Paychex (PAYX)

Q1 2012 Earnings Call

September 28, 2011 10:30 am ET

Executives

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

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

John M. Morphy - Vice President of Finance and Member of Executive Committee

Analysts

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

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

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

Nicole Conway - Stifel, Nicolaus & Co., Inc., Research Division

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

Matthew O'Neill - Credit Agricole Securities (USA) Inc., Research Division

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

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

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

James Macdonald - First Analysis Securities Corporation, Research Division

Roman Leal - Goldman Sachs Group Inc., Research Division

Gary E. Bisbee - Barclays Capital, Research Division

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

David Togut - Evercore Partners Inc., Research Division

Presentation

Operator

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Welcome and thank you for joining Paychex First Quarter Results Conference Call. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time. And I'd like to turn the meeting over to Mr. Martin Mucci, President and CEO of Paychex. Sir, you may begin.

Martin Mucci

Thank you and thank you all for joining us for our first quarter fiscal 2012 earnings release. Joining me today is Efrain Rivera, our Chief Financial Officer; and John Morphy. Efrain will review our first quarter financial results and guidance after my opening comments, and then we'll open it up for any questions.

We are executing our plans to continue to be the leading provider of payroll, human resource and benefit outsourcing to America's businesses. Our focus is on driving growth in terms of clients, revenue and profits, while continuing to provide outstanding service to our clients and their employees.

We are pleased with our operational and financial performance during the first quarter. Checks per client have improved 6 consecutive quarters, with first quarter growth at 2%. Payroll client retention has demonstrated continued improvement in the first quarter. Payroll ancillary product penetration also increased for the first quarter over the same quarter a year ago. And although the selling environment remains challenging in light of weak new business formation, all of the initiatives we completed the past fiscal year that we have talked about in previous calls are in place including the updated compensation plan for our representatives, our revised training programs and next generation sales force tablets with improved lead generation and tracking tools. I believe we have everything in place to continue to support our sales teams' ongoing success. In the first quarter, we have experienced an improvement in payroll sales representative turnover, a statistics that had increased in the same period just a year ago.

I would also like to take a moment to talk about the recent hiring of our new sales leader. As you are aware, Mark Bottini, formerly at Ricoh, will be joining Paychex in mid-October as the Senior Vice President of Sales. I'm excited to have Mark on board and look forward to working with him. Mark brings extensive experience with a 24-year career in sales at Ricoh and IKON, and strong leadership where -- having managed over 3,500 sales reps at IKON and Ricoh and is responsible for all U.S. sales for the company. He was able to join me at our recent year-end sales recognition event last week and his presence was received positively there and he was able to have focused sessions with many of the Paychex top sales performers.

We are also pleased with the efforts of our employees on many fronts. Client satisfaction results continue to be at exceptionally strong levels. We find this a particularly telling metric in light of the increasingly complex payroll and human resource services rules and regulations our clients are required to adhere to.

While continuing our product development investment in Paychex next-generation applications, we were able to achieve strong operating margins in the first quarter through continued productivity in our operation team. While our results for the first quarter were encouraging, we have not changed our expectations on full year guidance from that provided in June. Our expectations are that increases in checks per client will moderate through fiscal 2012 as quarterly comparisons become more challenging. We expect the favorability in expenses and leveraging to moderate as we continue our planned investments.

Our 2 acquisitions in 2011 are creating excellent opportunities in both their markets, SurePayroll providing us our anticipated entry into the online market. Software as a Service product, an area positioned to grow as the 5 million small businesses who calculate their payroll manually move to the Web. We continue to penetrate the financial advisor marketplace with ePlan Services, further expanding our successful 401(k) service growth. Both SurePayroll and ePlan offer quality service and from a client control standpoint, we offer a full range of payroll outsourcing alternatives. Clients who want more control have SurePayroll, where our clients who want a high level of personal interaction with a dedicated payroll specialist have the Paychex model.

I would now like to turn the call over to Efrain Rivera to review the financial results. Efrain?

Efrain Rivera

Thanks, Marty. Yesterday afternoon after the market closed, we released our financial results for the quarter ended August 31, 2011 and we filed our Form 10-Q. It provides additional discussion and analysis of the results for the year. These are available by accessing the IR page at paychex.com.

This teleconference will be -- is being broadcast over the Internet and will be archived and available on the website for approximately one month. I'd also like to take a moment to thank John Morphy for his presence here today and for his invaluable assistance in my transition to Paychex, and to introductions to the analyst community.

As Marty said, we're pleased with the financial results for the first quarter of fiscal 2012. I'll discuss some of the key highlights here. Checks per client, as Marty indicated, increased 2% for the first quarter. This was consistent with the growth we saw for the fourth quarter fiscal 2011. Total service growth grew 9% in the first quarter but excluding SurePayroll and ePlan, our total service revenue growth would've been 7%. Operating income, net of certain items and as a percentage of service revenue, increased to 39.6% from 37.3% last year. This increase is driven by the management of personnel costs, expenses and timing of spending on certain investment projects.

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