Paychex (PAYX)

Q2 2012 Earnings Call

December 21, 2011 10:30 am ET


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

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


Anthony McCready - Northcoast Research

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

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

Julio C. Quinteros - Goldman Sachs Group Inc., Research Division

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

Vishnu Lekraj - Morningstar Inc., Research Division

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

Nathan A. Rozof - Morgan Stanley, Research Division

Ashwin Shirvaikar - Citigroup 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

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

James Macdonald - First Analysis Securities Corporation, Research Division

Rayna Kumar - Evercore Partners Inc., Research Division

Gary E. Bisbee - Barclays Capital, Research Division



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Welcome, and thank you for standing by. [Operator Instructions] Today's conference is being recorded. [Operator Instructions] I would now like to turn the meeting over to Mr. Martin Mucci, Chief Executive Officer.

Martin Mucci

Thank you, Christie, and thank you, everyone for joining us for our Second Quarter Fiscal 2012 Earnings Release Call. And joining me today is Efrain Rivera, our Chief Financial Officer. Efrain will review our financial results for the quarter and our guidance for the full year after my opening comments, and then we'll open it up for your questions.

Paychex delivered solid results for the second quarter. We are focused on our strategy to remain the leading provider of payroll and human resource and benefit outsourcing to America's businesses. We continue to drive growth in revenue and profits while providing industry-leading service and products to our clients and their employees.

Investing in our business remains a priority. We recently launched an expansion of our software-as-a-service product offerings with our new Paychex mobile iPad application. This will permit our clients and their employees to have full access to the products and do anything that they could do now over the Web on a PC or a laptop.

We also unveiled a newly expanded single sign-on landing page and message center that users see when they sign in. This landing page puts all immediate information about the products that a user has in one place and with the full features and functionality of Paychex online services. We continue to invest in product development and supporting technology, which is a key building block to our future success, and we're excited about these new products that we've unveiled.

We were also pleased that several key business indicators continued to show improvement, including the following: Our checks per client have improved for 7 consecutive quarters, with growth for the second quarter at 1.5%. Growth for the first quarter was at 2%, and this moderation in growth was expected and anticipated, and we talked about it on the last quarterly call. Payroll client retention continues to demonstrate improvement, with fewer client losses year-over-year. Client satisfaction results continue to be at exceptionally strong levels, and we find this a particularly telling metric in light of the increasingly complex payroll and Human Resource Services rules and regulations that our clients are required to adhere to.

While we see an increase in sales from our CPA and web referrals, our sales from new businesses are on par with last year. Our main selling season is about to get underway, and we have -- we will have a better read on the selling environment in the next quarter.

Having the sales leadership in place, our new compensation plan, revised training programs and next-generation sales force tablets with improved lead generation position us well for the selling season, and I believe our sales force is doing an exceptionally good job at communicating the strength of our national brand and product and service quality. In addition, in the first 6 months, we have experienced a decline in the payroll sales rep turnover, a statistic that had increased in the same period just a year ago.

While continuing our product development investment in the Paychex next-generation applications, we were able to achieve strong operating margins by improving productivity and leveraging expenses. We have reaffirmed our expectations on full-year guidance provided in June. We expect that increases in checks per client will continue to moderate through the remainder of fiscal 2012 as quarterly comparisons become more challenging. We also expect to continue planned investments in our business, which will impact our operating income margin.

Our 2 acquisitions in 2011 are creating excellent opportunities in both of their markets. SurePayroll continues on track in a do-it-yourself online SaaS market, and we continue to make inroads in the financial advisor marketplace with ePlan Services, which further expands our successful 401(k) services business, where we continue to sell and service more plans than anyone else in the industry.

Both SurePayroll and ePlan offer quality service and from a client standpoint allow Paychex to offer the full range of payroll and 401(k) outsourcing alternatives. Clients who want more control have SurePayroll on the payroll side, where clients who want a higher level of personal interaction with a dedicated payroll specialist have the fully outsourced model we're known for.

I would now like to turn the call over to Efrain Rivera, who will review the financial information. Efrain?

Efrain Rivera

Thanks, Marty. Yesterday afternoon after the market closed, we released our financial results for the second quarter and 6 months ended November 30, 2011 and filed our Form 10-Q. It provides additional discussion and analysis of the results for the year. These are available by accessing the IRR page at This teleconference is being broadcast over the Internet and will be archived and available on our website for about one month.

As Marty said, Paychex delivered solid results for the second quarter of fiscal 2012. Some of the key highlights are as follows: Checks per client increased 1.5% for the second quarter and 1.8% for the 6 months. The growth has moderated slightly from the 2% we saw in the first quarter. But as we stated in that quarter, growth in checks per client was expected to moderate through the year, impacting quarterly comparisons in our payroll and HRS revenue.

Total service revenue grew 7% for the second quarter and 8% for the past 6 months. If we exclude SurePayroll and ePlan, this growth would've been 5% for the quarter and 6% year-to-date. Operating margin, which is our operating income net of certain items compared to our total service revenue, came in at 38.7% for the second quarter. Our year-to-date margin was 39.2%. We'll discuss this more later on. The interest rate environment remains at historically low levels. Our combined portfolios have earned an average return of 1.3% for both the second quarter and 6 months, down from 1.5% last year.

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