Paychex Earnings Call Insights: Bookings Growth Details and Business Creation

Paychex (NASDAQ:PAYX) recently reported its third quarter earnings and discussed the following topics in its earnings conference call.

Bookings Growth Details

David Togut – Evercore Partners: Marty you referred to strong bookings trends year-over-year in the third quarter, can you quantify what the year-over-year bookings growth was in Q3, both for the payroll services business and the HR services business?

Martin Mucci – President and CEO: David we don’t get that specific but I will tell you that it certainly the best new revenue we’ve seen in a number of years, new sales revenue on the Core payroll side in particular and where we put a lot of efforts. So while we don’t give the actual detailed number, we certainly were pleased with the new – level of new business revenue that came in and in comparison to the last three or four years it certainly was very positive.

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David Togut – Evercore Partners: I believe for Q2 you indicated bookings were sort of flattish or down a little year-over-year, did you actually see bookings growth year-over-year in Q3?

Martin Mucci – President and CEO: We certainly have seen growth and I’d say they were fairly – we did see some improvement in Q2, but we certainly saw positive growth in the third quarter during our peak selling season and we were pleased with it.

David Togut – Evercore Partners: And then Efrain OpEx was down year-over-year. It looks like you did have a restatement in the year-over-year operating expenses but is declining operating expenses sustainable with revenue growing at about 4% cliff?

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Efrain Rivera – SVP, CFO and Treasurer: I noticed in some of the notes people were asking the same question, David. So, here is our view, we think that the investments in technology should lead to increases in productivity and Marty made a decision four, five years ago to start the to start the acceleration of IT expense and what you’re seeing there is a result of a strategy, not a result of something opportunistic that we did in the quarter. So I can’t guarantee. It will be flat. Marty and I won’t do that, but what we can guarantee is that we’re committed to leveraging expenses, and that’s what you saw in the quarter…

Martin Mucci – President and CEO: Yeah, that’s exactly right.

David Togut – Evercore Partners: And just finally can you bracket for us what the net price increases year-to-date in payroll services, once you offset the discounting against the gross price increase?

Efrain Rivera – SVP, CFO and Treasurer: Yeah, and what I’ve said David consistently is we were at the lower end of what we talked about at our Investor Day in the summer and that range was 2% to 4%. We’re at the lower end of that range.

David Togut – Evercore Partners: And just finally, what would be your expected price increase for payroll services in fiscal 2014?

Efrain Rivera – SVP, CFO and Treasurer: We’re going to be in that range and we’ll talk to you more about it on the next call.

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Business Creation

Jason Kupferberg – Jefferies: So just wanted to build a little bit on the last question here. So with pricing kind of running at the lower end of the range as you guys said and when you roll that into revenue growth, you’re running I guess 1% to 2% so far this fiscal year. I understand Q4 will accelerate to maybe 3% or so. You guys had talked about kind of a mid-single digit guidance for the three-year period, 2013 to 2015, last summer. Is that something you still are very comfortable you can attain and how much improvements you need in terms of new business creation to actually get there?

Efrain Rivera – SVP, CFO and Treasurer: Yes, I think Jason, to your point we talked about that as a target. I don’t think we committed the same, we do that every year. What we need is unique growth and we need good price attainment and you can never say you are comfortable about something but we certainly think that within this period that’s something that we are targeting.

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Martin Mucci – President and CEO: And I guess to your point. I mean that’s kind of a CAGR target over that period is that right?

Efrain Rivera – SVP, CFO and Treasurer: No I don’t view it and I think it’s going to be a little bit different given kind of where we’re starting it to. I think that’s what we think is possible in this environment and again, as I said we need some unit growth, we need price to get there. So, that’s what we are executing against…

Jason Kupferberg – Jefferies: So, it sounds more like mid-single-digit is kind of aspirational at some point during that period but not in aggregate over that period is that fair?

Martin Mucci – President and CEO: Yes, it will be tough to do that in aggregate over that period.

Jason Kupferberg – Jefferies: What percent of new businesses created that you guys have won fiscal year-to-date or choosing the SurePayroll product versus the full service offering and has there been any material change in that mix over the past couple of years?

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Efrain Rivera – SVP, CFO and Treasurer: No. There hasn’t been a significant change in that mix. And what I’d say is that we have consciously been devising strategy working on our strategies from a sales standpoint, so that those lines get a little bit blurred. And SurePayroll is growing rapidly and as Marty said we also had growth in revenue in our Core payroll business. So, this was a quarter where we saw growth in both segments of the business.

Martin Mucci – President and CEO: Yeah, remember that Jason, we still see that as they’re getting their share of new business growth and are still wanting to do it themselves or be online only, and we’re getting our share of new business growth that is coming to those who want to totally outsourced. So it’s not like we’re seeing a shift between the two. There is opportunity for both and I think we don’t really see it as kind of a total pie for us that is now shifting to them or anything. Sure payroll is obviously doing well. There’s smaller numbers to grow on, but they’re seeing nice growth in their sales and revenue and we’re seeing nice growth in our revenue as well in the sales…

Jason Kupferberg – Jefferies: In other words not cannibalizing the core at this point?

Martin Mucci – President and CEO: Not really, we’re not, no.

Efrain Rivera – SVP, CFO and Treasurer: One thing I should clarify. We just finished a marketing study on payroll services, pretty extensive study. There is no evidence whatsoever that an outsourcer goes back to a DIY solution. It just doesn’t exist. So the issue is really kind of captured at the front-end, not erosion of existing clients. So people select a solution and then tend to stay with it.

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Jason Kupferberg – Jefferies: And just lastly on that point, can you just remind us what the average annual differences in annual revenue between a short payroll customer and a client on the traditional full-service platform.

Efrain Rivera – SVP, CFO and Treasurer: Yeah, so short payroll is going to be around 1,800 and traditional core – I’m sorry, 800 and a traditional payroll – I should say, traditional is a wrong word – our fully outsourced solutions is going to start around 1,800.

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