Paychex Earnings Call Insights: Payroll Services Growth and Core Clients

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

Payroll Services Growth

Glenn Greene – Oppenheimer: I wonder if you could first start with the underlying assumptions you have for payroll services growth going into ’14 kind of thinking through sort of the net customer growth, revenue per check, maybe some of the ancillary whatnot, maybe just sort of help us walk through the high level of thinking to get through to 3 to 4?

Efrain Rivera – SVP, CFO and Treasurer: So as you know we ended the year at 2 and so we are expecting that to improve. We see pricing a little bit better than we had this year. We expect net client growth to improve a bit and we expect checks per payroll to moderate from where we are. In the quarter we saw moderation. We think that we are reaching, we are building down in terms of what we expect the contribution. The checks per payroll to include and we expect some modest upticks both on client growth and on pricing.

Glenn Greene – Oppenheimer: On the pricing, is it kind of reasonable to think that the net pricing was kind of in the 1% to 2% range and you are kind of suggesting a little bit of an uptick going into ’14 is that the right way to think about it?

Martin Mucci – President and CEO: That’s probably little bit local and I think we were more towards the 2% range and we are expecting it to tick up a bit from there.

Glenn Greene – Oppenheimer: Then just one more and I’ll jump back in the queue, but sort of thinking through the 570,000 customers which you grew in direction like close to 1% is there any way to sort of parse how much of that was SurePayroll customer growth versus the Core payroll growth.

Martin Mucci – President and CEO: Well, Core payroll growth was modest. We have about five different customer bases in there somewhere up, somewhere down core was modestly up share was up and then there were some other older platforms that were down.

Glenn Greene – Oppenheimer: With Sure kind of like what it’s been doing in mid-teens or so kind of growth?

Martin Mucci – President and CEO: Double-digit, yes.

Core Clients

Sara Gubins – Bank of America-Merrill Lynch: Of your payroll services clients. I’m wondering if you could parse out the clients that have around 10 employees or fewer did that grow slower or faster than your overall business?

Efrain Rivera – SVP, CFO and Treasurer: I don’t think it changed that dramatically. What I will say, Sara, if you look at sales now in the back half of the year versus the first half we saw an uptick in the size of Core clients. So, I don’t think it’s enough yet to effect of the base as a whole, but we did see an increase that notable in terms of size of clients.

Martin Mucci – President and CEO: Well, we think the small market kind of the under 50, but really under 20. I think you could say.

Sara Gubins – Bank of America-Merrill Lynch: On the margin front it looks like next year you are expecting less margin leverage in operating income as a percent of service revenues that you got in fiscal ’13. Is that fair and can you talk a little bit about why?

Efrain Rivera – SVP, CFO and Treasurer: No. I don’t think it’s fair. So, we always go through this discussion around how precisely we are going to guide. So, let me just review what has happened, right. So, if you look at what happened over the past two years and actually I’ll go back three years, we were at 36.3, 37.1 and 37.8. So, when we guided last year, we guided in similar fashion. We expected to be north of 38, but we don’t expect it to reach 39. So, we said approximately 38. So, we do expect some margin. I wouldn’t go precisely the amount that we got this year, but we’re going to continue during the year to produce some leverage. So, we approximately 38 just simply as to say, we did more on a call it close to the 39.

Martin Mucci – President and CEO: We’re always looking as we’ve said in past calls. We’re always looking for additional margin and different additional leverage as we grow so.

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