Paychex's CEO Discusses Q3 2012 Results - Earnings Call Transcript

Paychex (PAYX)

Q3 2012 Earnings Call

March 29, 2012 10:30 am ET

Executives

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

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

Analysts

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

David Togut - Evercore Partners Inc., Research Division

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

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

Kartik Mehta - Northcoast Research

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

Ashwin Shirvaikar - Citigroup Inc, Research Division

Gary E. Bisbee - Barclays Capital, Research Division

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

James F. Kissane - Crédit Suisse AG, Research Division

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

James Macdonald - First Analysis Securities Corporation, Research Division

Bryan Keane - Deutsche Bank AG, Research Division

Sara Gubins - BofA Merrill Lynch, Research Division

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

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

John T. Williams - UBS Investment Bank, Research Division

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

Presentation

Operator

Welcome, and thank you for standing by. [Operator Instructions] Today's conference is being recorded. [Operator Instructions]

Now I would like to turn the call over to your speaker, to President and CEO, Martin Mucci. Sir, you may begin.

Martin Mucci

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

Paychex has made good progress in many areas during the third quarter. We continue to focus on our strategy as the leading provider of payroll human resource and benefit outsourcing to America's businesses. We are driving growth in revenue and profits while providing industry-leading service and products to our clients and their employees.

We were pleased with many of the key business indicators in Q3. Our checks per payroll has improved for 8 consecutive quarters. Growth in checks per payroll continue to be positive, with the third quarter comparable to the second quarter. Client satisfaction results continue to be at strong high levels, indicating excellent operational execution. And I find this particularly rewarding and telling of our employees the great work they're doing with increased complexity of regulations at the federal, state and local level. And our client retention continues to improve, with payroll client losses down another 5% from the third quarter of last year.

Our third quarter encompasses an important selling period, as you know. Sales of new payroll clients, excluding share payroll during the third quarter, increased moderately compared to the same period last year. While we continue to experience the impact of a challenging environment for new business formation, we find that in the third quarter period in the last 2 years we have seen, this is the first third quarter period in the last 2 years where we have seen an increase in sales compared to the prior year same quarter.

We are experiencing favorable results, I think, from our focus on CPA referrals channels and search engine marketing, and we also did well against all of our competitors. SurePayroll sales have also performed well. Our results reflect the sales force that is doing a great job communicating the strength of the Paychex brand and our product and service quality. With a solid sales leadership team, this year's new compensation plans and sales support tools in place, we have continued to also experience a decline in the payroll sales representative turnover, a statistic that had increased the same period a year ago.

Investing in our business remains a priority. We are excited about our achievements during the third quarter, which include the following: We launched additional enhancements to our software-as-a-service product offerings with our Paychex Online Mobile applications for tablet devices with our Paychex Android app. This will permit clients and their employees to have full access to products and do anything they do now over the web or on a PC or laptop. This is a continuation of our aggressive technology introduction this fiscal year that started with our single sign-on and landing page in October, our iPad app in November, this Android app just released in February and our smartphone app anticipated in June.

We also unveiled 2 new products. First, our Business Insurance Payment Service relieves business owners of the administrative burdens associated with paying their insurance premiums. Second, our Paychex Advisor Select 401(k) is a new offering that is specifically designed for the fee-based financial advisors.

We acquired Icon Time Systems, a provider of time and attendance solutions for small and medium-sized businesses. We have had a successful relationship with Icon being sold through our core sales force and related to our time and attendance offerings, a clock really for the under-20 employee group. And there was an opportunity to incorporate them into our company, which we seized upon. We continue to invest in our Paychex next-generation and its suite of innovative products. We believe this is the key building block to our future success, and we're excited about it.

Our 2 acquisitions from 2011 are creating excellent opportunities in both their markets. SurePayroll continues on track in the do-it-yourself SaaS market. And we continue to make in-roads into the financial advisor marketplace with ePlan services, which further expands our successful 401(k) services, 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 a full range of payroll and 401(k) outsourcing alternatives.

We have reaffirmed our expectations on full year guidance provided last June. We expect that increases in checks per client will continue to moderate, and we also expect to continue our planned investments in our business, which will impact our operating income margin. As we move toward the end of this fiscal year, I am proud of the efforts of our employees in all areas of the company. And on behalf of our clients and shareholders, I'm excited about our progress.

I will now turn the call over to Efrain Rivera to review the financials in more detail. Efrain?

Efrain Rivera

Yesterday afternoon after the market closed, we released financial results for the third quarter and 9 months ending February 29, 2012. We also 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 is being broadcast over the Internet, and it will be archived and available on our website for about one month.

As Marty indicated, Paychex continued to deliver positive results during the third quarter of fiscal 2012. Some of the key highlights are as follows: Checks per payroll increased 1.8% for the third quarter, which was consistent with the second quarter. This has moderated slightly from the 2.0% for the first 9 months. This moderation is anticipated to continue and will eventually impact quarterly comparisons in both payroll and HRS revenue.

Checks pay per payroll -- and let me just clarify that checks per payroll are exactly the same calculation we did and referred to as checks per client. We simply think it's a bit more accurate to refer to it as checks per payroll. It's an estimate of the average number of checks issued per client payroll run. During the third quarter, the estimation process was refined. Previously disclosed growth percentages are moderately higher, 2/10, 3/10 higher. But directionally, they were unchanged. Also at this point, we don't include SurePayroll in our checks per payroll statistic.

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