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Paychex, Inc. (NASDAQ:PAYX)

July 18, 2012 8:45 am ET

Executives

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

Andrew B. Childs - Vice President of Marketing

Mark A. Bottini - Senior Vice President of Sales

Michael E. Gioja - Senior Vice President of Information Technology, Product Management and Development

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

Kevin N. Hill - Vice President of Insurance Sales and Operations

Analysts

David Togut - Evercore Partners Inc., Research Division

Gary E. Bisbee - Barclays Capital, Research Division

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

Bryan Keane - Deutsche Bank AG, Research Division

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

Sara Gubins - BofA Merrill Lynch, Research Division

James Macdonald - First Analysis Securities Corporation, Research Division

Michael J. Baker - Raymond James & Associates, Inc., Research Division

Jeffrey M. Silber - BMO Capital Markets U.S.

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

Timothy W. Willi - Wells Fargo Securities, LLC, Research Division

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

Martin Mucci

Good morning, everyone. I'm Marty Mucci, President and CEO of Paychex. I'm pleased to welcome those analysts and institutional shareholders who are with us today here in Rochester, New York this morning, as well as those joining us on the webcast around the country.

Today is a great opportunity for us, our first Investor Day. It's an opportunity for you to meet some of the new key leadership of Paychex and review current -- our current year, as well as our strategies for the future. I sincerely appreciate your interest and your attention to Paychex, our past and our history. And I want you to leave with a clear understanding of the company, our leadership and the opportunities we have before us. We look very much forward to sharing the day with you.

The conference agenda is like this. I'm going to talk about the progress that we've had so far. I've been in the CEO job about 1.5 years now, a little bit more than that. I'll talk about some of the trends that we see on a macro basis, as well as from a product set and our future focus. Then we're going to have market opportunities by Andy Childs, our Vice President of Marketing. We're going to have a sales focus discussion with Mark Bottini; our product and technology, by Mike Gioja, who leads all of our technology for us; and a wrap up with a financial review and an outlook for us with Efrain Rivera.

Now you know this one. I'm not going to read it all. I couldn't read it anyway. But as far as forward-looking statements, it's in your book, and I think you know the drill on that one.

I'm going to start by talking about progress and trends and start with just a look at fiscal '12 from our perspective and how proud we are with the progress that we think Paychex is making to kind of take us to the next level.

First, let's just -- I'll hit the highlights of the financial results. It's always good going first because you get to cover everything before anybody else does. So others you'll hear this from, particularly Efrain, as we wrap up. But I certainly, like them, I'm very proud of this and I'd like to talk about it. By the way, all the slides are in the packet, as well as on the website for you to see.

Service revenue, highest in our history, very proud of that. Paychex has a history of trying to out-beat itself every year, and we recently reached the highest level of service revenue in our history at just under $2.2 billion. Operating margin, a record at 37.1%. That's excluding float, and we're very proud of the fact that we're able to bring the revenue to the bottom line. Earnings per share at $1.51, dividend payout ratio, 84%. We'll share a lot about that. And operating cash flow at about $706 million this year and a cash balance at just under $800 million.

From a progress standpoint, I'd like to tell you from a CEO's perspective, when I came into the role -- and I've been with Paychex a little over 10 years now. When I came into the role a little over 1.5 years ago, it was to be a long-term builder. That was what Paychex was looking for. That's what the Board was looking for, and I take a lot of pride in that. The team that you have before you, some of the team that you have before you, the rest of the executive team and our employees are very focused on taking Paychex to the next level. We're very proud of what we've done in the past and what all of the leaders of the past 40 years have done at Paychex. But we are looking forward to taking it to the next level, and that's what we're here for.

Very experienced executive team in place, I'll go over that in a few minutes. Service revenue and profit growth in a slow economy, very proud of that. We'd love to see a stronger economy, but we can't wait around for that. That's not the way we look at it. And we have to grow no matter what the circumstances are and the environment we're in.

Product technology and innovation and product expansion are a reality, and we're very proud of that fact. A lot of times, over the last year, what we heard is, "Geez, where are you on technology?" I don't think we've told a good story on technology. I don't think we've put our story out well, and that's what Mike Gioja is going to do today. No pressure, Mike.

Improving the client base. You'll see that we've been able to get ourselves back to flat with SurePayroll. We're up slightly, and this is after 3 years of decline. Client retention, near historic highs. It doesn't come easy, client retention, particularly in this kind of environment. So all the macro indicators help us a little bit. We had to do a lot to make sure our service is always at the top, and that's exactly what we're all about. And core -- speaking of service, core payroll service satisfaction, all-time high. We just keep pushing it to the next level.

So experienced team in place, you've got the bios in the book. But I'm very proud of this team, and I’d like to cover it a little bit. Mark Bottini is our Senior Vice President of Sales. Mark came in about 9 months ago. He's over a 20-year plus veteran of Ikon and Ricoh. And he's sold to this space, knows the small-business market, was most recently the head of sales for Ricoh in all of North America. And we're very happy to have Mark on the team.

Andy Childs, VP of Marketing, came in about 1.5 years ago. Andy has background at McKinsey and that other company and Pitney Bowes. And we've tried to -- we've handled that with Andy, so we don't usually put that on the slide actually. It slipped.

Mike Gioja, the Head of Product Management. Mike came in a little over 3 years ago in product management, took on IT development, has great background at PeopleSoft, SAP, really has taken our technology to the next level. And you'll see a lot of that. A lot of the presentation today is to tell you about how we're bringing together technology and service. We're not going away from service, which we're #1 at. And we've always been and have always held ourselves high in our front-line service providers, but we've got the mix of technology. It's where it all comes together.

Efrain Rivera, many of you have met, because Efrain is always on the road talking to you. And Efrain was formerly the CFO with Bausch & Lomb, a great partner to me. And it's great to have Efrain here. He's been in the role just over -- a little over a year now.

Laurie Zaucha who is not here today but is Vice President of HR and Organizational Development, came from PAETEC, a large major telecommunications company, I should know that, locally here in town and has been a great addition. And you'll see some of that as I talk about how Paychex, we've made very clear to our employee set, over 12,000, what our purpose is, what our mission is and what our values are. And it's a very important thing to me and to the executive team.

And then Kevin Hill, you'll hear from in the Q&A. Kevin runs our insurance business and has been with the company almost 5 years now. And we try to keep the presentations to somewhat of a minimum, but I wanted Kevin up here for Q&A. And Kevin will be here. He's been the Chief Operating Officer at Excellus BlueCross, one of the major insurance companies in the New York State and around the country. And Kevin's been with us, really taking that insurance company to the fastest growth product we have. He started in the service organization and took over sales as well. One of the few places that we have sales and service together over one kind of general manager, and so Kevin will be up for the Q&A if you have questions on health care reform and the impact on us. And Mark Bottini handles all other sales other than insurance.

So let me break these down just a little bit more for you. Service revenue and profit growth, you can see. We're very proud of the fact that we've taken service revenue up to an all-time high for Paychex at $2.2 billion. And operating income, we're very good at bringing that to the bottom line. The operating income with outflow, about $810 million, up 37% profit margin. We take that very seriously. And one of the things I think you'll find that's important to us is while we've kept those high operating margins, we've continued to invest in technology, and we've done that through driving productivity in the field. So from our service givers, and so we've been able to get productivity through very measures that's just part of the DNA in Paychex that has been around for a long time.

And I talked about innovation and expansion a reality. Innovation, you're going to hear about today. We've released more products and more technology in the last 18 months than we have probably in many, many years. And it's because of an ongoing investment that we've made for many years, particularly the last 3, though. We have -- this is the only expense in Paychex in the major expense line that has gone double digit year after year, and we knew that we had to bring technology and service together. And I'm very excited about seeing that really happen now and really get delivered, and we're getting very good feedback on those products.

From a product expansion, as I say a product expansion, we've had more acquisitions than we've had in the last number of years. Many of you know we picked up Advantage and InterPay payroll about 10 years ago. We've been probably always looking at -- we've always been looking at acquisitions but got more active and more from a product expansion perspective.

SurePayroll picked up about 1.5 years ago. SurePayroll added a SaaS-based model for us, and we're very excited about the growth that they have there. And it's a different market for us. It broadens the market, and we saw that of these $5 million businesses that are doing -- or more -- that are doing payroll manually, and Andy will talk a little bit about that, we knew they’d be coming more over to a SaaS-based model. Those who want to do it themselves have more control, and we're very excited to have SurePayroll, I think, one of the 2 premier companies in that business.

And I'm also very proud of the fact that, that management team is completely still in place 1.5 years later. We were just all out there, the executive team, having a meeting with them about 3 weeks ago in Chicago and just a very great plugged-in team that is very focused on growing that business and how they partner and how we do things together.

ePlan Services, another SaaS-based web offering, expanded our 401(k) offering for up to target more financial advisors. And you'll hear a little bit more about financial advisors from Mark in the 401(k). We've always been #1 in 401(k). This more focus on going after the financial advisors, you'll see, is very helpful to us.

And Icon Time Systems is a time clock that has been very successful for us. We trialed it. We partnered with them for about 1.5 years, and we bought the company a few months ago, something we feel is very good to get to our most 500,000 core payroll clients.

Improving client base, I talked about it. It's nice to see that after 3 years of decline, net client base declining, we have gotten flat and actually, up a little bit with SurePayroll. And so we're very proud of that. We really feel this is an inflection point for us, so we have really been able to turn that around.

And then the client retention and satisfaction, you can see retention back to its close all-time high. We're really excited about that. We put a lot into the service, a lot into the technology. That's how you get the retention to stay. And we certainly had some help from the macro environment, but we've really driven that we've got to keep the clients when you have them. And our core client satisfaction, we've talked about that.

Let me talk a little bit about market forces and trends. These slides might be tough to read some of the detail, but it's all in your books and it's on the website. I just want to give you a sense, and I won't go through each one of these in detail, but there's headwinds and tailwinds always with any of our products. And we've kind of picked the 4 major ones over the next 2 slides.

Payroll. You think about increased regulation with all that's going on in the current administration, not only federal but states. And there certainly is increased regulation, and I think we'll see this for some time. This is kind of a 2-edge sword to us. Increased regulation can hurt new businesses from forming, and we know we've talked about that, Efrain and I, many times that, that's a bit of a struggle and a push back on us. On the other hand, if there's increased regulation, fewer and fewer clients will decide to outsource. While we haven't seen that change over the long period of time, I think there will be more and more that will go first to a SaaS model or to an outsourced model just to avoid the regulations and the changes there.

I think a tailwind for us is also the investment in technology. We've gotten some nice push from the fact that we're rolling out our smartphone apps last month, that we've rolled out our iPad apps, that our website has a single sign-on. These are differentiators from a competitive standpoint.

Certainly, bankruptcy is being down, and we'll talk a little bit about that. And pricing environment, we always get asked, I think it's still about the same. It's very competitive, but I don't see it changing dramatically one way or the other. And we've adjusted our pricing here and there to be able to compete effectively, and I think we've been able to do that very well.

From an HR outsourcing side, where we have our ASO, PEO and our HR Essentials, which is telephonic support. Again, the regulations are a bit of a tailwind because the harder it is, the higher it requires someone to make sure that you're on track with what you're doing in that and not getting -- running afoul of administration or rule. This is -- more people come to us even at a smaller size than I think they used to.

And we have, I think, a very unique model with over 400 HR generalists that have been around the country in our ASO model, in particular, but they support both models, that they have that dedicated person that handless about 40 accounts a piece. And they are there for their HR needs, and that has made us very unique and I think a very strong retention on that service as well.

If you look at retirement and insurance, we've always been the #1 provider of new plans at least for many, many years now, almost 10 years. And now we have the most plans of any record keeper, and we're very proud of that.

We are very good at this retirement business. We've been in it since about 1996, and we've continued to push it, I think, as more and more -- from a tailwind perspective, more people want to save. From a headwind perspective, if the market is very volatile and people get nervous, we saw this pull back a few years ago with the recession and some of the volatility the market people pull their funds out of 401(k). We see that kind of coming back now. So I think more will invest in 401(k). And that's certainly a positive for us, and it's had kind of constant growth.

If you look at insurance, our fastest-growing business, Kevin will be here, as I said, to answer questions on that, but that's growing at 20% plus. We've talked about it before, over 100,000 clients are in our insurance agency. I did -- I have a slide somewhere. Well, I have it mentioned here, top 30 agency out of the top 100 insurance agencies and only really being in this about 5 years. We were named yesterday, as the new numbers came out, we're now at 28. So I was going to say we're moving up fast. I'll say we're inching up. But I'm very proud of the fact that we keep getting larger because we're good in this business. And I think if we don't get a question on it, we can find a way to explain to you how much the health care reform, the needs, the changes, the requirements of putting information on a W-2, of applying for a tax credit based on it. We have all that information when you have us for payroll and insurance. We link that very well so that we make sure that all of your premiums and so forth get on your W-2, that if you need to apply for a tax credit, we know who, we know what the employer deductions are, what the employer premiums are, what the employee is paying. We can link all that and help you file for that credit.

Now you guys follow this very closely. Just to give you a sense of the macroeconomic indicators we've all seen over the last 10 years or 5 years, depending on it, we've seen the burst get a little bit better from where they were. New business is starting but not all that much. And the death store is certainly better. And the small business optimism index, no matter which one you look at, has kind of bounced all over the place. But it's certainly come up from a few years ago. We still find it kind of bouncing around, and I think that's one of the biggest issues out there for growth of new businesses is consumer confidence. And it's just how strong is that consumer confidence going to get because of the things that are going on out there, now particularly in an election year.

So is there an impact on paycheck sales and losses? There certainly is. We just want to give you a sense from an indexing here of where you see birth versus sales and where you see deaths versus losses. Obviously, fewer businesses going out of business has helped us from a loss perspective and -- but we've also been able to lower losses and improve retention in every category of service, pricing, competitive and so forth, and that's what's driven us to the retention.

So let me talk a little bit -- I just want to give you a sense since we have you here kind of captive, what it's like when you're working at Paychex. We've made a very strong fact of saying that we need to know our purpose as 12,400 employees across the country. We're in over 100 locations. It's very important to me that everybody feels like we're on the same page. One of things that's really important about Paychex culture is that it is a large small business. When I came here 10 years ago, it felt like that. I want to continue that. It's something that I think Tom and the team originally did and kept it that way, and very few businesses can feel like that. If you talk to our employees that are in this building, 1,200 that are in this building you're in, they feel like they know the executive team, they know the purpose of the company, they know where we're trying to go, they know the value set. It's very important to us that they do, so they feel like it's a small-business feeling for the company even though it's over 12,000 employees.

So we've talked about our -- we've talked to the employees about our purpose, which is simply to really give our clients the freedom to succeed. Small business, midsized, major market we call, but midsized businesses across the country and little in Germany. Right? It's about freeing them up from regulations. It's about freeing them up from worrying about what to do with their money, when to file it going to taxes and so forth. And so it's simple as this: Our purpose is just to provide our clients the freedom to do what they do best and succeed in their business.

The mission has been around for some time. It's to be the leading provider of what we do. We like to define what we do. It's payroll, benefit outsourcing and HR. It is by being an essential partner with businesses. That's why our service model is so important.

Our payroll specialist, we talk to all the new classes. Unfortunately, you couldn't see the headquarters building, which is about 25 minutes from here back toward where the hotel was, this morning. But our first floor, if anyone who has been in our building, is all training. We bring every new sales rep and every new payroll specialist who deals with the client to Rochester to be trained in a 2-week session, that they have to be trained the same way and they have to pass the test before they go. And they all go through either me or one of the executives whose purpose is this mission and our values as a company.

Just something very important to us and I wanted to share with you, we normally talk about numbers but I wanted you to get a sense of what the business is like. Because they, the salesperson, is our first Paychex experience for the client and then our payroll specialist is the next one. And it's very important that you really understand that they got to be an essential partner, not a vendor, not someone that the client just outsources something to. We want the payroll specialist to be like one of their employees but they're in Rochester or they're in Paychex locations around the country.

And then our values, I won't go through it all. But I think it's important for you to see that one of the most important things to us is outstanding service and certainly, innovation, to drive innovation and constantly improve our processes.

So where do we come from as we look going forward? Strong foundation. Obviously, strong financially, in my opinion, debt free, profitable, great cash generator, valuable products for our clients. We focus on that and great dedicated services that I've talked about, and I think one of the best leadership teams in the country as I hope you'll see in a few minutes as they talk to you. A great sales distribution model, that's always been one of our strengths; 2,400 salespeople across the country and just a tremendous job in distributing that. That was always the plan with Paychex. We've kept that up, and Mark will tell you we stay very focused on operating process and operating procedure, this is what you do, this is the amount of activity -- high-end activity you have in core payroll, major market payroll, et cetera. And it's a productivity culture, how do we drive more productivity.

So we're very proud of the recognition we received. Most important to us is one of the most ethical companies. And you guys can see us, #1 in 401(k) plans, so our leadership. And when you talk about strength in our markets, we don't always talk about this to you but I think it's important for you to know, we certainly are #1 in the small business, our number of clients served in the small business. In the mid-market, we're probably about #2. In HR outsourcing, when you combine our ASO and our PEO and our HRE together, we have more client employees served in the small business than anyone else. Retirement, #1 record keeper in new plans and numbers sold, and the top 28 agency actually in the insurance business and we're just very proud of that.

So where do we go from here? Just in a summary fashion for 3 slides, the focus is on growth and it has been since I got in the role. We've got to be able to show you that -- how a unique company that we are that we're going to be able to grow that top line and more than most, and that we're going to be able to bring that to the bottom line and be great to our shareholders in far as the way as we give our cash back.

And so we're focused very much on top line growth. You'll hear about sales market segmentation. What we have found in going through kind of a strategy planning was that we think we can even go deeper into segmenting our sales and our service and be able to reap some benefit from that. I'm going to let Mark talk to you about that. But it's from the payroll side, 401(k) and insurance. How do we now go in and define our markets even better? By size and by location, by product and being able to segment that sales and service.

And on the HR outsourcing, it's really making sure that our positioning is very correct in going after the right clients and giving them the right products. And I think when we introduced the HRE, which is the telephonic support, we found we broke a lot of clients into HR outsourcing with telephonic but we didn't always position them into the right product, and we're working a lot on that and then refining that service to match that sales market segmentation. And again, Mark will speak to that in a little bit later.

Mike is going to speak to the technology innovation. To grow, we got to have segmentation. We got to go deeper into our markets, and we got to have technology innovation. A lot of people ask, as you look to the future, is technology just kind of taking over and making outsourcing irrelevant? We don't think so. We think technology plays an important role but it's a hybrid, and it's going to be very important that you have great service with the right technology. Even our clients, when you see where our clients are going, the iPad usage is more for reporting. It's to be able to go in and look at their reports. And you'll see some things that Mike is going to roll out here in the next -- in the fall. We think reporting is very important, and that's where technology is going to come in. But as far as -- you still got to have great service with it.

There's going to be that outsource market that Andy will talk about, but there's always going -- I'm sorry, the outsourced and those that don't want outsourced, but we think that the outsourced market is always going to be a connection of technology and service, and we think we're dead-on at bat to providing just the right mix.

Our mobile apps, our single sign-on, our reporting that Mike is going to talk about, product integration for our mid-market, major market customers very important on the integration, very important from a reporting standpoint. We are straight on the path of, I think, releasing the right things. And we always look at releasing with a differentiation from competition, very important to differentiate ourselves. Some of these, you can say we certainly were a little slower to come to market like the smartphone apps. But we think we did what we felt the market was really after and we delivered that first, and single sign-on, we think, is a real differentiator competitively as well. And so I think it's just that service and technology needs to come together, and we're very focused on that and have made the investment and continue to make that investment.

And product expansion. SurePayroll, I talked about, that was right in our strategy is to expand our markets and on payroll so we get them coming in and the manual users who will start to come over to a SaaS-based model. ePlan, the same thing.

The time clocks, merchant services, we've talked about. We're trialing that, where our core payroll sales reps are selling merchant services, credit card setup, debit card setup. And we're trialing that now. We haven't really released that in general but have certainly talked about it publicly, that we're trialing it now. And employee verification, background checks, something we've had for a while but we've kind of repackaged it, made it easier for clients, particularly small businesses, to be able to do background checks. It's a very important product that we think will tie into our packages and so forth.

And expanding existing geographies, always get asked about this. We have Germany, 2,000 clients, has grown well, takes a while to get profitable. We're looking at expanding either geographies or things that I won't go into detail unfortunately with you, but we're certainly always looking at that. We want the top line growth. And if we're not going to get it because the U.S. is not growing as fast as we'd like, we're going to look at other places for it, and we're going to do it right.

And we're very careful with acquisitions. We look at an awful lot of things and do them very carefully and don't really do bad acquisitions, in my opinion. I should probably knock on wood or something. But we've been very good at what we acquire. We've integrated extremely well, and it's always been very positive for us. And just looking at product expansion from widening the product set, what else can we do that hooks into that employer-employee relationship or helps the employer? And so we won't go way off our mark, but there certainly are some other things that we're looking at that we think are coming along that will be very beneficial to us, that our sales distribution model can be very positive on and that our service as well will be very helpful.

So I'd like to take employees to this. What does Paychex 2016 look like? It's out 4 or 5 years for us. If you look at it from our standpoint, from a client perspective, it's going to be the greatest integration of technology and service. That's what it's all about. It's going to be a hybrid between that. Some are going to want more technology and less service. Some are going to want more service. But to us, it's going to be that great combination, and we're going to nail that combination in the future as we do today. We're going to continue to nail that and be ahead of it as it changes. We want them to have what they want when they want it. That's what's important to us. And the client satisfaction, we'll remain #1 in the industry. We're extremely proud of it, have had it for a long time. We're not losing that.

From an employee standpoint, it's got to be a great top 100 place as you've got to attract the right talent. You've got to keep the right talent. I think we've been very good at this, but we don't take it for granted. So we want the best engagement scores. We want to be the top 100 company, the place to work, and this is where the best people want to work. And we have a great sales force who leads the growth, and we've got to make sure that they're known for being a valuable consulting, ethical leadership, that they're really leaders in the marketplace.

And from an owner perspective, things don't change there. We want to be always thought of as a unique company, one that has good top line growth that we can be proud of and you feel good about, and that we return the money to the shareholders in the best way possible. And I know everyone has their ideas on that, but we think that it's very important that we can be that unique company that has great growth and delivers industry-leading really back -- returning capital back to shareholders and be in the top quadrant for shareholder return. So it's always good to say that when we're near a 52-week high in our stock price, so that was good to be up in front of you for that.

With that, that gives you an opening to kind of what we're going to talk about today. You have the slides in front of you. You have them on the webcast. I'd like to introduce Andy Childs, our Vice President of Marketing. Andy is going to go through some of the research that we've done recently and -- on the market, and then talk about some of the opportunities that come from that. Thanks.

Andy?

Andrew B. Childs

Well, thank you, Marty, and thank all of you for joining us here today and also those who are joining us on the webcast. I'm happy to be here this morning to share some of our thoughts on the markets that we participate in.

What we're going to do over the next roughly 0.5 hour is cover 2 broad areas: The first is I'd like to share with you the results of a couple of pieces of market research that we've done over the last couple of years, one study on the payroll market and another on the HR and benefits markets. And then we'll go through each of our 4 sort of key markets, payroll, HR outsourcing, 401(k) and health and benefits insurance and talk about what's going on in each one of them from the perspective of market dynamics, where we see the potential of the market, where we stand today and how we plan to grow in the future.

So let's start with the market research. This slide shows sort of focused areas of the 2 studies. I'll tell you a little bit about the methodologies. So the payroll research, we spoke with payroll decision-makers from 1,200 companies with fewer than 100 employees. It was a blind online study, and it was in the field of May 2012 so just a few months ago. So it's literally hot off the presses. In fact, we haven't even completed our internal reporting, but we wanted to share some of these results with you.

The second piece of research was in the field about 1.5 years ago in November 2010. This study targeted business owners, senior lever managers and HR decision-makers at 1,800 companies with 1,000 or fewer employees. And we -- in this study, we took a look at the 401(k) retirement in general, HR outsourcing and insurance markets.

So let's start out with the payroll study. So the first thing we look at is how do people do payroll? And Marty has alluded to that, and I think there are a lot of questions always about how people do payroll. And so we think there are roughly 12 million businesses in our addressable market in the United States, about 1/2 of them do payroll manually, about 1/4 of them use software and the remainder outsource either to service organizations like Paychex or to CPAs or their banks.

And there's been not a whole lot of change in this. We did a similar study about 3 years ago so that the overall contours of the market shake out about the same although, as you all know, there's lots of companies that form and unfortunately unform each year. The one thing that has seemed to change a little bit over time is that there seems to be a blurring in perceptions among our customers between what is service and what is software. It's actually gotten to the point where we ask them, "Do you use a service provider or software?" We didn't ask them to tell them, "Well, who is it?" So we make sure we actually get it into the right categories so -- and we actually think that, that shows that both technology and service are important in these blurring lines, I think, reinforce the notion that these 2 things go together.

So this is the story of the overall sort of 12 million companies level. But when you take a closer look by size break, you see that what happens is as companies get larger, you see a fairly sharp drop-off in the percentage of companies that do payroll manually and almost a corresponding increase in the number that use service providers with software and CPAs and banks holding about steady across the different size groups.

So we -- in addition to looking at payroll method, we did try to dive into buying behavior in the part of our customers. And about half of software and service users make that choice when they start their businesses. And that sort of reinforces why it's important and why we're very, very focused in the way we go to market on getting the companies earlier on so that we can influence that decision and help them choose outsourcing.

And you can see from the second bullet point that businesses do choose their methods for different reasons. Outsourcers are looking for convenience, are looking for risk management. But importantly, it fits within their budget. It makes financial sense for them. People that don't outsource, flexibility is often cited, and that really shows up in terms of how they manage things like float and cash flow and the timing of their payroll. And it's quite related to the last one, which is control. They want to control those kinds of things.

And when we look at who influences the purchases, the top 2 are CPAs and business colleagues. And so sort of not surprisingly, these are our 2 largest sources of referrals are the accounting community, as well as our existing clients who recommend us to their peers and colleagues and help us with that. We're still trying to work on a way to tap into the channel called family. Anybody has any ideas about that, we're certainly happy to talk about it at the break, since it's #3.

We did ask these businesses what's going on in terms of hiring and there -- I would just probably describe this as cautiously good news. Again, this was in May. I think the market was doing pretty well in May. It's doing -- starting to do well again now, so these things can go up and down. But the good news is that 20% of small businesses do expect to add employees. The less good news is that, that means 80% don't. But there is a little bit stronger result among businesses that outsource payroll. They tend to generally be slightly more mature businesses on average with somewhat stronger cash flow.

And we see this sort of is consistent with the results that we've seen over the last 8 or 9 quarters with the growth in checks per client. Interestingly, businesses on the larger size -- side are expecting to hire faster than the very smallest companies.

And of course, we had to ask them how they like to be served. And of course, we like this answer. About 80% of outsourcers, the companies that outsource prefer to be served locally. And that's very consistent with our service model, providing very personal local service. A dedicated account rep is preferred over other delivery methods. It's not quite as dramatic as the local service, so about 32% prefer dedicated account rep. We gave them the alternative of 24/7 call centers, about 1/2 that, about 16%. Interestingly have no preference at 23% was the second-leading response there.

And then, the way -- how the people want us to submit their payroll, and we offer them a number of different options. And so if you look at -- sorry if I wave my hand is taken as a signal to switch slides there. It does split up fairly equally among phone, fax, email and online. It's pretty close to 1/3, 1/3 and 1/3. And what that suggests to us is we need to offer people a choice of ways to provide their payroll data and, of course, we do that.

Now we'll go to technology adoption. We are seeing businesses using mobile technology. However, they're not quite yet overwhelmingly, at least using it for transactional reasons. They’re using it more for information, but we are seeing the use for transactional purposes increasing. And Mike will talk quite a bit about what we're doing from a mobility standpoint in a few minutes.

So that sort of wraps up the slides we want to show, the payroll research. Let me sort of briefly cover the HR and benefits research. These are some of the key takeaways. We put them all on one slide so we could get into the individual markets. We definitely continue to see health insurance and retirement being very popular and commonly offered employer benefits. We see outsourcing in these areas starting to increase once you get to sort of a critical mass of employees, and I'll talk in a little bit about how our HR Solutions business, you sort of see the thresholds and definitely sort of a sweet spot in the marketplace as a result.

We'll talk more about face-to-face relationships and health insurance and how we intend to compete more effectively with local brokers. But there's definitely -- especially larger clients seem to appreciate that face-to-face contact.

And I'll just sort of skip to the last item. When we look more closely at the HR outsourcing, we see sort of an interesting dichotomy. When we asked you, "Why did you decide to engage in an HR outsourcing partner?" It's usually initially for cost savings and the efficiencies. But once they get into it, they realize it's really about risk management and helping them manage their employees in a way that doesn't introduce risk that threatens what they really want to do, which is run their business.

So these are some of the key findings. Let's take a little bit closer look at our 4 key markets. So as I mentioned earlier, we're going to talk about the payroll, HR outsourcing, retirement, insurance market and insurance. We'll focus primarily on health and benefits. In each section, we'll spend a little bit of time talking about market dynamics, what we think the potential market size is for us, where we are today and our strategies for growth.

So let's get started with payroll market. So each of these sections will start off with a chart. It's a little bit like Marty's headwinds and tailwinds chart except we sort of laid out a number of things we consider to be the important forces that work in our markets, so our customers and prospects, our competitors, technology and regulation, all the sort of key forces that affect our business.

So if you look at the payroll market, as Marty mentioned, business formations are coming back a bit. I mean, they're definitely improving over the last roughly 1 year, 1.5 years, but they're still below where they were a few years ago. And we are seeing an increase in technology expectations, in technology understanding amongst small businesses. Technology change continues to increase. It's fair to say that Moore's Law is not going away anytime soon. It's still quite alive and well and they're in our marketplaces, and that's why we spend a lot of time focused on technology. And Mike will talk quite a bit about integration and mobile applications, which are also important trends here.

We do have one strong national competitor and that would be the other company that Marty was alluding to earlier when talking about my bio. But on the other hand, we also have quite a few regional and local competitors. And with a lot of folks outsourcing to their CPAs or banks, the outsource market is actually more fragmented than it might look on the surface, and we'll talk a little bit about how those dynamics shake out from a share standpoint.

Regulation is a key part of our business. I'll probably be one of the few folks from the business who will stand up in this podium and tell you that regulation doesn't bother me very much. In fact, we find that the more regulation there is, obviously, the more challenges our clients face, the more that we can help them navigate those challenges. And there's certainly no shortage of complexity. And one of the sort of key characteristics of regulation is that old ones don't seem to go away when new ones come out, and so it's sort of ever-increasing complexity, which is good for our business model.

So let's take a look at the payroll market potential. I think I mentioned earlier that we think there are about 12 million businesses in our addressable market, about 1/2 of those are paying for something to do payroll with. So it may be software. It may be a service provider. It may be their CPA or their bank. And of that, 1/2 of those or 1/4 of the total are outsourcing either to service providers, banks or CPAs. And we have about 20% of those. And so there's quite a lot of room in the marketplace and for further growth. 600,000 clients sounds like a lot, but there's a lot of companies out there.

But again, much like the payroll method, that the story gets more interesting when you take a look at it by size. And so what you see is a little over 3/4 of the companies are in the less-than-5 employee category, and they represent about 1/2 of the potential revenue in this marketplace, which is important because we actually do a very, very good job of serving these kinds of companies. I mean, we've developed a service model and a level of efficiency that allows us to provide a very good quality service to fairly small companies while still being profitable.

So the fact that there is a lot of opportunities still down market is important for us. And when we take a look at the next page and we see where we are in share, you'll see there's still quite a lot of room across the different size breaks, especially further down market where there's so many companies. And so there's certainly lots of opportunities for us going forward.

So what are the strategies that we're going to employee to capture some of this opportunity? Certainly, product and technology enhancements. You're going to hear a lot about that today from everybody, I think, so I won't go into it in too much detail. But among other things, as we improve our product and technology, I think we entice people who are using other payroll processing technologies to consider outsourcing and especially as we produce a broader array of options, SurePayroll being a very, very good example. And then segmentation of our salesforce, the notion of making sure we're getting the right solution to the right prospects at the right time in the most efficient way possible.

And referral channels continue to be extremely important to us. I mentioned earlier that -- how influential CPAs and business colleagues are. Our OpEx external referral channels account for more than half of our new sales each year. So this will always be a key focus area for us. And again, SurePayroll, in addition to providing a very viable alternative for people doing payroll themselves, also has some very strong technology for hosting and private labeling and white labeling for banks and also for CPAs. It allows us -- actually, we're already beginning to access relationships that we really couldn't serve in the past in those channels. So that's been a very good positive development for us.

So let's turn now to HR outsourcing. I think I mentioned earlier that there is sort of our threshold phenomenon in HR outsourcing. So companies reach a certain size level where if they don't do HR right, they start to become exposed. They start to have to deal with a fairly complex array of not just rules and regulations but sort of an ever shifting world of court cases and various other precedents. And smaller companies basically can't afford the kind of expertise, at least full-time expertise. And so that combined with the fact that very often smaller companies need to compete with larger companies for talent and they do -- and provide more compelling employee benefits creates a considerable amount of opportunity.

So again, we see technology playing a key role based in -- both in terms of making processes more efficient but also providing some integration and easier access, both for the employer and the employee.

Our competition here is in many ways more fragmented than in payroll. And the reason for that is that the other company and us in the payroll business, we are in this business, obviously, but we tend to primarily server our existing client base. So we don't run into each other that much. What we run into are all of the smaller stand-alone companies and other service providers in the HR world. And there's really a very, very wide range, everything from folks providing primarily online tools to on-site expert consultants. And we see -- so we see not quite as -- not all of them have as robust a set of offerings as we do.

The other factor is, I think many of you follow, or most of you follow, the industry are aware that there's been quite a lot of consolidation in the PEO market and a number of transactions over the last 12 or 18 months. So from a regulatory standpoint, we try to offer a spectrum of services that allows us to compete geographically in all geographies. It's the reason we offer both PEO and ASO. And certainly, health care reform and the complexity and the confusion around that do strongly encourage smaller companies to seek help and guidance and information. And so that very much is working in favor of this marketplace.

So if we take a look at the potential market, you'll see sort of this threshold effect. Right? So you get up to about 5 employees, and you really start to need these kind of services. And it really carries on up until 50 and somewhat over. Once a company is really big enough, if they want to hire their own HR generalist or someone who can do HR and benefits for them, they have that. They really start to have that option. But you can see very much a fairly focused opportunity here.

And then when you take a look at our penetration, today, we have about 4% of our payroll clients are using our HR outsourcing service. That is actually double the overall market penetration. The overall market penetration is about 2%. But the interesting thing about this market is another 9% of companies are actually interested in HR Solutions, HR outsourcing solutions.

And so there's a lot of opportunity for growth. A lot of it has to do with getting out and making our clients and other companies in the marketplace aware of the benefits of this. And actually, when you look at the 10-plus employee category, 21% of companies are interested in these kinds of services. So a lot of potential for us there.

So what are we going to do about it? Here's some of the strategies. Certainly, focusing on under-penetrated segments. You'll probably notice in the last page that the 5 to 19 is definitely an opportunity for us. By continuing to expand our field sales presence, again, creating more awareness around these, given how many people are interested relative to the number who are actually using these services today. Always looking to enhance the breadth and the depth of the service we provide. And then we believe there's an opportunity also to sell these services outside our payroll base. There's only 2 companies that actually have what some have called the luxury of being able to sell HR outsourcing into an established base of clients that are already using something of an HR product. All of the stand-alone companies that sell this sort of off the street and cold. And so certainly, we feel we have at least as good an offering, if not better than anybody out there. So we think that we can be successful and that can be a source of growth for us as well.

So our third market that I want to talk about is retirement. Interesting market because despite the economic downturn, we see the number of retirement plans continue to grow. There continues to be strong interest in retirement as a employee benefit. We see a lot of themes in this marketplace around participants, getting people to participate more, educating them as to the benefits of sort of getting in early and often to retirement. So you see things like auto-enrollment and deferral escalation. I also see a lot of focus on employee -- on participant education. We also see a lot of things happening right now as there's a shift going on from commission-based to fee-based advisors that affects both our customers, folks that advise them, as well as the technology that we use to serve people.

Broad range of competitors out there. I'll come back to this because I think that some competitors will be more or less challenged by the imminent fee disclosure situation, which is probably the most near-term regulatory change. But there's some others as well, we think. Certainly, this market is not simple either from a regulatory standpoint.

So again, you're taking a look at the opportunity by size. Here, it's a little bit more evenly distributed relative to the opportunity in number of companies. Right? So about 26% of companies have some kind of retirement plan today, another 5% expressed an interest within the next year. And so -- and we see that as reality because the number of plans keeps growing. This was -- again, this research was in the field about 18 months ago, so we definitely have seen some of that happening.

But when we actually take a look at the opportunity, we tend to start with our payroll client base, which is on the next page. So about 30% of our clients -- 29%, if you add the numbers, have a 401(k) plan. About 1/3 of those have a plan with us. And so 2/3 of the plans today are an existing client base. Over 100,000 plans are being serviced by another provider. And beyond that, when we ask people, are you interested in forming a new plan, 16% of our client base are interested in new plans.

So historically, we've actually gotten most of our growth from that category, that third bucket, potential new plans, lots of new plans. We're beginning to increase our focus, and I'll talk in a minute about it, on the conversion plans. They tend to be a little bit larger, but there's a lot of them out there. So you can see, we are serving about 1/4 of the potential just within our client base. And then, obviously, there's opportunities outside the client base as well.

So what are we doing to capture these opportunities? Well, based on the last slide, continuing our focus in conversion plans, as well as focusing on the wholesale channel to financial advisors, which reinforces that conversion plan. Financial advisors tend to be more interested in plans that already have assets. Right? So building relationships with the financial advisors goes hand in hand with folks in conversion plans. And Mark will talk about how we're doing that with some very new market segmentation in our retirement sales organization.

We have quite a few capabilities of the ePlan platform that we have an opportunity to leverage. Certainly, some weight private label capabilities, as well as the capabilities as they relate to managing fee-based advisors.

The upcoming fee disclosure legislation, what's happening there is, as you probably know, as of a few weeks ago on July 1, there's a requirement to disclose -- fully disclose fees to plan sponsors. And on August 30, that requirement will be extended to plan participants. We've been very much ahead of that. We complied with that early, but we've always been fairly transparent about our fees. I think in general, plans that are more based on mutual funds because of some of the things that happened in that marketplace 5 or 6 years ago have been more transparent. I think, that some of the competitors whose plans are based more on insurance products may find themselves somewhat challenged to explain fees once they need to be disclosed. So to the extent that we can, we'll take advantage of that from a selling situation.

Just to be a little bit clear about it, it's difficult for us to sell to a plan sponsor. Our plans with a plan sponsor bears a lot of the fees versus an insurance-based plan, where the fees of the plan sponsor are relatively low but the fees of the participants are high. And so we think that this is going to level the playing field a bit and help us out.

And then always, we're looking to increase participation rates, both because we think it's a good thing for people to save for retirement but also because we get paid by the participant. So those are key strategies.

And I'm going to wrap up with a few slides now on the health insurance market, a lot going on there. Very sort of interestingly enough, a lot of talk, a lot of discussion, a lot of sort of anxiety around health care reform. But despite that, we're not seeing major shifts in terms of employers dropping coverage. So about the same percentage of employees are covered under employer health benefits as were a couple of years ago. It's still the most common employee benefit. But rising health care costs have created an increasing trend. As I'm sure you're aware, the more cost-sharing kinds of things, the higher deductibles, lower copays, plans that allow the employer to manage what's been the escalation in health care costs.

Lots of technology focus on integration. I think Marty mentioned that the payroll integration is very, very important. And you'll see, we compete quite a bit with traditional brokers and agents and the personal and ongoing relationship that they have with their clients. And I'll come back to that in a couple of minutes.

From a regulatory standpoint, all that seems to have been clarified in the last couple of months is that health care reform is constitutional, but I don't think the Supreme Court has actually helped small businesses understand any better what to do about it. So that's where we come in.

Taking a look at the market opportunity fairly quickly, overall, about 33% of the companies offer a health plan. Another 7%, as of the time we did this study were considering offering one. Again, it was 18 months ago, so a lot has happened in the meantime. But you can see, again, this is a market where there are a lot of plans down the market, but the real revenue is as you get to the bigger customers.

The next page, overall, we have about 3% of our payroll clients using -- purchasing insurance from us. As Marty mentioned, relatively new to this business, so there's still quite a bit of runway there. So shifting over to strategies, the first 2 really in terms of our local presence and expanded product offerings is really meant to make us more of a full-service agency and better position us against the local agents. So to the extent that we can serve all the needs of our clients that keeps us from having to share a relationship with a local agent, and that makes it easier for us to retain and expand our business with our clients.

And again, we spend a lot of time on education guidance, helping our clients with compliance with health care reform and also taking advantage of some of things that are actually benefiting from some of the tax breaks. So this goes to sort of our core strength to being an essential partner. And again, we think there are some advantages to payroll, payroll integration.

So that's our 4 primary markets. Just wanted to sum up by saying that we feel as though we're very well positioned to capitalize on the opportunities that are in front of us. We -- as Marty mentioned, we are the leader in many of our markets. Our clients are very, very happy with the services we provide for them. Our product set is broad and it's growing, and we are seeing results from the investments that we've made in IT in the last few years. Very, very strong sales organization. And as you saw, I think still quite a bit of opportunity in some of our markets, HR outsourcing, 401(k), insurance to cross-sell into our install base, so quite a lot of opportunity to go from penetration rates that range from 3% to 11% to a higher level of penetration.

So that said, that's what I want to share with you all today, and I appreciate you joining us. And it's my pleasure to introduce Mark Bottini, our Senior Vice President of Sales, to talk about sales.

Mark A. Bottini

Thanks, Andy. Good morning, everyone. How is everyone? Everybody enjoyed last night? Good. Those of you who attended, I appreciate that.

My name is Mark Bottini, I'm the Senior Vice President of Sales, and it's my pleasure to give you an overview on where we're going and the direction of our sales division.

Okay, Andy covered our market opportunity, and Mike is going to be talking more about products and technology. So I'll mainly focus on our growth initiatives and on execution, how we're going to get it done. Okay? So -- but before I do that, since I haven't been in front of many of you before, it's my first time in front of many of you, I want to give you a little bit of background on myself and my operating principles and operating principles that we're driving the sales organization with.

Let me go back really quick, sorry about that. I want to give you a quick assessment of the sales organization as I see it, a quick overview of FY '12 and some of the success we had in FY '12. And then we'll get into the growth initiatives for FY '13 and beyond.

So first, as it relates to my background, you probably all read this, but I joined about 9 months ago yesterday. I'm very excited to be here after a 20-plus-year career with Ikon and Ricoh, basically, the only company I ever worked for in my career. But when I got the call from Paychex and I took a look at the opportunity, it was an incredible opportunity. I looked at the history of success. I looked at the profitability. I looked at the operations and the client satisfaction. I looked at the opportunity for growth. I looked at a direct sales organization that was very strong, which is in my background, and a small mid-market focus, again, which is my background. And I thought the chance to be successful here and grow this business and take it to the next level was incredible. And I'm more excited today than the day I joined about making that career decision.

The operating principles, mainly, as basic as it sounds, is leading from the front, very field focused, very client focused and driving all the VPs and our senior leadership team into the field to execute the growth initiatives and strategies that we have. Most companies, most good companies have growth initiatives and strategies. But the difference between success and failure is actually getting out and executing those strategies, and that's who we want to be as we move forward is the company that executes on our growth initiatives.

Next slide, please. So let's take a quick look at the assessment of our sales organization. We've heard this probably already a couple of times. We'll probably hear it again. We have industry-leading distribution model direct with over 100 locations, 2,400 salespeople strong in multiple divisions with expertise in the products and the clients that they serve and markets that they serve and industry-best training organization for more than a decade. You may have read this, the top 20 -- #35 on the top 125 from Training magazine. We're proud of that. And Marty mentioned, if you ever come to the headquarter location, there's just constant training going on and development of our sales force and others. We have a deep -- our sales group, because of that training, has a deep expertise on the products they sell and the clients that they serve, the specific markets they serve and we have very strong discipline in cross-selling. And as Andy mentioned, I think we even have more opportunity for growth there.

So let's take a quick look at some of the highlights of FY '12, some of our accomplishments from FY '12. I'm very proud of the fact that in the back half of the year, we showed core unit growth for the first time in a while. We delivered growth in the back half of the year. We launched some initiatives. We executed on those initiatives, and we delivered growth in the back half of the year.

Our sales turnover was down significantly year-over-year as we not only stabilized the sales force with tools and compensation plans, but also sales force increasing productivity. And sales turnover being down benefits you in FY '12 but benefits you more in FY '13 and beyond, so we're really excited and proud of that fact.

It's been a very strong selling season, probably the strongest selling season we've had in many years. Specifically, January was extremely strong. And we put a sales operations team in place to help us drive initiatives and execute on the plan. We needed some infrastructure to help drive the growth that we're planning on.

As well as our leadership development process in place, which helped us to lower turnover, as well as execute on some of our strategies. We need to further develop our leadership. That's a main focus area for me, strong leaders and lower turnover and execute on strategies, and that's what we're looking to do.

So let's take a quick look, and I move pretty quick. So -- however, we'll take a quick look at FY '13 and some of the market approach. Andy's covered some of this, Michael covered a little bit, as did Marty. We have kind of 5 key focus areas plus execution. So I'll start with enhancing market segmentation. Marty and Andy have both covered that. I'm going to go into more detail on that. That's both in payroll and in Retirement, as well as Insurance. We're looking to strengthen and invest in our channel management, which is where we get our referrals for our sales force, and we'll talk a lot about that.

Driving productivity and revenue through both product and better execution, expanding our sales force in underpenetrated markets. We're not looking to just expand our sales force across the U.S. We have some underpenetrated opportunities where we believe expanding our sales presence made sense. Looking to focus on some expansion markets, possibly some Tier 2 markets that we're not in now. And finally, and most importantly, like I said, it's to execute on all these strategies flawlessly.

Next slide, please. So let's start with market segmentation. We were a company focused mainly on products. Our sales force was wrapped around a specific product, and what's the feel with the product. Oh, sorry about that. Should I start over again or -- okay. All right, good. We were a company that was focused and our sales force was segmented by product versus by client. So as we began this year, we segmented our sales force by client size and complexity. So it's a more client-focus than a product focus, bringing solutions to our client versus product to our client. It gives us more market expertise. People trained around the markets that they're going to be covering and improves the client experience, as well as closing ratios for our sales force to help us grow the business.

So that's the payroll market segmentation in a high level.

From a Retirement plan, our Retirement sales 401(k), we're looking to build on our industry-leading position. We segmented the market in almost exactly the same way as we segmented payroll, our large and small market. But probably the bigger move and the bolder move is supporting both of those groups with a wholesale channel to go and support financial advisors as we move forward.

So investing in the growth in 401(k) and moving into a new market opportunity. We have, like I said, a dedicated sales team there. We're going to leverage the opportunity from the acquisition of ePlan, both expertise and the platform technology, as well as licensed representatives working directly with the advisors, like I said, on more complex opportunities. So a lot more market segmentation. In our 401(k) division, we went to market in one way. Now we're segmenting large and small, wholesale channel, over-the-top, we invest in to work with financial advisors. We believe it's going to give us a great opportunity for growth in FY '13 and beyond.

So our next is channel management, and we've talked a lot about that. We needed to strengthen our channel management. We'll start with our biggest channel for referrals, which is the CPA channel. Year-over-year showed significant growth in FY '12. We're very pleased about that. But we think we have a couple of opportunities to even improve and grow more there. One is with the CPA Hosting Product. We do have CPAs who do not refer us. We think the hosting fees for CPAs who may be in the payroll business or want to be in the payroll business is a huge growth opportunity, and we're leveraging that with SurePayroll as well as we're testing a couple of CPA-centric or CPA overlay coverage models, bringing more expertise to our CPA, potentially higher closing ratios and larger clients, so having a special dedicated sales team for CPAs to overlay our general line sales force. We're piloting that currently in a few areas. I'll give you an update on that at a later date.

Clients. We have 567,000 clients. We've been discussing that all day, a huge opportunity. We have very high client satisfaction rates and net promoter scores. But we believe that -- we are getting significant amount of referrals, but we believe with a new -- some new marketing programs, some training programs on how to better get referrals from our client base, we believe we're going to get some growth from this large client base and satisfy the client base that we have.

Banking channel has been a channel that we've done well in for years, but we use sort of a grassroots approach, I would say, which is our field sales people going to banks to get referrals and partnering with banks. We're now putting in dedicated sales force, small dedicated sales force and a business development manager to better penetrate some of the national, large national banks as well and support our field sales from -- in the regional banks. We believe there's a phenomenal opportunity here to not only have the grassroots approach, but also have a top-down approach with dedicated resource and better expertise.

We're doing almost exactly the same thing from a national franchise perspective. If you think about Paychex, you think about small business experts and you think about national infrastructure, and the first thing that popped into my mind when I think about those 2 is franchises. Franchises are national. They need our national footprint, but they also need the small business expertise. We have used a grassroots approach here as well. We're now putting in dedicated resources in both the field and at the headquarters level to drive growth from a national franchise perspective. Just to give you a quick number, top 200 franchises have 400,000 locations. It's an incredible opportunity for our company for growth as we move forward.

So that's our channel management strategy. We believe this is going to be one of the key executing on all these -- all 4 of these here will give us significant amount of growth as we move forward.

Let's go to the next opportunity, which is driving productivity and revenue. Marty and Efrain have covered this many times on the call, things that we launched at the very beginning of FY '12. Some new sales force tools and technology in the hands of the sales reps to make them more productive with CRM improvements but with salesforce.com, as well as online ordering tools and other technology investments to improve productivity of our sales force. So it's continued to have benefited us in FY '12, and we believe they continue to benefit us in FY '13.

We've made some adjustments to compensation and recognition to align more around the company goals, which are revenue growth, really simple sales compensation plans and recognition. But they are aligned better with our company goals, we believe, which is revenue growth. And we believe we're going to see some -- we've already seen some benefit from that. It also allows us to better attract top talent, as well as retain top talent that we have inside the organization, which is our goal.

Training. We have ongoing training, and we've talked about it. And probably the only major shift -- or I wouldn't call it a major shift, the only shift we're making in our training because we've had a lot of success with it is more strategic selling in our major market sales group, as well as more of a focus on what I consider as our strength. Even though our products are our strength and our service is our strength, the company value and the value proposition of our organization and the brand is the strength. And we're going to do more training around the how to sell Paychex versus just how to sell product. And so we'll be giving you an update on that as well.

Improved turnover in FY '12. We believe, with more tenure in our sales force delivers higher productivity in FY '13 as well as, I've been mentioning, the VP of sales team, the senior leadership team in the field driving execution, our sales force giving more client focus, we believe, is going to drive improved execution in these strategies, which is going to help drive productivity overall.

Next slide. Revenue opportunities. We've launched the -- new packages in our core payroll division with enhanced features and functionality. Should allow us to capture some additional revenue, as well as we've empowered our field. We've been talking about moving closer to the client, empower our field to make decisions at the point-of-sale in front of our clients, which we believe will help us with our win rates, closing ratio and revenue overall.

Product positioning. Mike will be talking a lot about this as we move forward. But building on our industry-leading ASO position, we believe is a great opportunity. We're going to leverage the HRE success that we had in FY '12. We have some improved position from an insurance standpoint as it relates to PEO. We already talked about SurePayroll hosting opportunity for growth, which gets us into a business we were not in. And Mike's going to talk a considerable amount about product improvement for our mid-market clients, which we believe -- and based on all of Andy's research shows you moving up market slightly gives us a huge opportunity for growth as well.

All right, next slide. Sales force expansion, I mentioned this. We have a few markets where we believe adding sales reps made sense. We did an exhaustive amount of research, reviewed this. We're not just adding sales people to add sales people. That would be just additional costs. We know where we have opportunity. We've added those sales people. We're about 80% of the way through adding those sales people, and we believe it gives us an opportunity for growth in underpenetrated markets, as well as growing our client base and market share.

We're expanding in our core division from the leadership team to better execute, adding some additional leadership positions, as well as, I already mentioned, the business development efforts that we're making in both banking and national franchises to drive some top-down initiatives versus a grassroots approach only.

Okay. Next slide, please. So let's just kind of -- a quick review. This is sort of the evolution of what I would say is Paychex sales force overall from my -- in my opinion. If we go back to FY '11, we had leadership changes. We are preparing ourselves for growth. We made a significant amount of change in FY '11 to prepare ourselves for growth, and we created some disruptions. Sales force was disrupted. Turnover spiked. And I wouldn't say the performance was where anyone wanted it to be. As we moved into FY '12, we began to put tools in sales people's hands, compensation plans in people's hands. We began to stabilize the sales force. We lowered turnover, increased productivity. We built the foundation, operating principles that people have adopted. We built a foundation for growth in FY '12, and I showed you some of the highlights.

As we move into FY '13, we're launching these growth initiatives that I just mentioned. We believe that launching them now is going to get us the growth that we need to deliver our plan in FY '13. And as we move into FY '14, we'll have a 12-month benefit from all of the growth initiatives, the full year benefit from all of our growth initiatives in FY '13, as well as the initiatives that we're going to launch in FY '14. And we believe we'll be delivering the growth that will allow us to achieve the goals that we have.

Okay. So in closing, summary. I think you'll agree, based on what Marty's already mentioned and Andy's already mentioned, we're well positioned to capitalize. We're a trusted leader in all the markets we serve. We have a very strong sales force with expertise in the offerings, in their offerings, as well as the client -- the market that they serve. We have a record level of client satisfaction, significant improvements in client retention, which gives us an opportunity to get more referrals and grow our business, as well as retain our clients and sell additional products to those clients. We're making investments to strengthen the channels that deliver most of our referrals. Mike's going to talk a lot about product innovation and revenue. And as I've already mentioned and I told you I was going to talk a lot about this in the beginning, I believe that moving closer to the client with our sales force, moving closer to the field with our sales force, I mean, our leadership team is going to deliver improved execution. And I think you'll agree that a lot of companies have great strategies. We want to be exceptional in executing the strategies and delivering on the growth and delivering what we say we're going to do.

So with that, I just want to thank you very much for your time this morning. I want to turn it back to Marty Mucci, our CEO.

Martin Mucci

Thanks, Mark. For those of you on the webcast, we're going to take a break now. We'll be back promptly at 10:25 to start. So I just want to let you know on the webcast.

[Break]

Martin Mucci

If we could grab our seats and we'll start in just about a minute. Give me a minute to sit down. Okay, I'd like to welcome back those who are joining us on the webcast. Thank you for joining us and coming back after our break. This is an exciting part of our presentation. Mike Gioja joined the organization a little over 3 years ago, started out in product management and development, went -- took over the IT development. And most recently, last October, took over all of our IT organization, as well as Product Management. We find it great joining the 2 disciplines in both driving the product set and strategy of our products as well as the actual development of themselves. Mike has a great background, he -- and I think you'll find his presentation very interesting.

Many times we get asked about technology at Paychex and where we stand. And this is, to us, one of the most exciting things of having you all here and having you on the webcast is to have Mike be able to present and tell you what he's been -- what we've been investing in and where we're headed in the future. So with that, our Senior Vice President of IT and Product Management, Mike Gioja. Mike?

Michael E. Gioja

Thank you, Marty. Good morning, everyone, and I'm glad to have you here and for you to -- I appreciate you spending the time and to be able to share our story. What I'm going to cover today is I'd like to give you an overview of our product and technology timeline. As Marty and others have mentioned, we haven't really taken you through what we've done. So I'm going to take you through a timeline from 2009 through 2012. I'll give you a little background to set the context of what we've done to date with our platform. And then talk more about that platform in a little bit of detail, and then I'll continue the timeline through 2013 to take you through what to expect over the next 18 months as far as some of the products and the things we're bringing out that were alluded to earlier today.

You heard a lot about the Paychex Next Generation platform. That's how we're articulating it. I'll take you through the architecture of that as we go forward. So for an overview, from the timeline, back in 2009, as Marty has mentioned, I came on board a little over 3 years ago. We went -- we did a detailed product and technology evaluation. I'll cover technology, a little bit competitive landscape and some market research that we did during that evaluation phase. I think you all understand. I don't need to talk too much about the various technology trends in that time frame. Obviously, cloud, cloud-based technology is gaining a lot of momentum. Software-as-a-service, platform-as-a-service; infrastructure-as-a-service; service-oriented architectures in integrating with third parties in a more easy, manageable manner; mobility; tablets; smartphones; what to do with those phones; exploiting those phones were also big trends that were building at that point in time. Converged platforms, when you look at the infrastructure aspects and the operations of a cloud-based infrastructure, converging things, so much more of an appliance-oriented view versus servers that all get loaded up and handle so much capacity and when you run out of capacity, add another server, and again, that converts into various technologies that you could buy from particular vendors to standardize your operating infrastructure for cloud-based technologies.

Virtualization is very big. Behind that, virtualization is used in many different ways. Really talk about pre- and post-production as the complete exploitation, and we'll talk a little bit about that as well. So we took all of these trends into account. And then we went and we did a very detailed competitive landscape view. Obviously, looking at the national, regional and local competitors that were discussed earlier. We looked at functions, features, service comparisons, how were they bringing those things to market, what were the gaps, how did we want to fill those gaps, what were the priorities that we would have to fill those gaps to meet our own sales force needs, what were the biggest sales inhibitors and how to do that in the structure and the architecture that we wanted to based on leveraging what technologies were there and how do we move that forward.

We did some market research. You heard a lot about convergence of technology and service. We wanted to really understand how the people want to work with technology and service. So we did a very extensive survey. We went out to about 3,000 customers. We broke those up into different segments, into different employee size from 1 to 4 to 250 and above. We looked at various roles, whether you were the owner, the employer, the HR administrator, the payroll administrator, the benefits administrator. So we had different questions and different research aspects for those various roles, all focused on the attitudinal behavioral aspects of those individuals on how did they want to work, how did they work today, how would they want to work in the future, where do they want to use technology, where do they want to use service, where do they want that service local, where do they want that service on-site and where could it be a centralized call center.

So what did this all lead to? I'll take you through. On the left side is the initial strategy at that point in time, given all of the conditions. And based on those assessments and those various factors I just took you through, what did we evolve our -- what did we evolve that strategy to? So first, at that point in time, Paychex was in the final stages of a service-oriented architecture payroll engine. They knew and had built a brand-new payroll legend. It was in the process of completion of that engine. It was very focused on payroll and very service-oriented, web-based, new technology structure. What we did was we evolved that to an HR and payroll software-as-a-service platform. So we added HR and Human Resources to the aspect, so that payroll and HR would work together and not require each other. So we decoupled them, but yet can leverage them and understand both of them when they're there and created that outsourced platform and really stuck to and put certain principles in place that I'll talk to you in a little while about software-as-a-service.

They were integrating various product acquisitions that they had made and there was very good integration strategy. What we did was we took those things and said, "Okay, we want to fully incorporate this into the platform." By incorporating, we wanted to take each one of those products, we wanted to break them up into pieces, understand the various services that we would want to create that we could reuse in any way we want across the platform to eliminate the product boundaries, and I'll talk more about that. So we incorporated them much more fully and broke them down, so that we can leverage those products and the various sellable features within those products in any manner that we want.

Through those acquisitions and through the rapid growth that Paychex has had and through the new engine that they were building as well, there was a lot of multiple platforms and technologies. We moved this all forward to a single cloud-based platform and technologies. You'll hear a lot about single platform, and I'll show you through some of the milestones what we've done to convert and bring clients over. So that the end result is a platform that manages HR and payroll from an outsourcing point of view, leveraging the cloud-based technologies on a conversion infrastructure, so that we can gain further momentum and reuse as we go forward and have a very efficient operating structure. And I'll talk a little bit more about the cloud strategy in the upcoming slides.

It's a very service-based culture, heavily based on leveraging the workforce. What we drove towards was a balanced culture of where the technology drives the productivity of the workforce. One of the key challenges was how do we improve the productivity of the workforce, how do we enable our service providers to be able to build [ph] more clients and improve satisfaction at the same time, all of these things that we can do and then recover those benefits and those savings and use that to further invest into technology, so that we can further maintain our margins.

The IT life cycle, as well, was dependent on a lot of high-level manual processes across the organization and some differences based on the rapid growth and how the various product organizations were driving their particular life cycle. We moved this all to a full IT life cycle automation from development to production. Build automation, deployment automation, orchestration, leveraging virtualization, all of these things to drive a more automated process and allow the developing community to be able to focus more and more on what they need to do, and we continue to advance these as we drive the platform forward over the next 18 months.

Standalone product strategies. There was a lot going on from a Product Management point of view. Each product was looked at, what were the growth opportunities for those products, what did we need to do with those products and so forth. We brought all that together, along with everything that we're doing in the platform, moved it to a single platform and brought this all together from a management point of view as a single portfolio. And we look at that portfolio on a regular basis and use that to manage the business needs depending on where we want to drive our priorities and leverage the various parts of the workforce that we have in the portfolio management.

And last but not least, obviously, you know well our strong operating margins. The challenge was to build a comprehensive framework, technology framework, leveraging new technologies, significant investments in technologies, as you heard, double-digit investment growth. I've been very pleased that since I've been here, we've been able to continue to invest at the level we did to build this foundation. But we had to do that with one key principle and one key challenge in mind: formulate all of that, bring it to market, but we can't impact the margins. We have to at least maintain, if not help expand, the operating margins.

Now next on the timeline was the completion and the movement of that strategy of that payroll engine to an HR payroll engine. That work was completed and then we started converting the clients. In 2010, all 0.5 million clients were completely converted onto the new platform. They are all sitting on that platform today as the major basis for the other milestones going forward. It was an automatic conversion. There was a lot of work in building and creating and managing the conversion, and that was done in a seamless way, very quiet. And it actually has helped to increase client satisfaction scores as they're on the new system.

Now having that software-as-a-service platform in place and the operating principles in place, as you would expect, it's a classic software-as-a-service service model. We start delivering releases on an incremental basis. No big bang approach, we have items going out every few months. Some things are bundled up every 6 months. But it's a continuous improvement to a single code line base, as you would expect, as your classic software-as-a-service model. And with each one of those has continued to gain competitive positions with each delivery, making the current core product, I believe, are very differentiated in the areas that I'll talk about in a lot a while and extremely competitive. And I'll talk more about what we're doing in the mid-market on this platform as well.

One of the next big competitive gaps in the technology pushes in early 2011 was self-service. This was the classic employee self-service access to W-2s online, check stubs, various key documents, any kind of document that we want to present and have the employee have access to, we made available. They can get their profile information, tax and compensation information. They can make updates to that information. It will generate certain activities back to the branch if it's going to change any kind of payroll-related aspects. The whole idea was to provide update capability and information to the employee base. This was a very big move, and a lot of infrastructure that was put in place and the technology to do that.

The next one that you heard about was single sign-on and a landing page, and I'll talk more about what we can do with these landing pages going forward. But single sign-on was a very big thing. One of the things we noticed, and it was a key competitive gap is, we didn't have a single sign-on at that point in time. Our competitors had at that time, and still do, single sign-up from an HR payroll point of view. We believe we are much more differentiated in that, and the basis that we took was, as we move into a single platform, we want our employees and employers to have access to everything that Paychex offers, from Insurance to 401(k) to HR and payroll, the ASO, the PEO, whatever it may be, we want them to have access through one sign-on. So our single sign-on has access to and security administration, of course, the entire suite of products. Nobody else does that.

It also has a consolidated message center because as a service organization, we would push messages based on the various products that you're using for information or actions for our clients. We consolidated that message center. We allowed them to filter and adjust and drive whatever importance that they want, and we included that in with the landing page and the single sign-on as well.

Also, a very key differentiating point is dynamically switch the role and the client. For example, a CPA or a multi-client ID, somebody who has a franchise or multiple businesses that have separate client IDs or separate Federal IDs, but they have the ability at any point in the application, wherever they are in that session, to switch their role. Maybe they're an employer and they want to look at themselves as an employee. Maybe they're in admin and they need to go and look at it as the employer. Those that have the ability to switch roles can dynamically switch their roles right within that session and have the new information appear. And more importantly, if you're a CPA, again, one of these multi-clients, you can just go and pick another client to look at and right within that session, that information will appear.

We bring other tools to the surface to them -- to the presentation for them to drive productivity as well. So a very strong premise, and as you'll see, as we move into mobility, we built upon this. Everything that we do, because it's going to access the entire suite, we want to go after both employers and employees. So our smartphone releases, which you've seen just recently announced 3 or 4 weeks ago, leverages all those single sign-on capabilities and those multi-client capabilities. So if you had an opportunity and you downloaded the Paychex app, you can run the demo, you can look at the capabilities on the smartphone and you'll see that you can switch your roles, you can switch your clients, and you'll see the dashboard and the information associated with that particular client or that role.

The tablet as a mobility device. Our goal was to optimize the landscape of that device and enable our clients to be able to get access to everything within Paychex. So if they have an iPad or an Android tablet and they leave the office, they can leave their desktop or their laptop there. They can take that tablet wherever they go and they have absolutely the same access to everything we do. When we did the single sign-on and we pulled that together within that framework and that access, we accessed all of the software-as-a-service applications and put them into a consistent frame that we were able to manage on different devices, and therefore, no one else really provides that, the complete level of capabilities, whether it's 401(k) administration, payroll or HR on the tablet.

The smartphone is a robust application really designed for quick tabs. The whole thing about the smartphones is to get information quickly when you want it. The fewer clicks the better, the stickier it will be and the higher level of penetration it will be. That's really the whole focus on that. So we spent a lot of time on the design. A little late to market, as Marty had mentioned earlier, some things that have come later, but they've come for a reason later because we've really taken a holistic view. Again, leveraging the single sign-on and those capabilities, you have things like a dashboard navigation. You might have seen it on the video clip. You'll be able to swipe along the top and just move. You can click on 401(k) or payroll, whatever you're interested in, it's one click to get it, and then that information will appear.

Depending on how much information you want, which is also configurable by the user through their dashboard, you could have multiple views of that information. You may want to look at your payroll journal and you may want to look at your cash disbursements. So if you go into payroll and you click on that navigation piece, you'll also have tabs at the bottom that you can flip around to get information. You get one quick to look at another view. You may have looked at payroll, you want to go and look at something in your 401(k), you just swipe the navigation bar, hit 401(k) and there, you're on 401(k) in one click.

So again, very quick in and out. We think it's very differentiated. We haven't seen any other applications take this approach. Usually, they're very multiple-icon based and you have to traverse all the way through and traverse all the way back to go and to do the next steps. And we think that won't be anywhere as sticky or as usable. Plus, as I talked about 2013, this sets the pace for us to easily add anything into and any update capabilities into the mobility platform. And there's no learning or any additional activities required.

So now let's take a minute a little bit with that background and move into the Paychex Next Generation platform and how do we go about this strategy of evolution. First of all, we looked at all of the product databases that were there, of all those different things that I've said on the initial engine. We looked at the architecture for the payroll engine and that database and schema. We decided to converge all common features into an enterprise database so that we understand the worker, we understand the client. We create enterprise services, so it's a grounds-up approach versus a top-down. Instead of making the user experience look sexy and good, we wanted to make sure the foundation was extremely strong, so we can reuse it and package it to create new channels and new growth opportunities for us. So we converged those into common features and then we built an enterprise reporting database, which I'll talk to you about in a little while, which is a brand-new reporting database to bring everything together and report center that we're launching later this year.

We then went and we looked at all of the products that we had, all of the key features. We reviewed them all and then we identified the key components of those. And as you may know, the various products have lots of things that are used by other products or certain features that you wouldn't want to make. So we broke these features down. We created them into services. We deconstructed, essentially, the entire -- each one of these products. And then from those, we just started to determine what sellable features that we want and how would we want to bundle them and bring them together. So as we broke those down, we took those and we rebuilt them into features of services.

Some are delivered, and some you'll see that we're delivering. Everything that we're delivering is a pure service-based approach, again, all positioning ourselves to the cloud. So we started with the common features first. That makes more sense. We're also eliminating product boundaries, right, by bundling sellable features. At the end of the day, we're looking at products as a packaging. What bundles do you want, what features do we want to put in there. It's not a time and attendance product and a human resources product and a talent management product. They're all features, and some of these features to improve and have a very strong user experience, you may -- may be appropriate to be used with some other parts of the application. So we really broke them all down into these sellable features and then created a configurable software-as-a-service cloud-based platform.

Basically, as Mark and his team go out to sell any of the products and they take those bundles and any ancillary products, that's just automatically loaded into the system through some sales tools that we've provided, and that drives for the specialist essentially the product configurations and what will dynamically appear. And if a client decides to take on an additional product, an additional capability, it will just dynamically appear wherever the features need to appear in the user experience to make it the richest possible experience.

So you can see all of this comes through in a unified approach all the way through, and we can bring all of those capabilities depending on the mobile device, the tablet or the Paychex of the classic desktop approach. So we have a reusable software-as-a-service, cloud-based platform that really will drive and enable growth and expansion into new markets. By having all of these services that we've created, we can bundle them in any way we want. We can take 3 services. And let's say, a new idea comes up or we have ideas that we can't really disclose, we create new services that we don't have today and we add in the existing services that we have to create a uniform package or bundles to challenge or go into a new market or expand. When you have all these services, as you know, they're very leverageable in going forward.

So what did we do with reporting? We had to take a whole new approach to reporting because a lot of reports were with each product. So if we wanted to take an enterprise look, we really needed to build an entire new reporting system. And as you can imagine, this had a long lead time and it's coming out in October. So we have all the various databases, including the enterprise database. So we have all the technology now in place to do change data capture, which is really essentially capturing every single transaction that's occurring on every single database. We're using a reporting client, state-of-the-art technologies, right, where you do the various staging of the information, the transformation of the information, the various data warehouses and so forth that you would expect. We have a reporting interface. This all gets packaged up into analytics, web intelligence, canned reports. And we've done this in a way to be very configurable into one system and one-stop shop, whether you're a 1- or 2-employee company or 1,000 and above.

All of this appearing in report center, which I'll talk about in a little while and report builder as our common one-stop shop. So a very sophisticated infrastructure capturing all of the data we need in an enterprise way, so that whatever you want to report on in whatever manner and that you want to aggregate as a client, you'll be able to do.

So a little bit more about the principles now of the Paychex Next platform. And before I do that, we have a short video clip to give you a little bit of idea.

[Presentation]

Michael E. Gioja

So let's dive into each one of those in a little bit more detail. So the Paychex Next Generation platform. From the cloud strategy point of view, we're very much focused on the private cloud strategy given the information that we contain and the growing importance of security and the management of that information. However, we're leveraging everything within the cloud-based technology and we'll opportunistically use the public cloud as we need for either additional processing or space that we want to rent to expand or to put sales demo systems or other things within the cloud. So everything that we're structuring within the private cloud are utilizing all of the technologies that you would expect and have the discipline and the capabilities to leverage the cloud infrastructure and whether that's our cloud or someone else's cloud.

So what's the goal of everything you're hearing here? It's to enable users to do what they want, where they want, when they want and how they want. I'll talk about those principles on the bottom that really have driven us from products to services and really consumer focus to offerings. A lot of this, and there's been a lot of discussion around technology-enabled services and innovation and what’s that doing. Again, we really do believe that innovative technology along with customer service, and the combination of those is the most important thing.

So what is behind the what we want or what the users, what they want? We want a user to say, "If I want to do it all, I'm going to do it all. If I'm a mid-market I’m going to have my own HR and payroll organization, I'm comfortable with actually doing everything online myself and having all the safe -- self-service capabilities, fine. If I want to do the HR because I have a lot of activity and I like to do the payroll, can. If I want to do some HR functions and have Paychex do some HR functions, fine." What we want is the ability to say, you determine what services you can work with our service providers in any way you want, leveraging both the customer service model and the online technology and the self-service model, and what feels comfortable to them.

We also want them to do it where they want, not be limited by any devices, have complete device independence, do it when they want at any time of day and how they want, which is really around the user interface. We want them to be able to configure their system, work the way they want, manage the workflow and the activities that they want, and we'll talk more about these points.

So first, simple. It's a single platform, delivering applications and services on a converged infrastructure. What does that really mean? It's easy to implement through these configurable services, no professional services required. It's easy to access, via single sign-ons, all of our products and services I mentioned. It's easy to use by enabling users to work the way they want to work. It's easy to support single HR, payroll, Taxpay and information technology platform. And it's easy to grow with Paychex by just adding those services, and they will dynamically appear in what is a logical, intuitive manner within that user experience.

So it's inclusive. It's a comprehensive, cloud-based offering enabling clients, employees, partners like CPAs to interact across our range of services. So these various users can be accessing the systems in the cloud wherever they are, all sharing the same information from an enterprise and a product perspective at the same time. So it supports the core, mid-market and PEO clients, and I'll tell you more about where these are going. And the PEO clients are already on the platform and leveraging everything as well that was in the conversion.

Paychex specialists, employers, employees and CPAs are all a part of the mix. Client-to-client relationships are in the foundational model. As you can imagine, you have folks that have franchises, different types of models, different types of tax structures. We really want to be able to understand those relationships and be able to present to those users the various clients that they may want access to. All of this is a centralized and granular role-based security for all of these services across Paychex. You have that access to multiple clients regardless of those relationships. And then again, the individuals can dynamically switch roles and clients at any point in time, not losing where they're at.

It's flexible, adapting to how our customers want to work and how we provide our services. Features are visible based on what the client subscribed to and the various securities that they've allotted to the various roles in their organization, as you would expect. Features can be organized through multiple landing pages, so you can -- they can create as many landing pages as they want or you can have a payroll administrator, HR administrator, a manager looking at various aspects, whatever they -- they can determine how they want their landing page to look. They can create from a list of widgets what they want on that landing page and the order of those landing pages and the way they want to work. They can break up the way they want to work on multiple landing pages and segregate the work that way, and the actions and the information associated with it. The user interface and reporting experience is driven by context. That is, we know what you're doing. We know what tasks you're at. We know whether you're looking at all employees or a group of employees or a particular employee based on the context and what you're doing and where you're at. We help simplify that for you by filtering information out, so you can quickly just see the things that you want to be able to do.

Common features are accessible in all activities. There's lot of common features about company and employees, so wherever you are in the application, everything is linked. You could be in time and attendance, for example, looking at a particular individual and approving time off. And you may want to now go take some other action of that employee. Well, we could -- you just can click on that employee's name, it'll pop up a set of options. And right at that point at that time, you can make any change from looking at what their 401(k) balance is or change to going back to work from a TLO. So we took these features that we built bottoms-up, and again making them accessible at any point in time. This way, interruptions can be handled without leaving current activity. We do hear a lot, especially in small businesses, people have multiple hats. The phone is ringing while they're in the middle of doing work. They want to be able to not lose their spot, but go and handle whatever their request is on the phone. They can do that, and then they're able to use it again to get in and out quickly despite those interruptions and that their work is there.

It's mobile. Device-targeted user experience optimizing that particular device and leveraging the application-based services. Essentially, it's the same business logic, it's the same service. We just have different UIs that you can come through, and we can brand them differently if we'd like as well. So as I mentioned earlier, the tablet provides the same SaaS offerings across all of Paychex that you would have at your desktop in the office. We talked a bit about the smartphone, and that it's robust and it's designed for quick tasks. Simple, one-click navigation combined with those various subject tabs. It's leveraging all of that single sign-on, as I mentioned earlier. Again, those landing pages on the smartphones are configurable. You might have a 401(k), but maybe you don't really want to look at it through your smartphone, then you can just turn it off. If you want to look at it through your smartphone, you can decide how much information do you want. Do I just want to see the balance or do I want to go down to see the fund performance? So you can decide how much data visibility you want, and then you can just click on the Paychex icon, you'll see your dashboard. It can give you the highlighted information you want, and you could decide if you want to go further. Again, quickly in and out is the whole idea here and configuration. And those from a technology point of view, the smartphone release was all done on HTML5-based solutions, so we could cross multiple platforms when we deliver them.

And service reuse enables quick and flexible delivery to any of these devices. So as we create more and more services, as you'll see over the next 18 months, it's easy for us to take those services, incorporated them out into this UI framework that we have, the navigation framework that we have and tab capability and single sign-on, and make them available via the mobile platform as well. Obviously, as you'll see and if you look at it, and if you download it, we do things differently. Design, we've leveraged the underlying technology, but that user experience is totally targeted towards quick in and out, so that it's very simple to use on a smartphone.

So the Next Generation platform's extendable, very important. A process and technology framework driving convergence of all of our current and future offerings. So it's a reusable, software-as-a-service, cloud-based platform that enables growth. Cross-product reporting handles simple to complex needs, and I'll show you the report center in a little while on how we do that. Virtualized infrastructure that covers all of our environments from the developers' playground all the way through production deployments. Automation of our software cycle and everything that we do in development to manage that from a productivity point of view. Orchestration of our service deployments and recovery automation. So as we build these virtualized environments, and you want to move them through the environment, we orchestrate that through technologies that we're leveraging that allow us to drive and automate the orchestration of the deployment of those virtualized environments.

And then this all leads to a comprehensive framework with a culture that's ingrained within Paychex that everything we do has to be highly efficient, whether it's our own organization, my own organization or making it more efficient for any service provider in the field.

And it's innovating. Treating users as consumers via modifiable and contextual user interface. We focused a lot. At the end of the day, it's all about the user experience and it's all about the reporting and the information you can get and how simple, intuitive, quick and easy and differentiating it is. So when you look at it from an innovation point of view, we do have a reasonable SaaS, cloud-based platform that enables growth. It's easy to implement, access, use, support and grow. Individuals can dynamically switch their roles and clients within a session. Users, quick, in and out, or handling interruptions, keeping their work. Application services are enabled, quick and flexible delivery to any of our devices, as I mentioned, and a comprehensive framework to drive and maintain those culture efficiencies.

So one more video clip. It will give you a deeper look into some of the products and some supporting points for what we just went through.

[Presentation]

Michael E. Gioja

And before I forget, at the end and during lunch, Jeremy will be back there. There'll be a booth for P&G. We'll be able to show you some of the products. You could take a look at it live and see some demos. So all of this, what to expect over the next 18 months? So back to the timeline. Report center release. We spent a lot of time building out this reporting platform and technology in the user experience. It's a single cross-product data repository bringing all of the information together, as I mentioned, and went through the change data capture and all of those aspects. This is what the report center looks like. This is the main screen moving in. The whole goal is one-stop shop, regardless of your size, whatever you've signed up for and your bundles would configure and appear on the screen.

So if we take a little bit of look, up on the left, we have packages, quick links and favorites. So what do we mean by packages? There's about 150 reports across HR, benefits, 401(k) that are available. You can filter it easily, get to them, do advance search and so forth, get at that information and look at those reports.

You can then decide what reports you want on a regular basis, take those reports, create a package, give it that name and then run that package whenever you want. You can print that package because it'll take all those reports, put them into a PDF, if that's what you want, and send them to the printer and get them all in one bundle. If you're a CPA, you can do this for all of your clients, multiple clients, aggregate them to any way you want, so there's a lot of flexibility and power here for the CPA as a partner within these cloud services.

Report builder is the new realtime, ad hoc reporting tool. So if you clicked on that, it would bring up another framework where you can actually now go in and look at all of the types of data and templates that we have available, and you'll be able to aggregate information across the Paychex products and then be able to report on those and export them in any type of format that you want from Excel and PDF and HTML, all those things that you would expect.

Also, custom reports. So we provide a bunch of standard custom reports. And for a small business, core clients we have a bunch of data extract templates, as we call them, basic templates that give all of the information available to them that they can extract and then this will bring up a set of interfaces for them to determine what they want in it, how they want to manipulate that for a third-party system, as well as also have access to another set of reports to go against the transactional system where you can see a variety of parameters that they could just be entered, that they could edit and manipulate to be able to get the information that they're looking for, whether it's an employee, company or any of the various types of products that we have. And easy access to all of the previously run reports, you can see a preview of the report on the screen. So lots of flexibility and this capability again as the one-stop shop.

Mobility. So we'll continue to build on the mobility and the tablet capabilities. Paychex Insurance Agency capabilities for the employee and the employer, and FSA are the next set of things that will be coming out. And you'll see releases on that in 2013, early in 2013, where we'll be -- just be adding that capability into the navigation bar and there'll be new options and then information will be presented.

Quick pay and payroll entry, along with profile and benefits edits. So in the middle of next year, this is when you're going to be able to -- you'll start to see update capability through these -- through the phone and the ability to go in and do a quick pay or same as last pay or one-click payroll, an actual payroll entry and a very nice layout, again, user experience for them to go quick in and out and be able to do edits for the information that's available today. Maybe you want to change your 401(k) allocation, we'll enable those kinds of things, as well as alerts. So we'll start pushing information. Maybe an FSA claim came in and we'll push that kind of information to you. So you'll be able to configure alerts and get alerts, again, through that same interface, and obviously, mobility for time and attendance and time punch as well.

And then the major piece is coming out for the mid-market towards the end of 2013, but in time for March 2013 selling season for sure, our client-facing robust import toolset. These are all the things for the mid-class, major market capabilities that some of you may know is our MMS offerings today being put onto this platform. So an import toolset, so the ability to import things from different third-party systems that those companies may have. Labor distribution and job costing for import, payroll and general ledger. This is key for specific industries, regardless of size, and enhanced general ledger with third-party accounting integration capabilities. And then all of the self-service for company, company maintenance to employee and tax data, all with effective dating, very much focused around the ability to make any changes at a company level and a tax level.

HR compliance, performance and talent management extensions. We have these in various products today. They're in the process of being deconstructed and the sellable features being pulled together, and those services created for the platform. These will come out as well as a class of things that Performance Management, talent management, and those things.

And then time and labor will be fully incorporated, and we're doing a lot of work to streamline the on-boarding operations from a productivity point of view so our service providers and our clients can quickly implement time and attendance at the regulations that they would like depending on their locations and compliance-related information. And the ability to do things like actually implement time and attendance and take punch information before even payroll, so that we have, again, flexibility. All these products are integrated. They're decoupled at the same time, so that the idea is they can go in certain sequences based on the clients' needs.

So let me try to summarize a lot of information from a competitive comparison. I guess everyone who's doing one of these things has a competitive view, and I'll take you through our competitive view.

Functionality. Everybody has HR, payroll and benefits. We can go through various nuances, but at the end of the day, the competition and ourselves, I think, are fairly equal on HR, payroll and benefits-type technologies for the markets that we serve.

However, when you look at consolidated security sign-on, I think unlike the competition, Paychex goes, of course, everything we have, and it's a strong premise that we can use in many different ways, as you could see, which I think enriches the user experience and the access and the stickiness for the Paychex products by having the access to all of the products and the security around that.

Also, unlike the competition, our interface, as you could see, is a very modifiable interface. That, along with the integrated contextual workflow, which we don't think anybody else has, these things provide a very strong user experience. We're very, very focused on the user experience and the reporting experience, whether it's on the smartphone or the desktop or the tablet.

We want you to be able to work how you want, organize how you want, look at the information how you want, get access to the information in how you want, determine what you want to do, what your service provider wants to do and be able to do that in a seamless fashion along with your CPA because you're all working off the same cloud-based system.

Believe that, as well, unlike the competition, our report center is a differentiator. It is a one-stop shop. It leverages that single sign-on. It brings all of the information across the products that you're using, allows you to access, report on it. It's simple, intuitive, easy to use. You don't have to be experienced in reporting technologies. We're controlling the entire user experience and managing that for our clients, so that they can easily do what they need to do.

And what we don't see the competition has for the markets we serve is a single platform. We're moving to a single platform. This provides a couple of things. One, additional efficiencies for our service providers because they have to know one platform, and it's just a matter of what is turned on or off depending on the bundles or features that those clients have. At the same time, in a growing regulatory and heavy-compliance environment, we only have to make the change in one place. It's much better and more effective and efficient for my organization to make a regulatory change in one system than in multiple systems. That will -- all of these will continue to help us maintain or expand our margins.

And I think and I hope is you've seen, unlike the competition, we feel we have a very robust mobile platform, very easy to use. It should be very sticky. We've got a tremendous amount of downloads, almost 8,000 downloads now in a short time that's been out, very good ratings, and I think this will just continue to grow and provide much more stickiness for us.

So in summary. I hope that what we've taken you through today in our timeline and what's gone on in the last 3 or 4 years is we, indeed, are very focused on technology-enabled services. There's no doubt about it. We're just extremely focused on it, leveraging technologies. We just haven't really articulated our story and I hope you could see that in both the information, as well as in the products and in our growth.

A single HR and payroll cloud-based platform and technology, we're there. We're doing it. We're adding features now to it, deconstructing other applications, and as you see, as Marty mentioned, we've delivered a lot over the last 18 months and we're going to deliver a lot over the next 18 months.

Unparalleled user interface and reporting experience. We drive this all the time within the organization. It's really key. It's all about the user experience and it's all about the reporting experience. We do have a comprehensive technology framework in place, whether it's how we manage the portfolio or the automation on everything that we're building within the life cycle to the framework and the platform itself, again, allowing us to maintain and expand those margins.

At the end of the day, it's all about enabling our users to do what they want, where they want, when they want and how they want on an industry-leading platform.

Thank you very much. Enjoyed your time.

I'd like to introduce Efrain, who you all know, so I don't need to introduce.

Efrain Rivera

Thanks, Mike. Pleasure to be with you here today. I've got -- we'll talk about -- recap what we saw in fiscal '12, provide some perspective on where we expect to be in '13 and beyond and then talk about both capital strategy and other parts of our financial models.

So let me start with recap of fiscal 2012. So we look at fiscal 2012. As I put all of these pieces together, and you'll see them in the graphs that follow, fiscal 2012 represented the culmination of a rebound, frankly, from the 2008 high that Paychex had achieved certainly from an earnings perspective. In 2012, record service revenue of $2.2 billion. Strong operating margins, as Marty mentioned, we'll talk about that in a second. Client retention at its highest levels. Client base rebounding. It's one thing to talk about that happening. We had been talking about that. It's another thing to see it in evidence. We ended the year with -- in excess of $700 million in operating cash flow. That is traditional in terms of the cash generation power of the business. We ended with about $800 million in cash, and then $460 million of that was paid to shareholders. We are a shareholder-friendly company. We pride ourselves on returning capital that we can't use in the business back to shareholders.

Next slide. So one of the things as I looked at 2008 -- as I finished 2012 and then look back 5 years, we had a 5 year comparison period, '08 marks the last year of our performance prior to going into the great recession. The market hits its low in 2008 and the question is how did we look from a revenue perspective over the next 5 years? Well, if you're looking at it in the first 3 years, you had every reason to say maybe the model isn't working so well. But frankly, we went through, took our lumps as the economy went through its doldrums and you can start to see what I've been seeing in the data when I walked in, that we're showing gradual steady improvement. You can see we went from 4% or so of revenue growth up to 7%, 6% organic this year. So we start, all of the things that Andy talked about, all of the things that Mark talked about, all of the things that Mike talked about contribute to what we think is some building momentum in the business.

Next slide. From a profitability standpoint, this is also interesting. As we finish 2012, I went back and looked because I get a lot of questions about when we'll get back to 40% operating margins. And I wasn't quite sure what operating margins people were talking about. You're talking about EBIT, you're talking about operating income, you're talking about without float and I think the right way to look at what's happened in the business, which is a bit of a transformation, frankly, in our model in 2008, we had $132 million of interest on funds held for client. As you know, we were down into the low-40s. What we've done systematically over the last 5 years and accelerated that frankly, in the last 3 years is take that interest on funds held for clients and converted that into operating income. Obviously, not as efficient from a tax perspective, which causes our tax rates to grow but from an operating perspective, a good story. It says something about how powerful the business model is in the company and how sustainable it is even during periods where we've seen a lot of turbulence in the economy.

Next slide. So let's talk a little bit about 2013 and then we'll take a peek forward. What do we expect to see in 2013? Well, one of the things that's not on this slide that I'll talk about is a tailwind from checks per client. We expect it to moderate. We expect some growth in checks per client, but certainly not at the 2% level that we saw this year or the 2.7% level. What that says to us is that the depths of the recession were probably much bigger than we had originally anticipated and the climb back took -- is taking, obviously, more time. So where do we expect to see revenue growth from a financial perspective? Primarily from client-based growth. We expect that the client base will grow even in this economic situation, in this macroeconomic environment. We also expect revenue per check, a combination of pricing and mix to drive higher revenue.

Mark talked about sale segmentation and expansion. We expect to see modest benefits this year. We expect to see more of those accruing as we go forward. And then, renewed focus and I hope you've got a good sense of how we're really focusing on all of our referral channels to literally squeeze as much as we can out of each of those areas to drive growth. And then finally, we expect to get ancillary penetration from HRS and other products.

Next slide. From an expense standpoint, 3 things. This -- for those of you who've covered Paychex for a number of years, you know that these are -- 2 of these at least, are important parts of the way we operate the model. The first one is interesting and I hope you've gotten a sense of where we were spending our IT dollars, high teen growth over the past, certainly 3 to 4 years and the benefits that we think that we've gotten and the positioning that it gives us going forward. So we will continue to invest in innovation. We expect the rate of IT spending, it's growth at least, to moderate as we go forward. We needed to spend to get up to a certain level. We think we're getting close to that level and we expect the rate of growth to moderate as we go forward.

We have an ongoing expense -- focus on expense control, which then drives operating margins higher. So when I get to the next slide, you'll see that from SG&A standpoint, we focus very heavily on controlling expenses. A lot of our expenses are people. We make sure that we don't get cost into the system because once they're in the system, they're difficult to get out. We adequately fund what are the growth opportunities, so where we see portions of the business that require investment, we put it there and we figure out how to leverage. From an operating perspective, and Mike talked about this in his presentation, our philosophy is to continue to drive operating productivity. Part of the reason why you didn't feel or you didn't see as much of the impact on SG&A that, that IT spending created was we were also doing -- we were driving productivity on the operating side of the equation and we will continue to do that. It's built into the DNA of how we create plans. So it is the case that we go into every plan period thinking here is our revenue growth, how do we get expense growth to be below revenue growth? And typically, about 100 basis points is what we start with and if we can do better that, we will. In some years, we say look, we want to redeploy some of that expense into investment initiatives, we'll do that. But that's our operating philosophy.

Next slide. So this is a bit of a summary of where we've been over the last 3 years. You can see -- and start to look a little bit forward in terms of where we expect to be in the long run. You can see that payroll revenue, as a proportion of total revenue, and that's what that 68% number signifies, is declining in the mix of overall revenue. And you can see that HRS is growing. At some point over the next several years, we'll be about 1/3 in HRS revenues to 2/3 payroll. But payroll does drive some of that HRS revenue, so it continues to be incredibly important to us. We've been growing the HRS business in the 10% to 11% range. We expect that, that will continue over this longer period. What do I define as a longer period? 3 to 5 years, that's about as much visibility as we can get in this environment. Interest on funds held for client, I'll take you through an exercise to think about that. But I would say this, interest on funds held for clients in 2008 was an important part of our operating income and of our revenue. It's gone down as you know, looking at our reported results, down to the low 40s. It will not be a drag from this point forward. We expect that it will have some impact but it won't be of the drag that it would have been looking at where we were in 2008 and we are hopeful, if interest rates get better, that it will start to contribute a little bit. And we'll talk about what our thinking on that is. Operating expenses, I already talked about how we intend to leverage that, and SG&A at or below the rate of sales growth, because it incorporates some of the investments and innovation that we'll continue to do.

This means that operating margin should pick up as we go along. If we aim for 100 basis points on the difference between sales and expense growth or put another way, if expenses are growing, more slowly than sales, we should see the kinds of pickups that you see on operating margin. It will not be as robust as it was. This year will not be as robust as it was last year but every year, you should understand that we go in, set the plan bar and then during the year, we try to beat that planned bar in terms of operating expenses. Then finally, taxes about 36% with the current mix of interest on funds held for clients that we have.

Next slide. What's our outlook? Let's start first with this year. Next slide. So we issued this guidance and much of this is well known to you. Just a couple of comments I want to make and reiterate. This year, first half, we had delivered about $0.80 per share, second half, about $0.71 per share. We expect both halfs of the year this year, in fiscal '13 to be more comparable. And we expect it difficult compared going into Q1. Talked about that extensively on the call. We had a very, very strong quarter on HRS. It did not repeat throughout the year and we're going to bump up against that compare. We're also fixing a compare on checks per client, which were strong in the first quarter. It will not be as strong as we follow; first quarter will be a difficult compare for us and then the year will normalize as we go through it.

That's the only comment that I'll make with respect to this year's guidance.

Next slide. Let me give you a thought process around '13 through '15 and when I say '13 through '15, I don't mean calendar, I mean our fiscal, so this would be '13, '14 and '15. What are we looking at? We think in this environment, we can grow the client base anywhere between 1% to 3%. If the macro-economy stays at the current range, we're somewhere at the lower end of that range. If we get some improvement and frankly, some improvement is any improvement in the macro-environment at this point, we start to drift up towards the top of that. We're not sitting here saying that the only way we can grow the client base is based on macro economy but we're also not standing here saying that it doesn't have an effect. It absolutely does have an effect. We think we can overcome some of that. This is the range within which we think about we can grow the client base. Let me just say one thing, I said organic, let me define that and that will be the last time we talk in this way. Organic in this sense means without SurePayroll. If I add SurePayroll, we'll do better probably than these numbers.

Pricing, we're still in the 2% to 4% price environment. I get asked can you price at the higher end of that range? Sure, we can price in the higher end of that range but we do a lot of sophisticated modeling, which tells us what happens from a retention perspective at different price points. We know what that is. Now, our pricing flexibility is probably towards the end of that -- bottom of that range in this environment and we're careful about it. We have pricing flexibility. We don't have pricing power. We can't simply dictate to clients nor is that the way we want to operate. Checks, we'll still get some benefit from checks, but over the next 3 years, we think that will moderate closer to 0 from where we are right now.

Now, we kept saying that our track record on checks is not great. We kept saying that during the year and ended up with 2% growth. It's very, very difficult to predict what exactly is going to happen with checks because it's a function of what's happening with the hiring within our base, something that we can't completely call.

With respect to HRS growth, we expect it within the range of growth that we've seen over the past 3 to 4 years. There's no reason based on the opportunities we have that we shouldn't continue to deliver that growth. Let me talk about acquisitions. We screen a lot of acquisitions, we look, we're pretty choosy, we don't do big acquisitions, we don't think that makes sense. We have the ability to drive products through the best distribution model in the industry and we think that we can take smaller products, drive them through our business or we can take smaller businesses and grow them. That's our thinking about acquisitions. We are actively looking at them. I occasionally get the question why don't you guys do more acquisitions and my only response is over the last 18 months, certainly since Marty has been CEO, we have done the most acquisitions we've done over a period of time. We are interested, constantly looking, constantly evaluating what's out there and I hope that you've seen with what we've done on the system side, the ability to integrate acquisitions, products, et cetera, much, much easier than it's ever been. So we are interested in looking at that.

Operating margin leverage. We continue -- we expect to continue to see it grow. Our model is such that when you get the right sales growth, you should get leverage on operating margins. We expect that to continue to grow. Will it be 50, 100 basis points? It will frankly depend on the environment we're in at a point in time when we do our plan. I got asked this year, well if you guys said you were going to do 37% operating margin on your business that's excluding float, aren't you not leveraging? The point is we are leveraging, you just -- we're not going to call it to the last 0.1 of a point but we do have leverage in our plan.

And then finally, tax rate, we don't expect it to change too much from that 36%. It could be a little bit below, it could be a little bit above. That's our thought process around the next 3 years.

Next slide. Let me talk about interest on funds. So we ended the year at about $43 million. We gave guidance in the down 8% to 6% but I wanted to -- as you think a little bit about the portfolio, we manage about $4 billion that's ticking up 2% to 3%, typically. It grew last year because we had the inclusion of SurePayroll funds. About half of that is in short-term vehicles and about half of it is long-term, so if you do the math overall, weighted average return on the portfolio last year was somewhere around 1.1%. What happens to us? I mentioned that we don't expect to see a drag. So I just wanted to have a little bit of thought around what we see. Every time the Fed talks about Q3, the market rejoices and I am crying at my desk. Because I know there will be a point when interest rates get to some reasonable level where we will see that return on float. It's an important part of upside to the stock. Timing is subject to anyone's decision. Now, the interesting thing about the way about our portfolio is structured as low -- as short-term interest rates rise, that effect is almost immediate. So let me take you through the thinking that's on the slide. So if nothing changes and we do nothing next year, then we would expect interests on funds to decline about within that range that you see there. That is to our P&L, not a significant hit. Now I will just say one thing, I said if. We obviously, are going into the year, see the same interest rate environment and we would look at how we configure the portfolio to mitigate that impact. But just for this discussion, if we did nothing, that's the kind of decline you would see. Now let's talk about what the second bullet is. So talking about interest rate futures is frankly a pretty futile exercise. So we could do that, it wouldn't mean very much. All I said was let's stop at this point in time and say I'm going to pick the high point of the last 12 months for intermediate municipal bonds. So right now, that would be about 80 basis points higher than bonds are currently trading, so intermediate union. That's the best that I could think in terms of framing opportunities. So in the last year, rates have moved around in the muni market. If we were to get there over the next, let's say, 6 to 9 months and I had Fed funds at 25 basis points rather than 0 to 25, which is where I'm at, because I literally get very, very little on the short-term portfolio. The impact would be we'd be 6% to 10% above where we ended last year. So small changes could have a big impact on the portfolio. What do we anticipate? What do we expect? We frankly go year-to-year. Our guidance is our best thinking about where we are on interest rates. There is an option out there, what's embedded within our P&L on interest rates, but I suspect every financial institution in the country has the exact same option. When there'll be a cash out on that is anyone's guess but just some sensitivity around what would happen to our P&L if interest rates change.

Next slide, we talk about capital strategy. Go to the next slide here. So what are we doing? We ended up with $800 million. What do we expect to do? Well, invest some of it for organic growth. CapEx typically is somewhere in the range of about $100 million. We expect that is where we'll be over the -- over certainly the next 3 years. We're looking for strategic smaller acquisitions that are accretive relatively quickly, don't have to be in the first year, but relatively quickly. You remember if you where here when we did the SurePayroll acquisition, we said that was about $0.01 impact and now that we've anniversaried that, it's certainly less than that. So we're not looking for big bang strategic smaller acquisitions that we can do that brings some interesting technologies to the game, bring some products that are of interest to us.

Now, returning cash to shareholders. Our dividends, and you'll see those in a second, we had climbed all the way up to a 94% payout ratio. That was too high. And we have managed it down to about 84%. This year, we expect it to be in that range, around 80% and we expect it to grow with earnings. That's our expectation around dividends. But that leaves a lot of cash. That leaves a lot of cash, still.  And the question is what do we do about that? And the answer to that is if we don't have good acquisition opportunities in the intermediate term, now we obviously are looking, then we're having constant dialogue with the Board around a share repurchase and we would do that if we got to the point where we didn't think the pipeline of opportunities really warranted holding on to the cash. Now the difficult thing sitting in your seat from where we are, you don't know the pipeline of opportunities we have. We do, and we're trying to strike the balance between deploying cash for those opportunities and then returning it immediately and we're in that dialogue, I'll just say that. We're in that discussion and we have a very robust discussion about that point. I've mentioned about capital expenditures.

Next slide. So just a couple of slides. The cash flow last year was $706 million, down slightly from the year before. That's really just frankly changes in assets, nothing significant there. We generate more than $700 million. So when you think about that $700 million of cash generation, we use about $100 million in CapEx, that still leaves a lot of money, plenty of money, frankly, even more than net income to cover the dividend, which is why we're comfortable at the dividend ratios that we're at. Frequently, people will look at it and say well that's very high. We're an unusual company. We generate a tremendous amount of cash without having to deploy a lot of capital within the business. That model or that issue is not going to change.

Next slide. And then this is just where we are with respect to the dividend payout ratio. You can see that we peaked at 94% down to 84% and you can do the math in terms of whatever your model says around where you see us. So we're comfortable with the current rate of the dividend and it will grow over time with earnings.

I think it's the final slide. Okay. So just a summary. We're really proud of the fact that we have industry-leading margins. That's a function of the way we do business, it's a function of the operating model. I frequently remind myself when I am driving home and feel good about something, that it's the operating model, stupid. That's what drives all of these results, nothing is going to change in the short-term in terms of the way we operate. I hope you see, if you look at from that 2008 period to 2012, we've been resilient. We took some lumps early in that period. We are now building the company back up. Certainly, in the last 3 years, you see that. We've managed through economic headwinds and I'm really proud of what we have done as a company from an investment standpoint. We leaned into the headwind and we invested in technology when it could have been the easy case to simply cut back and try to deliver a better bottom line. I think that was a long-term, the right decision and we're pleased that we're able to do that. Strong balance sheet, no debt. We are committed to returning capital to shareholders. That's the way we operate. We will continue to do that. We will continue to invest in innovation and I think that's on account of what you've seen today, puts us in the best position we've been in to capitalize on the opportunities in the market. So I will end right there and we'll go to the next slide. There we go. So the moment you've all been waiting for, the question-and-answer. If you could just give us a chance to put some chairs on the stage and then Marty, you want to just introduce who's going to be on stage with the rest?

Martin Mucci

Those on the webcast, we're just putting out chairs on stage as we're setting up for the Q&A, if you could bear with us. I'll invite the officer team to come up. Thank you. If I would just ask, you've been very polite to us as we went through all the material, I appreciate that. We all have mics and since we're on the webcast, we'd like to run to you with a mic before you ask the question, so just give us a minute to get to you.

You've met all the team except Kevin Hill. Kevin is our Vice President of IT -- or excuse me, of Insurance Services, as well as running our PEO operations for us and it's great to have Kevin here. I knew you might have some healthcare and while we didn't have time to do a formal presentation, Kevin is here to answer questions as well. And I think Efrain and I will kind of take the questions and then decide who to pass them to. So lucky for these guys. So with that, let's open it up. First question right here.

Question-and-Answer Session

David Togut - Evercore Partners Inc., Research Division

David Togut, Evercore Partners. I have 2 questions. First question is for Efrain, you didn't mention the possibility of the special dividend with the excess cash. I guess why not and is that part of your thinking?

Efrain Rivera

I didn't. That certainly is within the realm of the possibilities that one would use excess cash for.

David Togut - Evercore Partners Inc., Research Division

That sounds pretty noncommittal.

Efrain Rivera

We look at a range of possibilities. So the fact that I didn't highlight it doesn't mean that it wouldn't be something we'd consider. I guess that's a better answer, David.

David Togut - Evercore Partners Inc., Research Division

Next question is for Mark Bottini. Mark, can you discuss what percentage of your wins are competitive versus noncompetitive? And then just as a follow-on, we heard a lot about the new features of your products today. Could you give us a sense of how the product stacks up directly against ADP's RUN product where they have been investing a lot also on new features?

Efrain Rivera

David, the second question I think is better directed towards Mike. So I'll let Mark handle the first one.

Mark A. Bottini

I don't have the specific percentage off the top of my head here, but I will say that year-over-year, our percentage of growth or wins against our competition was up pretty significantly, high single digits, up year-over-year. So we are making traction against them. I don't have the specific percentage on wins with competition versus without.

Michael E. Gioja

In regards to the question in comparison to the RUN product, what we've taken you through and what's been delivered is extremely competitive. We've addressed all of the functional gaps, sort of a self-service, single sign-on, the user experience and so forth. So we think it's extremely competitive and differentiated against the competition. And in regards to the hosting part of that capability that they have within RUN, that's what the SurePayroll, you've heard a lot about the work going on from the CPA hosting. So we think it's extremely competitive and has its differentiated points.

Gary E. Bisbee - Barclays Capital, Research Division

Gary Bisbee from Barclays. In the financial presentation, in the 2013 revenue driver slide, I noticed you had ancillary penetration as last of the 5 things you mentioned and I guess just given the earlier charts, I guess in Andy's presentation, showing how low penetration is, what are the gating factors to investing more aggressively or driving the penetration of HRS in ancillary more quickly within the payroll customer base? Seems like a huge opportunity. I can't figure out why you're not doing it more quickly.

Martin Mucci

I think, I'm not so sure it's not as much the investment in technology, I think it's execution. I think it's on the sales side and that's one of the things when you see segmentation, I think we feel, as Andy went through, as you noted, there's a lot of opportunity there. And so, when we look at 401(k) opportunity and we're growing 4% in 401(k) as we've mentioned before, how do we grow even faster than that? How do we get more of the clients -- of our client base who have a 401(k) that we don't have? I think it's more going after the wholesale channels, it's going after the financial advisors. It is segmenting the sales force in payroll to be more focused on the client base that they are going after and I think it's really pushing execution. I think the opportunity is there, Gary. I think it's just -- I just don't think -- we haven't hit it as strong as we should and I think we got to do it. It's not some -- the good news is it's not as much technology although Mike showed you what's there from a payroll side, it's really going after the opportunity that's there.

Efrain Rivera

The other thing, Gary, is the sequence or the list doesn't, in any way, reflect the importance. It was really intended to say ancillary penetration comes from expanding the client base first and then going into that client base and selling more services, not intended to indicate importance.

Gary E. Bisbee - Barclays Capital, Research Division

With the sale -- just a follow-up on that. With the sales force changes and all the things you've been doing, are you at a point where you think you can accelerate that or is this still maybe off a couple of years?

Martin Mucci

No. I think we can accelerate it. For us, nothing's off a couple of years because we're always trying to increase it. I think we have done a very good job. I think we're probably the best at it in the industry to go after the client base. We have a very clean sequencing that we do. So we sell you payroll and then within roughly 30 days, we're on top of you for 401(k), talk to you about 401(k). Within 45 or in there with HR outsourcing products for the grid's a good fit. And I think what you'll find on what we've sophisticated even more is now modeling. We're doing more modeling to say these are the clients that are more apt to take a 401(k). And so we've just really gotten better at that in the last 6 months and I think that's going to help us as well. So I think the only thing that sometimes works against us is that client base is ever-changing. So even though we show where the penetration is, remember that in a typical year, you have 100,000 clients coming in, in payroll, 100,000 going out. So in the years when we're growing, we'll have 120 coming in and 120 -- 100 going out, but it's a constant churn too. So you got to stay on top of -- when you're out reaching into that client base, and then some of them go out of business, you got to kind of get more sophisticated in who you're going after. But we're very focused on it, it's a very important -- always has been very important to us and I think we're going to get better at it.

Unknown Analyst

2 questions. First, is there an opportunity to price the product differently now because of all these mobile products and all the technology that you've embedded in the product?

Martin Mucci

I think we've gone through some pricing changes in the last couple of years. We went with some different strategies that I think is going to help us and I think that's the first place to start. I don't know if it's so much tied to the mobility because I think you have to have -- what we felt is you have to have all of this, the great service and the mobility and the user interface to compete. And so, we don't look at it as initially charging extra for it. I think there'll be some products as they come along and we add to the suite that you can charge more for. Some of the reporting, there may be different pricing plans there for the reporting because you really have -- you have a lot of flexibility of things that they can do and add and it adds more value. I think on the pricing, the big thing to us was giving more pricing flexibility back to our sales force and so 1.5 years ago, 2 years ago, we decided hey, let's tighten that down, make it very clean, very simple for the sales force and kind of fix the price and give less flexibility. And what we decided in this fiscal year, really, a few months ago was we're going to go back at it, allowing them more flexibility, which was more our traditional approach. So it's not -- we haven't focused as much of charging additional for things, although we're always looking for that, where we add value but the most important thing I think, was giving more flexibility to the front-line sales rep, that's the biggest change.

Unknown Analyst

And then Marty, the healthcare changes that are happening is there an opportunity to grow that HRS business to the higher end because there is more complication and small businesses will be looking for expertise?

Martin Mucci

I think I'll give Kevin a chance to talk about healthcare.

Kevin N. Hill

There is. We started even before the Supreme Court decision. We started quite a while ago to segment our sales organization as well. We've historically, when we launched, had a focused down market. There were fewer competitors down there finding that the revenue attractive to them. So that was early penetration for us. More recently, as we've segmented, we're making an intentional focus to more strongly penetrate the 50-plus employee market. I also think not only do the,y, like smaller businesses benefit from the consulting that we can bring to them, but if you think of some of the reporting and regulatory requirements that they face, Safe Harbor testing for example, there's a lot of information that we are uniquely positioned to provide because we have the insurance information.

Unknown Analyst

So the 2 have, or they claim to have over 1 million payroll customers and it seems like those all should be Paychex customers given your track record in this market. So how do you do a better job in that segment?

Efrain Rivera

I think there's a couple of ways. I mean, first of all I would say, from our referral partners, getting these businesses, all the new business starts and catching businesses on the front end of it. So between our referral partners and some modeling that were doing now, how can we get in front of these clients who are start-up businesses on the front end? That would be one and the other one is we have things like SurePayroll that we're looking at to try to get some of these manual users to convert to a SurePayroll platform, which is kind of a hybrid platform between do-it-yourself and full-service payroll. So I think those are the 2 ways. We're looking to do it, banks, CPAs, getting the referral channels who people trust and they refer us and 2, the modeling we're doing on new business start-ups and leveraging our SurePayroll platform.

Martin Mucci

And we really do see Intuit more as a competitor to SurePayroll and those that want to control more and do it themselves than the full outsourcing model. More of the outsourcing comes directly to us or the other competitor that's national, but it's -- Intuit, most people don't think of either us or Intuit. They kind of pick one or the other based on their preference of outsource or do it themselves.

Unknown Analyst

If I can get one last one. So your full service is about 2,100 on average, is that about right? And SurePayroll is around 800 on average?

Martin Mucci

Yes.

Unknown Analyst

Would a hybrid be somewhere in the middle?

Martin Mucci

I think still though, you just don't want to necessarily mix them too much. I mean, I think, its starts getting hard to draw the line. SurePayroll does provide customer service. You're calling in to an 800 number to support but most of it, you're doing yourself, you're helping yourself set up and so forth. I think with this counting and some of the flexibility the sales team has, you can do some that but I don't think we'd necessarily put our product directly in the middle of it and say that we've split hairs and say that there's that much difference. To us, if you want to do it yourself and you want to spend $800 a year to do it or if you go to an -- or Intuit even less, a little bit less than that depending on what you buy from them or you want to go to a full outsourcer, pay $1,200, $1,300 more than that per year, which is probably the cost of an average penalty from the IRS. And not to mention as we talked last night about the time that you put into something if there's a problem with the IRS. So I don't know if there really needs to be a hybrid in between because I think there's enough of a spillover when you look at it. Our service with all the mobility, they can input if they want to but they always know they have a dedicated payroll specialists that know everything that they need to know and they can call and they're dedicated to them. And I think it's important to keep that differentiation to some degree.

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

Mark Marcon, R.W. Baird. 3 questions, first on SurePayroll, could you put a little bit more quantification with regards to their current size and what the plans would be in terms of the growth rate that we would expect out of them? And at what point do they start becoming meaningful from a profitability perspective? How should we think about SurePayroll?

Martin Mucci

I think we've given that number out. I think when we bought them and they're still -- they're around 35,000 clients or so, 35,000, 36,000 clients, they're growing double-digit and they -- I think to get profitable in that size and the revenue and so forth, you probably got to be double that or slightly less. And at the way they're growing, I don't think it's going to take too long because I -- to be able to do that, not to mention and that's just kind of looking at the straight payroll. They sell ancillary services and we're partnering more and more with them to tie in our ancillary services, some of the Insurance Services, to go into their base, to sell into their base. So where they have started some of that, we have a little bit more depth in number of people selling into that base that we can do. So I think we can even pick that, their revenue up even faster. Just from a pure client size, you'd probably expect it to be double or a little bit less. But with all the other ancillaries, we might be able to do that a little bit faster. We're very pleased with the growth that they've shown and again, as Mark and some of the other guys have talked about, we've partnered with them like, to go into the banking channel. So where a banking channel have used your payroll for a white label product, but -- and then we went to them for referrals for fully outsourced, we can now go to the bank as a joint banking partner to, say, if you want to do white label and you want a referral that way, it’ll go this, it’ll go to the SurePayroll product; if you want to go full outsource its Paychex, it's the same person from a bank referral partner that you get to talk to and that's going well.

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

Can you talk a little bit about the incremental pricing that you might be able to get from the reporting modules that are coming out? Is that included within the 2% to 4% or is that a whole separate charge that could be an incremental opportunity?

Martin Mucci

I think that would be too early to talk about that pricing, I wouldn't want to get into that from a competitive standpoint until we're ready to roll out the product in the fall.

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

Great. And then last question. Efrain, just in terms of the margin improvement, just to be clear, the 50 to 100 basis points, you're talking about the 50 to 100 business in terms of the operating profit growth in excess of sales growth, is that correct?

Efrain Rivera

Well, let me make it more clear. So what I am saying is we put together a plan. We expect in the typical plan we put together, to have a revenue growing more -- revenue growing faster than sales. And so, when I showed you the chart, you would see we went from 35.4% to 36.3% to 37.1% for operating income excluding float as a percentage of service revenue, that's what I'm talking about when I'm talking 40, 50 basis points or continuing that progression.

Bryan Keane - Deutsche Bank AG, Research Division

It's Bryan Keane at Deutsche Bank. I just want to talk about sales growth. Can you talk about where sales growth has been and then where is it going to be, I guess, in that '13 to '15 outlook and how that translate into revenue? I know sales growth means different things to different people. I think ADP has a different definition of sales growth. So maybe if you can just help us understand your definition of sales growth versus ADP and where that's going to be and how that translates to the revenue model.

Efrain Rivera

Let me just say, Brian, I don't understand ADP's definition of sales growth because it's difficult to see with low teens sales growth, how that's being delivered to the bottom line. When we put together plan, I'll let Mark talk qualitatively to that. We put together pretty aggressive plans. Don't always hit them, but we put together pretty aggressive plans and what you saw based on the presentation that Mark gave was in the back half of the year, we saw growth on payroll units. We've been seeing growth on the HRS side. You can see that in the numbers. So we typically are targeting upper single digits in terms of sales growth every year or sometimes, more than that. And then how that flows to the bottom line depends on how successful we were in a given year. It's difficult for us to see -- to figure out what our -- exactly what's happening with our competitor’s sales. Mark, do want to add more color on that? Go ahead.

Mark A. Bottini

All I would say is yes, that sales growth and P&L growth get to be sort of a tricky compare because the timing of when the business happens and I think that's what you just said. As far as all of these initiatives that I talked about, each one has a specific impact on the numbers and they are high single digits and when I say stretch targets, I mean, our goal is to deliver that revenue target this fiscal year. It's the only way that we deliver the numbers and we need to deliver in FY '14 and beyond.

Bryan Keane - Deutsche Bank AG, Research Division

Okay. And just one last one. Efrain, is there a total service revenue growth in the 2013, 2015 outlook that we should think about? I know this year it's...

Efrain Rivera

Yes. Right now, we're mid-single digits. We'd expect that to ratch up, but we’re -- our goal is to

[Audio Gap]

What's happening with that green arrow at the side, which was the clever or not so clever device to indicate, to say that there is some impact in terms of what's happening with the macroeconomic environment. But we get those pieces together and you can do the math and I can and you're going to get into the upper single digits.

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

Joe Foresi from Janney. Efrain, you talked about converting the interest rate.

[Audio Gap]

Efrain Rivera

2008 high watermark of our profitability. We had 40% operating margins but we had $131 million worth of interest on funds held for clients. If you look at the graph carefully, what I'm saying is that 36% was actually our margin when you look at interest on funds held for clients. So what we've done is build up sales -- service revenue, I should say, not sales, service revenue over that period of time and it's basically substituted because if you look at the numbers, you'll see that we are now at a level both for EBIT and for operating income that's comparable to where we were in 2008. So all I was saying was simply that if you go back to 2008 and you're seeing this huge number that's interest on funds held for client, we had to figure out if the operating model operated the way we wanted it to. We had to figure out how to substitute that and what's happened is we flipped what essentially was interest on funds. We've flipped that into operating income for service -- operating income coming from service revenue. So I guess that's the way I'd explain it.

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

And then just my follow-up is as you continue to focus more on the technology part of the business, how does that structurally change your delivery? Are you increasingly hiring more technology-capable service reps? How does that change your back office servicing of the clients and what should we think about that from a margin perspective long-term?

Martin Mucci

Interesting question. I don't think it's -- I think it has pushed more of our training that way. But again, as Mike -- we try to make it very simple so we're not trying to have a real heavy technologist from the front line service givers. So I think as we've hired more of our payroll specialists, number 1, they're focused on customer service; 2, that they have to know payroll really well. As I said, they all come to Rochester and have to go through an intensive course and we've had that in place for many years. And -- but what they're learning now is more of the technology and so forth and they handle kind of first level questions and then can be shifted to a second level group or a little bit heavier online issues that are centralized in Rochester. I don't think it's going to -- I don't see it changing the margin much at all. I think frankly, most of the young people you hire today can handle most of the front level -- first level easy questions very quickly.

Sara Gubins - BofA Merrill Lynch, Research Division

Sara Gubins, BofA Merrill Lynch. Efrain, could you talk about where the client base growth expectation comes from for next year? Is it client switching, better, greater penetration or actual growth in the economy?

Efrain Rivera

Well, a combination of it is obviously what we're seeing. So going way back to the beginning of the presentation, new business formation is ticking up. It's actually -- if you look over the last 3 years, and it's reported on a long lag so -- and then they revised it so -- which makes it even more confusing. But if you normalize it, it looks like to us, it's growing about 3% or 4%. We're expecting that to continue. So that's one part. So that's 50% of our business. Everything else is the other 50%. So we expect obviously, competitive takeaways, search engine marketing, a number of other referral sources or other sources will drive the remainder of that growth. 1% on 567,000 is not a huge amount of clients, but it represents positive growth.

Sara Gubins - BofA Merrill Lynch, Research Division

Great. And then Mike, could you talk about with the rollout of the next gen platform and the major reporting segment coming in the fall, is there any concern about disruption for clients?

Michael E. Gioja

Good question. No, not at all. Right now, the systems are actually -- all of the information is being pulled from all of the databases that hold all the information. We've tested this and done all sorts of scaling. So it will just appear to the clients and all of the existing clients we've captured and pick up all of the history since they have been our client and that will automatically appear in the system. So we expect no disruption at all. And as Marty had mentioned, there's extensive training that goes on for our service providers and for the CPAs and so forth as we launch this out to the field.

James Macdonald - First Analysis Securities Corporation, Research Division

Jim MacDonald, First Analysis. Thanks for giving us your views on the technology, we haven't seen that before. A little further on that, can you talk about where your technology is with third-party applications and how and whether they're going to be integrated? And then, because of this new technology, my follow-up would be, does that make it easier for you to do acquisitions and then just tuck them in and maybe also easier to buy just small payroll companies and tuck them in and how long does that conversion take?

Michael E. Gioja

Two aspects to that, and Efrain had mentioned this earlier. It clearly does help us with acquisitions. We have a frame work, we have a technology framework that's clearly in place. We have things like centralized security administration. So if we look at an acquisition as a third-party, we will break down their technology, evaluate it, be able to understand the level of investment required to bring that in. They probably have their own security, how marginalized, how service based is that, is it easily replaceable by us or is not? That's an example. We look at that to their entire set and we can easily know how to put a plan in place and the investment required to leverage that asset and bring it forward and then make the appropriate decision. In regards to payroll and payroll companies, when we deal those acquisitions, we typically just convert them into our system. That's been a process for many years and that's probably the way we would approach those.

Martin Mucci

One of the good things is that as Mike mentioned about 2 years ago, we completed the major conversion of the 500,000 clients that we had on the old system and we did it very quietly and it was a lot of work and a lot of planning but it went extremely well. And to have that behind us, there are not more conversions that are needed now. So as we get into the major markets, we'll be selling the product but we won't look to convert clients. So it's nice not to have to go through a conversion where there is disruption. We see very little disruption and the way we're building things, as you can see, it's very intuitive and very simple so that any client can just pick it up but we have a whole training process that we go through as well when we roll things out to go to the client, with brochures, online tools and videos to help them learn it. But it's -- hopefully if we've done it right, it's so simple that there won't be an issue or any disruption there at all.

Michael J. Baker - Raymond James & Associates, Inc., Research Division

Mike Baker from Raymond James. Mark, I was wondering given the deployment of the new platform, as you look at new sales growth, are you starting to see more of it come from an in-house solution or in people that were previously in-house given blurring in lines around control yet?

Mark A. Bottini

We are not seeing a big change in that percentage. I mean, Andy had those percentages. Those percentages in-house have been pretty much the same for the last I think, 8 to 10 years, right? So we haven't seen a big change there. We are seeing some growth in SurePayroll for people to manual, going in that direction, but we haven't seen a big shift.

Michael J. Baker - Raymond James & Associates, Inc., Research Division

And then a question I had for Kevin is, there's still some unknowns as it relates to reform. What are some of the key elements you're watching in terms of how it ultimately gets delineated that could either give a tailwind or a challenge as key pieces are still unknowns at this point?

Kevin N. Hill

At a macro level, I think what everybody is watching now is the national election to find out whether or not there's Republican control of anything that attaches funding decision-making to it because a lot of it is still subject to specific reg writing, as well as the funding of the implementation of a lot of this. Our planning assumption, because it’s the only one I can responsibly take, is that what's now been affirmed by the Supreme Court is what we have to deal with. Uncertainties in a real specific level would be our ability to be appointed as an agent to distribute into exchanges. I mean, if we're appointed it, to distribute it into an exchange which we'd want to be, what's our compensation. So, that type of specific is unknown to us but otherwise, we think we know enough to continue the planning that we've been doing for quite a period of time and see it as upside because of the complexity and the kind of the heritage that these clients have with Paychex as a source of a lot of valuable information to them. I think they'll be very confused. I think they'll pay more attention now that the Supreme Court decision is made. And so, they'll begin to value a little bit more, the advice and counsel that we can bring to them. But for us, I think we know all that we can know and I can't stand still and wait for anything else to be more clearly defined.

Jeffrey M. Silber - BMO Capital Markets U.S.

Jeff Silber with BMO Capital Market. Marty, at the beginning of your presentation, you talked about how this is a domestic story. I know you've got the small operations in Germany but what would have to change your mindset for the company to be a little bit more aggressive outside the U.S.?

Martin Mucci

I think, just the right opportunity. I don't think -- I think we've probably been a little bit shy of going outside the U.S. during the recession and so forth but I think that we've proven that we can do it in Germany. I think we've learned a lot there that it took longer than we had expected. But we feel we've got a very good base in Germany and I think if we find the right acquisition and the right valuation, I think everything is always evaluation. There's a lot of high prices out there for things whether they're payroll companies or whether they're SaaS-based models or anything. And so I think the right opportunity, and we would do it. We're looking to grow. We do look to grow profitably. We don't let that necessarily hold us back but it's got to make sense for us and know that we can integrate it. But we're very open to that and have looked at a number of things already.

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

Tim McHugh, William Blair. Just wanted to follow-up on the reporting tools that will be rolled out. Can you update us on your thoughts on the middle market? Is there a sales force expansion that's going to be associated with that or how big are you looking to go in terms of client size? And what's the risk as you go more aggressively middle market? Like it sounds like clients or -- I'm sorry competitors push back price wise at you in the small market or something in response to that?

Martin Mucci

Yes. What we call either the middle or Major Market Services, which was the MMS product, it is the MMS product, as we go to the Single Platform and all of the integration, I think we're perfectly positioned in there. I don't want you to think that -- we're not looking to go over 1,000. I think our sweet spot right now in the mid-market is probably 50 to 500 and we could go slightly up or we could go above that. So I don't want you to get the sense that we're necessarily going to go. We do have some clients over 1,000 but for core payroll, obviously, 80% of our clients are under 20. For the mid-market or Major Market Services, it'd be the 50 to 700 probably, type of thing. We're probably mostly fitting in the 50 to 500 now, but we can service any of those clients. I think the reporting, it's more about the integration. The key thing in that size client is the integration. We started a few years ago buying our time and attendance solution, TLO, time and attendance online. Our HR solution, we built HR administration. We added expense management through a partner and some other products, Taleo and so forth. It's now about bundling all that together and having the combined reporting and the user interface to be much more seamless. We do have a single sign on for that group that we put in probably 1.5 to 2 years ago. But now, its integrating all of that into a single user interface that makes it even easier for the clients. That business actually has been very good for us. It has continued to grow. We don't separate out the dollars in that business but it's become a significant part of our payroll service revenue and when you add in the time and attendance and HR, it's become a very good size business itself. And they -- actually, that sales team actually leads with HR administration at that size client. They tend to lead first with selling HR administration and payroll and time and attendance and everything follows it. So I think it's got a very good growth trajectory that we see it going out, particularly with the technology changes.

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

Okay. And just the one follow-up. The sales force segmentation and the focus on the channel partners, what did that involve from kind of the ground level in terms of the sales force? Was it simply dividing the existing salespeople up differently? Did you need a different type of salesperson and have to go change over a certain percentage of it? Just talk about what's involved in it?

Mark A. Bottini

It's basically just dividing the sales force in a different way, bringing different training and different solutions to the different groups versus just having a product in a rep's bag. So it was basically just segmenting the sales force and who they call on was the main piece of the work.

Martin Mucci

Mark did a great job and this was a big change for Paychex because we had the core payroll sales and we had the MMS sales, payroll sales. And what happened was when you have product focus, it's good in one way but you may go into a product, you may go into a client that is a better fit for MMS or a better fit for core but depending on who got there first, they had their product to sell. And what we decided was, and we've talked about it for many years, whether to do this or not, we decided this is what we were going to do, is draw that line in the size of the client and say you handle this market and you handle this market. Mark did a great job with his team of Vice Presidents and the rest of the group, communicating this ahead of time. We've made the switch, got very positive feedback in the sales force that it was clear, defined, they had the right tools and training and they were off and running at the beginning of the fiscal year.

Efrain Rivera

And so it has managed the conflict in the field, 1; 2, we're bringing the right solution to the client and it's had very little disruption on the sales force and we're moving forward.

Timothy W. Willi - Wells Fargo Securities, LLC, Research Division

Tim Willi with Wells Fargo. Could you talk -- you've done a lot of work on the platform where you talked about for the user experience. I'm curious to what degree it provides you with a tremendous amount of more insight into your customers and all the data that runs through Paychex? Has there been any notable improvement and ability to see it and use it to manage these changes in sales? And frankly, has it clarified other opportunities in terms of channel partners or products for you?

Mark A. Bottini

In regards to the user experience and the reporting, we are now as the platform is going to the market in the fall, we'll have a lot of information. There are 2 parts of data warehousing. This data warehousing is all warranted towards the client having everything that they need. So whether technical, the domain marks, the warehousing aspects are all oriented towards that. The next step is we can orient that towards that on the inside. We already have an external -- I mean, an internal data warehouse where we capture information. We're going to take these and leverage these things going forward once everyone is on that platform with all that data is there and starting to be consumed.

Timothy W. Willi - Wells Fargo Securities, LLC, Research Division

So you're really not, at this point yet, necessarily maximizing or you think there's further maximization of the data you guys have and still working through it and so more to do?

Mark A. Bottini

Yes.

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

David Grossman. Just -- if we go back to the self-service market for a minute, you said you'd be profitable at 70,000 clients. First, can you help us understand, would that be profitability that would be comparable to what the core business is generating today? And then secondly, could you also maybe help us understand how the customer thinks about that, paying that $1,200 insurance premium? Why wouldn't you pay the incremental $1,200 to insure yourself against some kind of payroll tax issue and just how the client thinks about that because it seems, at least on the service, to be a relatively nominal amount?

Martin Mucci

[indiscernible] I'll take that last part, and turn the margin, the harder one over to you. So I think it's just, David, it's interesting, its Andy's research. The research we just did still shows that there is this group, or roughly 70% that like to not outsource, that they want to control. I think it’s still control for small business. And so, they're willing to take the risk because either they're not aware of what the risk is of having a penalty or the work that's involved in chasing an -- IRS chasing you or something. And maybe, we can do more to explain that. We don't try to go in from a threatening standpoint. But instead, from a value. And I think when you've never had that happen to you, we've had small businesses that even with us, something happens and they get a penalty notice from the IRS. It's extremely scary to them. It can -- the next -- the second one is I'm going to take your business, that kind of thing. And so, unless that's happened to you, I don't think they realize how much time that takes and focus off their business. And I think that -- so, to start with it, they don't understand the risk, then they just want the control. They want to do the payroll when they want to do it. They also -- for a major part of it, the control is the cash, right? A small business is not always -- is always concerned about when we would take the cash to do their payroll on a very automated basis and that they're maybe concerned that if they had the flexibility, if they don't quite have the cash to do it, they might tomorrow or the next day and they like controlling their cash. So we found that's still the biggest thing that will stop them from going to a full outsourcer is, I want to control my cash flow. I want to know exactly -- even though we'll tell them, hey we're going to take it a day before or something, they still want control of that. That's what we find is one of the biggest things. I don't know -- I agree with you, I think it's just a certain person that says I want to control and I want to do it myself and I'm not quite to that full outsource yet and I don't think they always know the price points, either. The difference between -- even Intuit with the tax information and getting updates and so forth, you're getting yourself up probably $500, $600, $700 a year too, versus $2,000 or $2,200, it's hard to believe that we don't get more.

Efrain Rivera

And David, margins, Marty or I should say, the profitability of SurePayroll at the levels that Marty was mentioning, which are getting close to scale, let's call it, no they're lower than Paychex. They're still attractive, but they're certainly lower than Paychex’s operating margins.

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

And that's at scale?

Efrain Rivera

I'm sorry?

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

At scale, they'll be lower.

Efrain Rivera

Yes. At scale, yes.

Martin Mucci

We have lunch set up for you in the room right behind us here. I want to thank -- I just want to tell you, I want to thank the team for the work that they've done. As you can probably see, I'm extremely proud of the Paychex executive team and all of our employees across the country for the great job that they do. It makes it easy to tell a good story. I thank you for those who have invested in Paychex. We hit a 52-week high today, so while you were locked in here, we did a 52-week high, it may keep you this afternoon. And so, we're very proud of that. We're very much looking forward to our future. As you can see, I think we have the technology, we have the leadership in sales, we have the leadership across the company to do a great job and we're certainly looking forward to that and make you very proud of the growth that we have as a company. So thank you very much for coming to Rochester. Please enjoy the lunch. We have some client videos that will play during lunch but it's very informal and just enjoy yourself at lunch and then we have buses that will pick you up at 1:15. We'll sign off on the webcast. I thank all those who joined the webcast today and thank you very much for your interest in Paychex.

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