases withheld in the prior year. We've got extra investments in IT, but all those were offset by operating productivity in both G&A and in the branches. So what you're looking at, I knew we would go through this, we do not -- the only reason we have operating margins not going up 200 basis points over revenue growth is because I had to add in the results of those 2 acquisitions.

Rod Bourgeois - Sanford C. Bernstein & Co., Inc.

Okay. All right. Now, it makes sense. And then on the pricing structure, you made some changes to the pricing structure at the beginning of fiscal '11. And I just wanted to see if you could give an update on what the real impact of that has been in the business. I'm assuming it maybe has contributed some to the lessened discounting trend that's out there. Is that what's happening?

Martin Mucci

That's certainly true. I think also then we made some more adjustments probably in the next 6 months after that. We've made adjustments back and forth. I think it's a little hard to tell because you got the economy at the same time, but I think we did reset our pricing and our packages. We then kind of tweaked them again about 6 months later. And I feel -- the sales force feels pretty good about where we are right now. So we've kind of tightened down the discounting policy and got the prices and the packages set right. And of course, you always continue to watch that, but I wouldn't say there was dramatic change as a result of that. But I don't think it necessarily hurt us either, once we've made some adjustments. So we're kind of still watching it. But the sales force, I believe, feels that we're pretty properly set right now.

Rod Bourgeois - Sanford C. Bernstein & Co., Inc.

Okay. So no new pricing structure changes in fiscal '12?

Martin Mucci

Not at this point, no.

John Morphy

Not a significant one.

Martin Mucci

No, not significant. No.

Rod Bourgeois - Sanford C. Bernstein & Co., Inc.

All right.

Operator

Our next question comes from David Grossman of Stifel, Nicolaus.

David Grossman - Stifel, Nicolaus & Co., Inc.

Just to circle back to the questions that you've had about growth, it looks like you're investing in 3 areas: increasing the client base in the core, adding new products to increase revenue per client and then expanding into new market segments like self-service. So I'm sure you're optimistic that each will yield attractive returns, but it sounds like if I take that 3 -- 2% to 3% client growth and let's say, 2% to 3% pricing, you get 4% to 5% of the total high single-digit growth from the core. Is that the right way to think of it? And then the balance from expanding into new market segments and the [indiscernible] revenue [indiscernible]?

John Morphy

Because numbers' dollars work exactly when you get with more volatility like we've had, but you're not far off.

David Grossman - Stifel, Nicolaus & Co., Inc.

Okay. And then secondly, John, just quickly, is it possible to think about the float in the context if rates were flat, but let's just say they flatlined, can you guess at when investment income from client float would go from being a headwind to a tailwind?

John Morphy

It's hard to say but I think if you go 2 or 3 more years, the whole portfolio is going to turn over. But you got 2 or 3 more, we go down. We can't go down much more than it is. I mean, the reinvestment rate at long term was as high as 1.0. I mean, you'll have some, but it's going to go down gradually. You're not going to see any big drop like we saw before. And eventually, the rates got to go up.

David Grossman - Stifel, Nicolaus & Co., Inc.

Right. So you obviously had, relatively, the rate difference is significant in fiscal '12. Based on what you know is in the portfolio and what trends over in '13, does that pretty much go to a flattish-type scenario in '13...

John Morphy

It's closer. Not quite, but a little bit negative. That's why you got the guidance. But the thing I do know is if rates go back up, this thing will move pretty quickly. If you compare us to what I would say are the normal rates for those last 10 years, except when you take up this period where interest rates were 0 sometimes, we're down about $0.15 a share. So it doesn't have to go up much to give us some of that back.

David Grossman - Stifel, Nicolaus & Co., Inc.

Got it. Okay, guys.

Operator

Our next question comes from Tim Willi of Wells Fargo.

Timothy Willi - Wells Fargo Securities, LLC

Two questions, one was around sales and one around sort of the financial stuff. First, Marty, can you talk a bit about anything around sort of, I guess, changes in behavior or territory management, things of those nature, around the compensation plans that you've put in place? Just curious if the market had evolved where sales wasn't being incented correctly, but has now evolved to be more in line with the market or product. Just to understand, is it purely financial or is it around certain behaviors that needed to be addressed?

Martin Mucci

Good question. I think it's a number of things. In one, on the territories, we -- the sales vice presidents took the lead on reviewing all the territories and being sure that people have equal opportunity and so forth. And I think they're comfortable that they've made some changes that have done that well and set up for this fiscal year. But I think the comp plans were really a couple of things. One was to raise the base of what we start new sales representatives for so it attracts a little bit different candidate. It's sometimes difficult to have a candidate come in and get attracted, at least, to then see what they can earn. So I think we've been able to do that. And that's helped in our recruiting efforts. And then the other thing is really to gear them towards revenue. It's very important. You always have this kind of revenue in unit. We certainly want the units to grow and there's some tied to that to get them to certain types of recognition. But the majority of that is driving them towards revenue and finding the best revenue and getting the most revenue from the clients and so forth. So it encourages them to sell the right package, but to get more focused on the revenue. And then there certainly is some kickers as well for unit productivity, which gets them to things like sales conference and so forth.

Timothy Willi - Wells Fargo Securities, LLC

Okay. And then just a follow-up on that quickly is, obviously, a lot of tight financial controls within Paychex and decision-making. Is the profitability and the discounting leeway, et cetera, does that flow more into a salesperson's ability around managing the revenue production? Or are there safeguards in place around compensation, around the actual profitability that's coming in with the revenue?

John Morphy

When they discount, they hit their commission immediately. So they don't want to discount any more than they have to. Sometimes, they'll take some for the price we don't like but they got to act pretty much within the guidelines. And if you've got a control mechanism, it's really the branch manager.

Timothy Willi - Wells Fargo Securities, LLC

Okay. And then on the financial side, just 2 quick ones. One on the M&A environment, just sort of your thoughts around pipelines, pricing, maybe some comments around relative size of deals you view as potentially doable. Are we talking smaller ones like we've seen? Or are there some that might require substantial resources?

John Morphy

Well, we tend not to buy things that are very large because the prices are big. And if that gets big and really, a great company is always going to be putting this company in any form in jeopardy of acquisitions. There was a payroll acquisition that's out there right now that's got a fair number of clients in it but they want a lot of money, we don't think it's strategic to anybody at this point, maybe a new player. But we're not going to get enough to be able to do that much with it, so we are not going to deal on that one. The best kind we can find are ePlan and our SurePayroll are perfect examples. SurePayroll was $115 million, so we didn't shy from paying over $100 million. If basically they offer something that's very strategic to us and very important to us, and if we have to pay up for that, we'll pay up. That's why we paid so much for SurePayroll. Normally, we would not pay that much, but we saw the chance to get a fully integrated Internet application we could not design in the timeframe we felt we needed to get it. We saw the ability to get some people and some process, so we did it. And I think it will work out fine. So when you look at other acquisitions that we're still very picky about whether it's in our space, whether it makes sense, and we don't want to start changing the whole way we look at things. So we're going to look for the good ones and we always done quite a few now, and not that many big ones, but since I've been here, now, it's probably well over 10. The only one that we, I would say, did not come out real well was the time and attendance solution. But we got the products we needed, we moved them to us, and then we sold the piece back to some other people. So even on that one, we do not have anything where I would say was very distasteful.

Martin Mucci

That was the Stromberg one. I think, yes, as John said, I think we're very selective. We always have 4 or 5 things that we're looking at, which is good because that means they're out there and available. I think the pricing sometimes is a bit high. And also we pay a lot of attention to the distraction. We've got a big business to run and there's a lot of things we're trying to do and so we're very careful about being selective in making sure that's not a distraction unless it's worth it. And I think I've been very proud of the 2 that we did this year. They've, I think, joined the company very well and we're off to a very good start very quickly. So if we can get it a reasonable price even if we have to pay a little bit more, if it fits and it's not a distraction and we can fit it very quickly and integrate it, we'll go after it.

Timothy Willi - Wells Fargo Securities, LLC

Okay. And then just quickly, could you talk about the board's sort of stance around debt? I'm just thinking buyback, dividend. Obviously, you generate a ton of cash. You don't want to do big deals for the sake of doing them. With the stock where it's at, I'm just sort of curious around the thoughts around more buyback activity.

John Morphy

I don't know that we would borrow money to buy stock back. And I could say that would be never. And they're pretty well committed to the dividend. We look at the stock buyback we did -- I think we started in '08. And to me, you can't just look at the stock buyback. Our average price is 42, but you've got to look at the whole scenario from '08 to now. We had a lot of money. We got it out of interest or investment return levels at a great time. It got us out of some investments, which maybe would have got out of anyway, but we wanted first to get out of auction notes. We had over 500 million at one time. We were one of the first ones to get out of certain variable rate demand notes. So I look at those strategy and say, okay, it might not have been perfect, but all I know is from '08 to now, we didn't lose any principal money and we got some money off the right time. I'm not always in favor of buying stock back simply to take on the debt. Some of us pay in order to yield a little bit better structure. I'm not sure when I look at the earnings per share, impact is enough of a meaningful change. I'm never even sure it's always going to change. So I think we'll continue the way we are. I think we've got excess cash and that we would probably consider a stock buyback. Now one change I think we would make is the last time we implemented the program over a relatively short period of time, about 6 months. And next time, I think we'd be more opportunistic. We might have announced the plan, but we wouldn't necessary try to complete in a short period of time. The reason we did that on the last one was we had $1 billion and we wanted to be a company that's known for doing what we say we'll do. We do not want to announce a stock buyback program and then 12 months later, not bought really anything back. So we'll keep watching it. I wouldn't say there's any closed viewpoint on this. They're still open, but in these conditions, I don't think that's going to happen at any significant size, but then, you never know.

Timothy Willi - Wells Fargo Securities, LLC

Okay.

Operator

Our next question comes from Gary Bisbee of Barclays Capital.

Gary Bisbee - Barclays Capital

I'll just sneak in 2 quick ones. Can you give us an update on the level of penetration of the major HRS product categories into the existing payroll customer? Any thoughts on that? And sort of how successful you are selling into customers that are not existing payroll?

John Morphy

Well, a lot of -- in our HRS products, I would say the normal fee on everyone is about 50% comes from outside, 50% from inside. And while the one that's starting to move up is the 401(k), the product offering is getting better to get conversion. The product offering and this -- that we just bought is going to help in these financial advisors. And the one thing on 401(k) that we make sure we are is we evolve continually because we want to stay #1. And now, we have more plans than anybody else, we sell more than anybody else and we know if we don't keep evolving and moving kind of ahead of the curve, then we won't stay that way. Healthcare is still very much in its infancy, the one that's kind of amazed me on the strength of the full outsourcing of HRS Services. Those grow rather nice. They rate through this recession, which should say, why would the most expensive product you have take you on the best growth prospects share to that? But I think we've got a real good offering that meets clients' needs. So penetration is there, but I don't think it's anything that's alarming yet. And we just got to keep watching it. But we look at HRS, it's going to continue to grow faster than payroll and we'll see what happens. But we haven't reached a point where there are no opportunities yet. Now the same time I say that, it's like getting some client growth is important because you do want to throw more clients into the mix that the HRS people can go after.

Gary Bisbee - Barclays Capital

And then just given that and what looks -- I mean, if retirement's only really 10% penetrated, if it's 57,000 clients ...

John Morphy

No, it's not. It's more than 10%. Only 29% of our clients have an HR -- have a 401(k) plan.

Gary Bisbee - Barclays Capital

Oh, I got you. Okay. And I...

John Morphy

And we have about 40% of that.

Gary Bisbee - Barclays Capital

Okay. And then just the 8-K last night indicated only 1% expectation in sales headcount growth, which is slower than last year. I guess given the ramping growth, you're given maybe a slightly better economy on average. That's surprising to me. Any reason?

John Morphy

Operation productivity, we lost some productivity on our sales force. As the economy gets better, we're hoping we're going to get some of that back. That doesn't mean that's 1% forever, but we're looking at stabilizing the sales forces. And I'm sure we'd back to growing them more aggressively. Now, some of them are more aggressive, the insurance area. One of the problems in HR is a few years ago, we grew it faster than we probably should have then we've let that stabilized. We'll get the payroll thing stabilized when we get back growing that aggressively. And I guarantee that will happen because we got a founder that asks us that same question every year.

Gary Bisbee - Barclays Capital

Okay.

Martin Mucci

I think to commit -- yes, I think it's very much about getting the territories right. We've -- as I said, the sales vice president that redesigned some of the territories, redesigned the comp plans, the training, it was like, let's let some of this settle. Let's make sure that we've got everything in sync. And then hopefully, start growing again as we move through the year even.

Gary Bisbee - Barclays Capital

Okay.

Operator

Our next question comes from Christopher Mammone from Deutsche Bank.

Christopher Mammone - Deutsche Bank AG

I guess just a quick one. You gave a couple of reasons why for your success in the marketplace against some of the local and regional competitors. I guess, do you have any more granularity on -- or is any one reason, product versus sales driving the bulk of that? Is it sort of even split? Can you give more color there?

Martin Mucci

I think it's -- I would say it's fairly even. I mean we've always had a very strong sales force model and sales force team with their execution. I think to watch their closing rate pick up a little bit, it certainly didn't drop any. And then as the economy has started to come back, their closing rate has started to pick up. We have very good, very well-trained sales reps. We're very careful about who we pick. And I think as the economy starts to get a little bit better, and as the current client base starts to get a little bit stronger, they're out there right at the door, getting referrals and so forth. And I think we've done well on the web in getting them more leads, which then they're executing on. So I think it has been sales execution, but I also do think that having moved to the new product application about a year and a half to 2 years ago now, finishing that conversion, the online interface and so forth, is very good and we're getting very good feedback from the clients. And of course, the service. We're at the highest levels of client satisfaction in our history. So we're not losing a lot, and we're probably getting more clients that would refer us whether they go on the web or not.

Grant Keeney - Northcoast Research

Okay. That's all I had.

Operator

Our next question comes from Vishnu Lekraj for Morningstar.

Vishnu Lekraj - Morningstar Inc.

A quick question here for you. Have you seen any uptick in competition from some of the larger financial institutions concerning the core payroll services? And have you seen more competition or more aggressive competition from other nontraditional players?

Martin Mucci

Not really, no. I'd say we still have one national competitor and we have a number of regionals. And as we said, we are doing better on the regionals and about the same experience with the national competitor. So we really have not seen other players pick up much at all.

Vishnu Lekraj - Morningstar Inc.

So none of the bigger banks have moved into this area or have tried to aggressively to move into maybe taking share from you guys?

Martin Mucci

No. We have not felt it. I think they offer white label offerings and so forth, but we have not felt that. It's either a different market or we're not seeing it.

Vishnu Lekraj - Morningstar Inc.

One more then real quick. Given the change in mix in your revenue and your business and the heavier investments in terms of acquisitions and HRS, how should we view capital returns given all this and the pricing mix and job growth? I know it's kind of a large question, but can you give us some context around that? That would be great.

John Morphy

What do you mean by capital returns?

Vishnu Lekraj - Morningstar Inc.

Yes, I mean do you expect to same capital returns from the investments you're making in these other businesses that you've made in the past in terms of your core payroll service?

John Morphy

Yes, but generally you calculate in our return equity and we've met 235%. But in this business, I'm not sure that's a -- and it's nice, it's beautiful, but I've realized this business turns cash off better than many any other business in the world. And we're very profitable so I don't see any reason our profit lows are going to change near investment levels. But I don't know that that's always the best way to look at our business.

Vishnu Lekraj - Morningstar Inc.

Got you. Great.

Operator

Our final question comes from Jeff Meuler from Baird.

Jeffrey Meuler - Robert W. Baird & Co. Incorporated

It's Jeff Meuler from Baird in for Mark Marcon. Our question is around the productivity on the sales force as well. What is your productivity currently tracking at relative to what it was at during the peak, just to give us some sense of the capacity and the existing headcount? And then with all of the changes that you're making and hopefully some macro improvement, what type of productivity improvement would you expect this year?

John Morphy

You're not going to get a specific answer to that question, but I won't leave you with nothing. Basically, we were the leader in the industry. We have -- we still believe we're the leader in the industry, but the gap isn't as big. We lost some, but for competitive reasons, we're not going to answer that question because we got this big guy that competes with us that would probably like to know how we're doing. But we know when we swap people sometimes, we know where our productivity as compared to theirs, we've got to get ours back up. Some of it probably can never be achieved again because at one time, we were just, I'd go along with spectacular. But we know that we go and by Advantage and InterPay and other things, when we look at what their sales forces is selling compared to ours, and ours is always considerably higher. Now in some instances, they're going to be twice as much. I don't know if it's still twice as much, so it's still there. We're down some. Some of it's recession, some of it's we got to get better execution, but the key is we keep working on it and we keep hoping it's going to improve. And we're as committed as possible, getting the sales engine, doing what we need it to do.

Martin Mucci

Yes. Well, I think we see as it has decreased and flattened out, and now we see it really improving. But it's still, by far, even when it flattened out and decreased, that we're still the best in the industry.

Jeffrey Meuler - Robert W. Baird & Co. Incorporated

Okay. And then just one separate question. In terms of your investment in product development, you rolled out a couple of new solutions organically this last year. For the product development roadmap for next year, is it more about enhancing existing products and getting the MMS and core platforms moving towards each other? Or is it more net new development?

Martin Mucci

It would be -- right now, that roadmap sort of laid out for the next few years -- I mean next year is more about improving -- enhancing what we have and adding more to it, because that's of course where the majority of the clients are anyway. We'll always look though, through acquisitions and so forth, if there's something new. But it will be continuing to enhance both the small business and the mid-market space products.

Jeffrey Meuler - Robert W. Baird & Co. Incorporated

Okay.

John Morphy

And with that, I think, we're out of questions. I'll probably give it back to Marty and he's going to give a couple of comments.

Martin Mucci

Yes. Just to close it up, I'm very proud of the employees and our results in fiscal 2011. We've got an executive team very pumped and primed for next year, for the fiscal year. And I would just like to close with thanks for your interest and participation. And I would like to thank John. Once again, John has done a tremendous job. He's been a great partner to me for many years, all the years I've been here. And we're excited for John and we're excited to have Efrain on board too. So thank you very much for joining us today and have a great weekend.

John Morphy

Bye.

Operator

Thank you. This concludes today's conference call. You may disconnect at this time.

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