Paychex, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the Paychex second quarter FY20 earnings conference call. At this time all participants are in a listen-only mode. After the speaker presentation there will be a question and answer session. To ask a question during the session you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Martin Musi. Please go ahead.

Thank you. And thank you for joining us for our discussion of the Paychex second quarter fiscal 2020 earnings release. Joining me today is Efren Rivera, our chief financial officer. This morning before the market opened we released our financial results for the second quarter, ended November 30th, 2019. You can access our earnings release on our investor relations webpage. And our form 10Q will be filed with the SEC within the next few days. This teleconference is being broadcast over the internet and will be archived and available on our website for about one month. On today's call I will review the business highlights for the second quarter. Efren will review our second quarter financial results and discuss our guidance for fiscal 2020. And then we'll open it up for your questions. Financial results for the second quarter of fiscal 2020 reflect good progress on our key initiatives. Total revenue growth was 15% for the quarter. Management solutions revenue grew 6% and PEO and insurance services revenues grew 57% including the results from the Oasis acquisition. We have been investing significantly in the area of sales, marketing, service and technology. These investments are paying dividends as we've seen continued momentum in new sales efficiencies, excuse me, in operations and the introduction of new and enhanced products. Paychex is being known much more as a provider of innovative HR technology solutions than ever before. Our investments in demand generation and sales are contributing to solid growth in new sales revenue. And in particular we are pleased with the strong performance of the mid-market space, aided by greater attachment of our broad suite of HCM, SaaS-based software solutions, such as our time and attendance and HR administration products. We are now in the main selling season. We believe we are well positioned for continued momentum. We are also continuing to experience improved efficiencies in our operations through the use of self-service functionalities in our robotic process automation efforts. By automating more routine processes, we are reducing operating costs and providing more time for more high-value client-service interactions with our team. The evidence of high quality service by our teams is demonstrated by our client retention and satisfaction scores, which remain consistent with record high levels. We have seen continued increases in net promoter scores, most notably in the mid-market space. Let me touch briefly on what we are seeing in the small business environment. The Paychex IHS market small business employment watch showed hourly earnings growth at its highest level since 2011, while job growth has been holding steady. Wage increases are beginning to reflect the tight labor market for small businesses. The constant battle for talent highlights the importance of having a partner like Paychex who can provide solutions to simplify HR recruiting and onboarding, and a competitive benefits package to attract and retain top talent. We are currently operating in an unpredictable regulatory environment. Compliance with a rapidly evolving regulatory landscape is one of the many reasons employers choose Paychex for their HR needs. We are proud of our leadership role within the industry, partnering with regulatory agencies, keeping our clients informed, and quickly updating our systems to be in compliance and support changes as they become effective. Just this month, the IRS released the final version of the new Form W-4 to be used by all new employees and for all adjustments effective January 1, 2020. By remaining actively engaged with the IRS and providing feedback throughout their process, we were able to have the new forms and related calculations integrated into our systems within minutes of the issuance by the IRS. The workplace continues to evolve both in technology and the way people work, and we are very proud that Paychex has been included on the Fortune magazine's Future 50 list of companies that are best positioned for long-term growth. In addition to solid financial results, Paychex was recognized for its commitment to innovative technology offerings designed to meet the needs of the evolving workplace. We continue to focus on enhancing our product offerings and the use of technology to remain a leader in this industry. Last quarter at HR Tech, we discussed some of the newest products being introduced. This month, we launched one of those products, Pay On Demand, which enables workers to access wages they have already earned before payday. This pay option is a great tool for recruitment and retention of talent as it allows employees to be paid when they want, allowing flexibility, more flexibility than the traditional weekly, bi-weekly, or monthly pay schedule. Other companies in the industry offer similar services on a smaller scale, but our solution is unique in that it provides our clients with flexible payment options, including direct deposit, pay card, and digital payment into Amazon or PayPal accounts, however the client employee wants it. The other exciting products we demonstrated at HR Tech are progressing on track and will be launching in the coming months. We continue to focus our investments in emerging technologies such as wearables, real-time payments, product integrations, data analytics, and artificial intelligence. We are proud that Paychex's commitment to tech innovation has been recognized by industry experts. We were very proud to earn the awesome new technologies for HR Award at the HR Technology Conference and Expo in October. This recognizes the enhancements and increased flexibility of our Paychex Flex service product. We were also named to the HR Examiner 2020 watch list for artificial intelligence and HR. This recognized our innovation using AI tools and machine learning to strengthen existing operations. Our Flex Assistant chatbot currently answers over 200 commonly asked questions, spanning the Flex suite of products, and seamlessly integrates with real-time live chat capability with a Paychex service agent, 7 by 24 by 365 days a year. In addition, we have intelligent tools within Flex architecture that deliver a more personalized user experience through learning individual user preferences over time. That can be listing out how to do something or even watching now short videos to learn how to use the Flex product. Paychex Flex also won a Gold Award for Excellence in Technology from Brandon Hall Group in the category of Best Advanced in HR or Workforce Management Technology for Small and Mid-Sized Businesses. This is the fourth straight year that Paychex Flex has been honored with a Technology Excellence Award, which validates our tech vision, investment in that vision, and the value tech brings to our clients. We are proud of the experience our Flex platform has given our employees enhanced through automation we have built into the application based on individual patterns and preferences. We also continue to see increased utilization of our industry leading 5-star rated mobile app. During the quarter we experienced an increase of over 50% in the number of mobile sessions and a 35% increase in the number of mobile only users. This increased mobile usage by clients and their employees has led to efficiencies internally and higher net promoter scores. We are serving clients and their employees the way they want to be served. Shifting to our PEO business, the acquisition of Oasis was the largest acquisition in our history and doubled the number of worksite employees we serve in our PEO as with any significant acquisition. The integration efforts can cause some initial disruption in sales cadence and some operating inefficiencies as we realize the expected synergies. As we discussed last quarter, we realized some of this in the first part of this fiscal year as we went through that process. That has led to slower than anticipated revenue growth for the year. However, we believe we are in a good position now as we progress with full sales rep headcount and our operation teams continue to focus on what's most important. That is serving our clients and providing them the right combinations of solutions to help them succeed. We are excited about the continued strong demand for PEO services in the markets that we serve. In summary, we continue to focus on growing our business by making things simple for our clients. Our innovative technology allows us to service our clients in a way that they want, when they want, and where they want. We are focused on continuing to introduce innovations to our technology enabled service to improve business efficiency and drive even more value for our clients. Our full suite of HR solutions has been the recipe for growth and positions us for continued growth going forward. The efforts of our employees and their commitment to our clients are definitely making a difference. I will now turn the call over to Efrain Rivera, our Chief Financial Officer, to review our financial results for the second quarter. Efrain?

Thanks, Marty, and thanks to everyone on the call. I'd like to remind you that today's conference call will contain forward looking statements, refer to the customary disclosures. In addition, I'll periodically refer to non-GAP measures such as EBITDA, et cetera. Again, refer to our investor presentation press release for reconciliation of second quarter to related GAP measures. I'll begin by providing some of the key highlights for the quarter, and then I'll follow up with some greater detail in certain areas and wrap with a review of the fiscal 2020 outlook. As you saw, total revenue growth was 15% for the second quarter. Oasis contributed approximately a little bit less than 9% to this growth. Expenses increased 18% for the second quarter, $649 million. Similar to last quarter, increases in compensation related costs, PO direct insurance costs, and the amortization of intangible assets contributed total expense growth. Total expense growth was primarily driven by the acquisition of Oasis. Operating income increased 11% to $342 million. Operating margin was .5% for the second quarter, and EBITDA increased 16%. And EBITDA margin was approximately 40% for the quarter. The EBITDA margin increased slightly compared to a year ago. While operating margin declined due to the amortization of intangibles associated with the Oasis acquisition, as you all know. Other expense net for the second quarter of $5 million includes interest expense of approximately $8 million related to long-term barrings. As a reminder, we borrowed $800 million of bonds to fund a portion of the Oasis purchase price. The effective tax rate was .2% for the second quarter compared to .8% for the same period last year. Net income increased 10% to $259 million, and adjusted net income increased 8% to $254 million. Diluted earnings per share were up 11% to $0.72 for the second quarter, and adjusted diluted earnings per share increased 8% to $0.70. We received a little over $0.01 of benefit from stock-based comp payments during the second quarter, which is included for GAAP, but we excluded for our adjusted diluted EPS. Let me provide some additional color in certain areas. Total service revenue was up, as I said, to $971 million, 15%. Within service revenue, Management Solutions revenue increased 6% to $727 million, and PEO and insurance services increased 57% to $244 million. Management Solutions revenue growth of 6%, which actually exceeded our expectations, included a contribution from Oasis of slightly less than 1%. The remaining growth was primarily driven by increases in our client bases across many of our services, along with growth and revenue per client. Revenue per client improved as a result of higher price realization and increased penetration of our suite of solutions, particularly time and attendance, retirement services, and HR outsourcing. And that's been a focus of our efforts over the last several years, and if you chart our growth and revenue per client, you've seen a pretty steady increase. Retirement services revenue also benefited from an increase in asset PEO revenue earned on the asset value participant funds. PEO and insurance services revenue growth of 57% was largely due to the acquisition of Oasis, which contributed 47% to this growth. In addition, the increase reflects growth in clients and client worksite employees across our existing PEO business. Insurance services revenue benefited from an increase in the number of health and benefit applicants, partially offset by the impact of softness and workers' compensation premiums, as we've been discussing all year. Interest on funds held for clients increased 9% for the second quarter to $20 million, primarily as a result of higher realized gain, average investment balances, and interest rates. Funds held for clients' average investment balances were impacted by wage inflation and increases within our base offset by changes in client base mix and timing of collections and remittances. Turning to our investment portfolio, we continue to invest in high credit quality securities. Our long-term portfolio has an average yield now of 2.1%, average duration of 3.1 years. Our combined portfolios earned an average rate of a return of 2% for the second quarter, up from .9% last year. Quickly looking at -to-date results, total revenues up 15% to $2 billion. Service revenue up 15% to $1.9 billion, with management solutions reflecting growth of 6% to $1.5 billion. PEO and insurance is reflecting growth of 57% to $491 million. Interest on funds has grown 14% to $40 million, operating income up 10% to $691 million, and net income and diluted earnings per share each increased 9% to $523 million and $1.45 per share respectively. Adjusted net income increased 7% to $511 million and adjusted diluted earnings per share increased 8% to $1.42 per share. Let me walk through the highlights of our financial position. It remains strong with cash, restricted cash. Total corporate investments of $708 million as of the end of the quarter. Funds held for clients were $3.7 billion compared to $3.8 billion as of the end of last year, May 31, 2019. Funds held for clients, as you know, vary widely on a -to-day basis, an average $3.7 billion for the second quarter. Total available for sale investments, including corporate investments and funds held for clients, reflected net unrealized gains of $39 million as of the end of the quarter compared with $20 million as of the end of last year, May 31, 2019. Total stockholders' equity was $2.6 billion as of November 30, 2019, reflecting $444 million in dividends paid and $172 million of shares repurchased during the first six months. Return on equity for the past 12 months has been a stellar 42%. Cash flows from operations were $565 million for the first six months, a robust increase of 14% from the same period last year. So strong performance on cash flow. The increase was primarily driven by higher net income and non-cash adjustments. Increased in non-cash adjustments was primarily due to higher amortization expense, largely driven by intangible assets acquired through the acquisition of OASIS. Let me talk about 2020 guidance. I remind you that our outlook is based on our current view of economic conditions continuing with no significant changes. Though we have reflected the impact of the three interest rate cuts that have already occurred this fiscal year, I'll provide our current outlook in some color on a couple of areas. We provided updates to the guidance as you saw. Management solutions revenue has been trending positively and now we anticipate it to grow in the range of 5 to 5.5%. This is raised from the previous guidance of approximately 5% growth. And we're doing well in almost all of the buckets that comprise that revenue stream. PO and insurance services is now anticipated to grow in the range of 25 to 30%. As Marty previously mentioned, we got off to a slow start with the OASIS slower than we anticipated. We still maintain a strong long-term outlook and continue to execute on our plans to integrate our PO business. Interest on funds held for clients is now anticipated to grow approximately 4%, modified from a range of 4 to 8%. We started the year and this simply reflects the most recent federal fund rate cuts. And diluted earnings per share growth has been increased to a range of 9 to 10% growth, raised from our guidance of approximately 9%. Other guidance remains unchanged as followed. Total revenue 10 to 11%. Operating income as a percent of total revenue approximately 36%. Even margin for the full year expected to be approximately 41%. Effective income tax rate expected to be in the range of 24 to 24.5%. Net income adjusted net income and adjusted diluted earnings per share are all expected to grow at approximately 9% for fiscal 2020. Now let me provide a little color on the back half of the year. As I indicated, PO and insurance revenues are now anticipated to grow in the range of 25 to 30%. While the second quarter results were within the range provided, 56 to 60%, we have taken a more conservative approach for the back half of the year given our current trends. In particular, we've continued to experience the lower compensation, lower workers' compensation insurance rate that have moderated our insurance services growth. We anticipate that this trend will likely ease as we enter the next fiscal year. We're also seeing modestly lower at-risk insurance attachment in the PO. In addition, this change reflects impacts from the slower start from the OASIS acquisition. We now anticipate that growth for the third quarter PO and insurance will be approximately 10%. Management Solutions guidance was increased to a range of 5 to .5% growth from our previous guidance of approximately 5% due to favorable trends that we've seen in the first half of fiscal 2020. This incorporates the higher than anticipated growth achieved in the second quarter and assumes the third quarter will come in the full year range. I refer you to slide 16 in our investor presentation, which shows the impact of the reclass in the fourth quarter of fiscal 2019 of an immaterial amount of OASIS revenue. Please note that the as-adjusted numbers on this slide represent the base on which we apply the growth rates we are guiding to in Management Solutions and PO and insurance revenues. And the reason I call that out is when I look at your models, two-thirds of you do it that way and one-third have split between third and fourth quarter. Please look at that number so that you can adjust your models correctly. Operating margins, which for the full year are anticipated to be approximately 36% due to varied quarterly. Our margins for the second quarter exceeded the guidance we provided in the last call, which was a range of 33 to 34%. That beat was impacted by delays in hiring related to the tight labor market. We still anticipate margins of approximately 38% for the back half of the year. We expect to continue to invest significantly. And sales and marketing in the back half of the year, while still achieving our target of a full year operating margin of approximately 36%. And with all that, I'll turn the call back over to Martin.

Thank you, Efren. I will now open the call to questions,

please. Ladies and gentlemen, as a reminder, if you would like to ask an audio question, please press star, then the number one on your telephone keypad. Your first question comes from the line of Ramsey Ellisel from Barclays.

Hi, thanks for taking my question. I appreciate it. I wanted to ask about the trend and the lower workers comp insurance rates. And I just was trying to get an idea of your visibility to how those rates trend. How do you, what gives you confidence about those rates over time going into next year? I think you indicated sort of becoming more favorable. What type of reads do you gain on that, you know, on that rate?

Well, I'd say a couple of things. One is that because we have an insurance agency and our pricing policies on a virtually daily basis, we get a sense, a pretty clear sense of where that pricing is trending. That's one part. The second is it's influenced by what state workers compensation boards, where they're setting a pricing. And we know we have a pretty good sense of what states are contemplating or have contemplated changes in workers compensation insurance. So I think the combination of those and then the final thing is we're looking at the mix of revenue quarter by quarter. And we know that we started the year with a high compare and it starts to ease as we get into the back half of the year. A little bit.

Got it. OK. And then could you talk about your retention trends and the degree to which those trends are, you know, I would imagine moving in the right direction and giving you confidence in terms of raising the management solutions segment guidance for the year.

Yeah, we're continuing to see pretty much near record levels on retention across, you know, both small and midsize clients. We're seeing very good retention numbers. And so they've been very solid. And you know how conservative we are as we look forward. We still think they're going to we're going to maintain that going forward. So we feel that the value of the products, obviously, and along with the needs of the clients during this, particularly this kind of tight labor market, I think are really keeping the retention and we're not seeing out of businesses really increase either. So all both from an environment and from our performance, I think are both keeping are both keeping our retention numbers at record levels.

That's terrific. Thanks for taking my questions.

Thank you. All right.

Your next question comes from the line of Kevin McVeigh with Credit Suisse.

Great. Thanks. Hey, it seems like the organic growth, particularly in men's services is settling in at higher levels despite much tougher comps. Can you just frame out like how much of that is retention? Because, you know, and Maureen, I know you mentioned kind of maintaining those levels. Is it possible you kind of set a new level based on, you know, more of the SaaS offering as opposed to the traditional service? So maybe just the sensitivity on SaaS for service and what that can do to the retention over the course of time?

Yeah, I think it certainly does. I think we're appealing to the clients the way they want to be served, as I mentioned earlier, and their employees. The employees are playing, you know, a pretty strong role these days, more than I think ever in the past. As you see the mobile app, you know, 70 percent of the usage of the mobile app is the employee of the client. And so they're having a bigger impact on retention. And we started talking about that a couple of years ago. So I think that that does have an opportunity. The issue, though, is still, you know, when you see improvement, particularly on the small client basis, there are so many businesses that go out of business every year. And we've been in this a long time and it hasn't changed that dramatically. So what I think where you do have room for improvement is certainly from a service value standpoint. I think the need for clients, small businesses, mid-sized businesses, to have software as a service, to have mobile apps, to have self-service available to their employees, all those things are making them more valuable and stickier, I would say, to a client. So we certainly see some, we're optimistic, but we still also know that so many businesses start up and go out of business on the small end.

And just to follow up on that, Morty, real quick, if it's, you know, if you're bumping up at that 82 percent level, any sense of how much of that is failures versus, you know, maybe other parts that are driving the attrition?

I think if you put all together kind of no employees out of business, bought or acquired, you know, it's typically been 50 percent plus a little bit. So that accounts for about half of it and a little bit more even sometimes. And then the other pieces are price and it's still just as competitive as it's always been, hasn't really increased, but that number has been pretty consistent. And then service value kind of stuff. So I'd say 50 to 60 percent of you rolled all those things together are kind of out of control type of thing.

Thank you.

Okay. Thanks, Kevin.

Your next question comes from the line of James Berkeley with Wolf Research.

Hi, guys. Thanks a lot for the time. Appreciate it. Hey, just a quick question on the PEO side. Would it be possible just to break out in more detail just kind of that segment, you know, PEO and insurance separately, how bookings have been trending on the PEO side and maybe how much of the guidance drop was attributable to OASIS, which you expect to turn around?

Well, let me start now. I have Efrain jump. And I think what we've seen there is one, we have our, we think the market is still very strong for PEO in particular. So the demand continues to be strong. You know, you're still seeing a very tight labor market. So they're looking for help in recruiting and retaining employees. They're looking for benefit packages that will retain employees and HR kind of mobile app and strength to not only recruit but retain in that mid-market, small and mid-market. The other thing is that the integration of OASIS certainly has impacted this somewhat. You know, we got off to a slower start. We mentioned it in the first quarter last year. We really began the active integration around June, so about six months ago, you know, and once we started aligning underwriting procedures, sales comp models, service processes and those things, it kind of slowed our sales cadence down at OASIS. And it was definitely impacted by underwriting. You know, we've always been very tight on the underwriting side. We wanted the processes to be very tight. And so that gave a slower ramp up for the sales, for the sales. And then we had to ramp up the sales headcount. And that was a little slower than we expected. Now we're at that full, near that full ramp up of the sales headcount. And also we got through a couple of insurance renewals. You know, it's always important to kind of see where we're coming out for the first time with a major integration like that with insurance renewals. And we came through fine. But that and the underwriting, I think, certainly impacted some existing clients. Now that all that we're through that, we have a much better sense of the first year of OASIS and where we're going to come out for this first fiscal year, the remainder of the first fiscal year. We think the market is very strong. Our organic PEO business, non-acquisition, was very strong year to date. And so we feel still very strong about it. We just got up to a slower start than we thought. And that's going to impact the full year's performance.

I guess I'll ask another way, if it's okay. If you didn't do the OASIS acquisition, would have organic PEO growth been in line with our expectations? Like, would that have been unchanged?

I think it would have been pretty much unchanged. I mean, when you look, because we feel very, where we're actually performing sales have been stronger than we expected in our organic PEO business. And so, yeah, I think it would have been stronger. I mean, this is, we really feel like this is kind of around the first part of the integration. And although we've had the company, we purchased the company in December, we kind of let the fiscal year play out. We had a number of things we were organizing around, running some synergies. Then in our beginning of our fiscal year, we kind of put new processes in place. And frankly, it had a little bit stronger impact than we thought in slowing things down from a sales and even retention perspective. Now we've kind of got that turned around and we just wanted to make sure we're conservative kind of on the rest of the year and how that'll come out. But we feel very good about the market. And yes, it would have been stronger if you just looked at without the integration, we certainly would have been above, I think, our expectations on the PEO only side.

That's great to hear. And obviously doing really well on the merchant, I mean, on the management solution side as well. And so just last question on that point. You know, just given the tight labor market, any thoughts, incremental thoughts on kind of where we are in the economic cycle? How you think about things like labor participation rate, how much slack there might be left in that? And room for you guys to rot on the small business side.

Yeah, I think, you know, we're still feeling pretty strongly about how the market is, how the market outlook is. The optimism still, it bounces around a little bit, business optimism. But, you know, what we're seeing is the wage increases are the highest, as I said, since 2011 from small businesses under 50 employees. This is what's in that watch. And the hours worked are up also for the highest in like three years. So we look at that as demand for the employees. So the business is the toughest thing for small, in particular small, but mid-sized businesses right now is I can't find the people to finish to get the work done for the demand I have. That to me points to a pretty strong economy still. And that's how it feels to us when hours worth are up and the wages are up. It's because, hey, I've got the, you know, I've got the demand from customers that want that. So I think that's very good. The tariffs and the trade issues, you know, we've seen impact roughly, you know, a third, maybe 25 percent to a third of small businesses. Most of those are much more regional. And so they're not going to be impacted by that. The third, 25 percent or third that are impacted by tariffs and so forth, you know, have a harder time. But most small businesses are not impacted by that.

That makes a lot of sense. Thank you.

Your next question comes from the line of David Toga with Evercore ISI.

Thank you. Good to see the strength in bookings in the quarter. Could you perhaps dimension the rate of growth that you've seen, Marty, both in the small business managed solutions market and also mid-market? And then call those strengths, you know, from a macro standpoint, any additional color about, you know, which solutions are getting the most traction? And where you think you might be gaining market share?

Yeah, I think one, retirement continues to be very strong. And I think, you know, the Secure Act, most of you probably know, got through the House yesterday and it's headed for the Senate. You know, if that gets approved, that's giving tax credits for new retirement plans. And I think that would continue to be a boost for small businesses starting retirement plans. And we continue to be just very solid on retirement services, both what we would call large market and small market, you know, generally are doing very well. Time and attendance, you know, when you think about the overtime changes that have been recently made in providing overtime to more, it's hitting more employees of our clients. Time and attendance continues to be very strong, double-digit growth as well. And we're, we try to state, we really stayed, I think, ahead of even the market from a technology standpoint. So, you know, it's not just the old punch cards. It's, you know, it's finger scan, which has now gone to eye scan, which has gone to face scan. And now wearables will be introducing very soon that you can punch in and punch out on your on your watch. And these are all things that are being demanded by clients. So I think time and attendance, retirement, certainly HR overall and the technology that goes with that, meaning I want to see data analytics that can help me as a smaller, mid-sized business compared to other businesses. We have that database that other clients or other businesses don't have. We can use data from 600,000 plus clients that say, hey, you know, here's what your turnover looks like compared to others. Here's what your wages look like. So I think data analytics and HR and, you know, all of those things, all are pretty strong. And so overall, we see pretty good growth. Now we're heading into, we're in selling season, so it's too early. So we really need third quarter to kind of give us that look on sales. But so far, year to date, sales have been good. And particularly in the mid-market, we feel very strong about the pickup that the products have have done in the marketplace.

Thank you. Appreciate all the insights.

OK, David.

Thank you, David.

Your next question comes from the line of Stephen Wald with Morgan Stanley.

Hey, good morning. Just maybe going through the pieces of the revenue guide, I know you have changed the overall revenue guidance, but if I look at your adjusted numbers, I believe Efrem talked about this after last quarter, the two different adjustments you made there and, you know, sort of map out the pieces of your segment guidance, sort of getting to a 9 to 11 percent range at the bottom and top end of those pieces added together. Is that generally how we should be thinking about it? It sort of seems like at the midpoint, you'd be at the low end of your prior 10 to 11 percent guidance that's not. Yeah, I don't

think you're far off, Stephen. I think that's not, that's fair.

OK, cool. I just want to make sure I understood that. And then, because I know this is caused some question last quarter, the OASIS components, I know that you reclassified a piece of it last quarter as to how to think about it, but I think in the press release you said it added about 1 percent to the management solution. So should we think about it as, you know, OASIS minus 7 to 8 million is all in the PEO, and the rest goes into management solutions?

Yeah, I'd have to, I'm doing mental math really quickly. I think it's a little bit lower, maybe 67, but I'm not looking at the detail. But I don't think that's far off.

OK, yeah, I just want to make sure I was clear on those things. Yeah. All right, thanks.

Your next question comes from the line of Andrew Nicholas with William Blair.

Hi, good morning. Just wanted to talk a little bit about technology in the PEO business. I was wondering if you could talk maybe about your plans for OASIS and maybe even HROI from a tech perspective. Are both businesses still running on a third-party software or are there plans to transition to internal proprietary software in the near to medium term? And then maybe related to, Lee, I was just wondering if you could maybe speak to the tech capabilities of your PEO business relative to the competition?

Yeah, I think the capabilities, well, first of all, yes, they're both on third-party and the latest software, and so far, you know, that seems to be going very well. So we're watching that closely, but we're not looking to necessarily move to any quick integration or client conversion to disrupt the base or anything like that. So we think that the third-party software is doing fine and in fact gets upgraded pretty consistently. And so we feel good about that. The integration, we're tying it in as much as possible to our products as well. So I think the technology that we're focused on with the HROI and OASIS is how to tie it into our retirement information, our retirement integration, excuse me, into our retirement, time and attendance, and so forth, so that they can benefit most of those products, and that's going well. And so we'll determine over time whether it makes sense to get them to our PEO in-house product or not. I think you never want to necessarily move clients through a conversion if you don't have to, and if that's taken care of, you know, we're still continuing to watch that. It's not a focus right now. Our technology on the PEOs that we feel is very competitive, we can see, as I said, the demand is good in the street and we're selling well, particularly on the organic side. If you look kind of non-acquisition and integration, we're doing very well on the organic PEO and in fact are ahead of sales, so I think our product is performing very well competitively in the marketplace. Just

to add a little bit more color there, Andrew, so we run on both a flex platform for our PEO business and we also run on a third-party software, which many of you know what it is, but it's a customized instance of that software, so there have been a lot of upgrades and adjustments, enhancements made to that system, and I think the challenge, as Marty mentioned, is with those customizations and enhancements, over time we want to figure out what the right decision is in terms of bringing all on one on our internal platform, and that will take a little time to sort out.

Makes sense. That's very helpful. Thank you. And then maybe sticking with the PEO space, just wondering if you could update us on your appetite for M&A there and maybe more broadly how you would characterize pricing in this space. And last thing there would be, does some of the slower than expected start with Oasis tied to kind of integration issues change that appetite at all?

Thanks. Yeah, let me start at the end and go back. I think, yeah, any integration, you know, when you update, and remember Oasis had had a number of companies as well, and so we had to go across the number of companies that they had acquired as well. We wanted to be sure that we felt comfortable with all the underwriting processes, the sales comp models, getting tighter process on service. When we pull all that stuff together, you have some consternation that goes on and some, you know, slower ramp up of hiring of the sales folks, et cetera. And we really think that was tied to, you know, just getting things all aligned. And we really didn't push those things until about June into the summer. And so that put us a little bit behind this year as far as starting out. So I think it was really geared around that. M&A, still very interested, certainly always looking at what opportunities are there. When you talk about pricing, if it's pricing of the M&A, the valuations are still, I think, pretty high, but it all depends. There's so many PEOs at such a fragmented, you know, environment, but there's a lot of opportunity, I think, out there, and we're just trying to make sure that we get the right valuations. From a pricing, from the market standpoint, I think we're extremely competitive. I don't think the competition in that market has changed very much. And I think we're very competitive, and we're seeing that by being above sales, our sales forecast in the first part of the year with our organic PEOs. So where there's no distractions or anything at the beginning of the first half of the year, we've seen very good sales results from our organic PEO.

Great. Thank you. Your next question comes from the line of Jason Kupferberg with the Bank of America.

Hey, thanks. Good morning, guys. Happy holidays. I wanted to ask a follow-up just on OASIS. Just so we have the numbers right, I think originally the expectation was for OASIS to generate 335,000 PEOs per year. So, from 335 to 375 million in revenue this year, can you just help us get a sense of what the new range would look like, obviously just given the integration challenges that you talked about?

I think, Jason, we're still in that range, but we're certainly towards the lower end of that range.

Okay. Okay. Got it. Got it. And then just on the Salesforce side of OASIS, I guess as you went through the integration process, was there any unexpected uptick in voluntary turnover among OASIS salespeople?

Yeah, Jason, I think we lost a few. We started making changes to underwriting process and sales comp and things like that at the beginning. It was a pretty minor number, but we lost a few because at the same time you had some PE firms buying up a couple of other small companies that were trying to attract sales reps. So, I think we lost a few. I wouldn't say it was a big number. And then that put us a little behind ramping up the Salesforce to the number that we wanted, which we're back at now. So, that's a bit of what we encountered at the beginning.

Okay. And then just a final clarification, Efren, just on the EPS side, I know because there's a couple of EPS's out there. So, diluted EPS, you did uptick, but your adjusted EPS growth expectations are unchanged, correct? And I think that's the number you focused on. That's correct. Yeah,

that's reflecting, well, we focus on both, Jason, but that's reflecting taxes. I mean, look,

I

get the question frequently, why do you guys call that out? I think in an effort to be transparent about what we think is underlying operating performance and what's underlying financial performance. Underlying operating performance, we exclude the impacts.com. Not everyone does. We do. And then financial performance is what it is. So, that's what we're trying to be clear on.

Yeah. Yeah. Okay. Very helpful. Thanks, guys.

Okay.

Your next question comes from the line of 10, Seng Wang with JPMorgan.

The ancillary services, can you give us an update on the penetration for some of the services like time and attendance and retirement services? How much more room is there to go?

Hey, Tingen, sorry for the mispronunciation, but for some reason at the beginning of the question, you didn't come in. You cut out. Yeah. So, we didn't hear the full question, so to answer it, could you repeat it?

Yeah, I'm happy to help this a little better. Just the penetration rate of some of the ancillary services like time and attendance, retirement services, I think both were called out as being positive. Where are you in that?

Yeah, we're definitely picking up. We don't give detailed penetration rates on those, but we definitely are picking up penetration across the base on time and attendance. Retirement continues to go up. The other thing on retirement that has been very helpful to us is in the mobile app, we have released probably six months ago where you could sign up on the mobile app. I think I've talked about it before. As opposed to all of the paper that employees of our clients would go through. So, the participation rate is up, and that's now retaining more 401K clients that otherwise would have dropped out because they didn't have the correct participation of their employee base. So, not only are the sales stronger, but the retention of 401K and retirement is stronger as well. Health and benefit insurance is picking up a bit as well. Of course, we're still strong on the insurance side, and we've linked the PEO to our agency. Being a top 20 agency, we have, if you don't qualify for underwriting in the PEO, we take you over to the insurance agency to write you. We have a very unique offering at that point by the insurance agency. So, I think all of it has picked up pretty strongly. Those are certainly the best that I can think of right off hand right now.

Yeah,

so, Tingen, we only update those at year end, but I think just to underscore what Marty said, we're trending above where we ended last year. And if you look at it from a revenue standpoint, we don't break out the revenue on each of those areas that were called out time in attendance. HR and retirement services, those are trending above where management solutions as a whole is growing. So, we're experiencing good results. And by the way, I just want to make sure that it's clear that that is our strategy. Our strategy is to approach a client and sell them on the full bundle, which is why we present the revenue in the way we do.

Right, yeah, and it's been clear you want to drive up revenue per, so I get that. So, just as a quick follow up then, and I know Marty mentioned, I remember last week we talked about improving enrollment on 401k, what have you. So, sensitivity to AUM and asset value given some of the move up here. I'm curious, is there an update or any rule of thumb we can use? Because the equity market has been strong, it sounds like that's just helping you quite a bit here maybe.

Yeah, that's a good question. So, it's really assets under administration contingent. We'll have to come back. It's not a huge number, so we wouldn't anticipate a significant change, but in the back half of the year, you know, as we get into thinking a little bit about next year, we'll talk about it. Right now I don't think it would be a significant, unless there was something dramatic in the market, it wouldn't be significant in the order of pennies in terms of EPS, but we'll update as we go through the year.

Okay, we'll stay tuned for that. Have a safe holiday, guys.

Thanks, you too.

Your next question comes from the line of Brian King with Georgia Bank.

Yeah, good morning, guys. To me, it sounds like the OASIS, a little bit of an integration challenge is more one-time in nature, so I'm trying to think about what the normalized organic growth rate for OASIS might be post one year out.

So, when we bought them, people asked me this, you know, they were growing kind of mid to upper single digits organically. That's where they were. They, we expect that we will be able to bump that growth rate with additional salespeople. Obviously, as Marty mentioned, we're off to a slow start there, but our expectation is we can get it get it growing above those rates in the future. We've got to get through this year, get through the disruption of this year.

Yeah, guessing that the growth rate this year will be a little bit below their historical average as a result.

Yep, it will.

Yeah. And then one follow-up I had on the revenue per client increase, it also sounded like you're getting a little bit of higher price realization. Just trying to figure is that normal, you know, higher prices or is that something that you're seeing a little bit different, a little bit more pricing power than usual?

I think we've had a little bit more pricing power this year than other years. I think that we do a lot of work on the analytics side to understand how to price each client. I think we've done a good job on the pricing side to do that. So, you know, you hope every year there's opportunities to do it. Obviously, we hope to hold that kind of pricing power, but every year brings another set of challenges. It also depends on competition. So, while I think the level of competitive intensity remains high, it certainly hasn't dramatically increased. And one thing we haven't talked about, Brian, which I think is important, is we're having a really good year to begin the year in our mid-market business, which also helps Management Solutions. So a continuation of those trends in the back half of the year going into next year then has a solid, I was going to say a buoyant effect that's a little bit too strong, but a positive effect on Management Solutions revenue.

Yeah, I think the investments are really paying off that we've made in the product and the technology of the EHR side, the mobile app. Those things are paying off. And as Efren said, you know, mid-market is really coming on strong. We've had a couple years where it wasn't as strong as we would have liked, but we're feeling this year, certainly we're seeing this year in the first half of the year, and now we can tell you more after this quarter, but it feels really solid about the performance there on the sales side and retention side.

Okay, great. Thanks guys. Happy holidays.

Your next question comes from the line of Kartik Mehta with North Coast Research.

Hey, good morning Efren and Marty. Efren, just to maybe get a little bit more color on the pricing comments you made for the payroll business. I'm wondering from a competition standpoint, have you seen a change? Are your competitors getting less aggressive or is this a strictly paycheck issue where you're able to raise prices and maybe the competition for new business is still the same?

I think it's primarily internal. I think we have, I think our algorithms internally get better and better every year and I think we understand what clients are okay with certain price increases and what clients are not. I think you have to be very good with a great, a lot of care if you raise prices carelessly, you end up creating shopping behavior. I think the other part is that there are, I think the strength of our model permits us to understand the level of customer intimacy we have, permits us to understand what segments of the client base we can get better pricing out of. So I think it's more internal than it is external, but I think it's important in that equation that the rest of the market is not acting irrationally from a price standpoint.

And then Marty, just on the PEO M&A question, I know you said obviously valuations are everywhere, but just from a paycheck standpoint, you said OASIS, you want to get this integration done, maybe it didn't go as smoothly in the beginning as you wanted. Is that slow down maybe M&A, would you wait a little while and get OASIS running to the point you want before you acquire another PEO or do you think you're in a position where if an asset came up you'd be ready to acquire it?

Oh, you know, I think we're very much in position and we really feel like OASIS is in good shape now. It was really this kind of first half of the year that was, you know, most of the integration kind of just a lot of changes that we had to make that always caused some slowdown. But I think, no, we're very much ready and in fact looking at a number of things today that are out there and available. And no, I think from a management leadership standpoint and organization, no, we're very much ready. You know, remember how large, OASIS was the largest private PEO in the country. So, you know, you knew you were going to have some integration there that we had to do more. But, you know, as far as everything else from HROY to all the acquisitions we've done, we've had a very solid track record from integrating and then hitting or beating the numbers that we expected from those acquisitions.

All right, makes sense. Thank you both. I really appreciate it. Have a really good holiday.

Your next question comes from the line of Lisa Ellis with Moffitt Nathanson.

Hi, good morning, guys. First one for me is on the rollout of the Pay On Demand products you called out. I think that you just launched one of them in the prepared remarks. But if I recall correctly, I think you're launching two, right? One that's more targeted toward employers and one targeted at employees. Can you just give us a little more color on the exact timing and the monetization models for those two products? Thank you.

Yeah, sure. Lisa, the one we rolled out this month, a few weeks ago, was the one for employees. That was the basically Pay On Demand. And as I mentioned, it's an expanded, we think, options better than we almost have out there. This is, you know, you can not only select when you want the money, and not only put it in your bank account, but you can put it on a pay card if you want. You can put it in your Amazon account. You can put it in your PayPal account. We think this has the broadest selection of options and flexibility that we've seen in the marketplace. And we get a percentage, obviously we're doing that with a third party, and we get a percentage of that back into the business. And we think for the most part, though, that the monetization of that is really in the retention of the clients and their employees that we're adding another thing to get to employees that's going to want them to stay with paychecks, stay with the mobile apps, stay with the pay flexibility, etc., which is going to be good for the clients in a very tight labor market. In the real time payments, which is really more geared toward the clients, as you mentioned, that's geared toward the end of the first quarter of the calendar year, as it consistently has. It's right on track, and we feel that we'll be one of the first to offer real time payments. There will be a charge for that, as we've mentioned in the past. We're still working through all of that in looking at the marketplace and so forth. But as we get closer to rolling that out on schedule, then we can talk about the monetization of it.

Terrific. And then second one for me, maybe Marty, can you comment on how the new, it looks like this, the 85 law impacting gig workers in California is going to go into effect. Can you comment just on how you see that type of law impacting paychecks and how you'd handicap your expectation that that spreads across the country?

Thank you. I think, you know, it's funny, two years ago the gig economy was very big and expected to kind of take over employment. And then it really is kind of quieted down to a certain degree. I think those laws and similar ones will come up. I think it's the flexibility that we want to give employees. I think it will be picked up by states like California and New York, places like that first. I think we'll be ready to handle that. And I think frankly having a mobile app, having pay on demand, having flexible retirement plans, things like that, we're very well, we're pretty well geared for that. And we're continuing to look at our product set to see how we can do things even more around an employee versus an employer, which has obviously been our model for many years. So I'd say it's still early stages, but it's still pretty early on the gig economy too that seemed to be the, it was going to be the wherewithal, it was going to be everything a few years ago, but it's quieted down. I think we're able to handle some of that now and we're continuing to look at our product set with our head of product to see what else we can do to make that easy and to be able to comply with any new employment laws that come out.

Okay, great. Yeah, and I guess just to completely clarify, I think those law impacts like workers will be classified as like W-2 full-time employees versus ones that are classified as contractors, but you currently essentially cover or process payroll for both of those, right? I mean, does this, yeah, yeah, so it's sort of a neutral effect.

Correct, neutral effect right now. Yeah, I was thinking more of a wider look at that issue of the whole gig economy and there's a real opportunity there, but you're right, we cover both of those now, whether they're contractors, 1099s or W-2s, either way.

Okay, wonderful. Thanks, guys. Happy holidays. Thanks a lot.

Your next question comes from the line of Brian Burgen with Cowen.

Hi, guys. Good morning. I wanted to ask on margins, so the Maintained Margin Guide following the first half here, is there a ramp in the investment absorbing this somewhat in the second half? Was it a function of just getting the Oasis back on the path you expected or is it more broad than that? You can just go into some of the moving pieces.

I think, Brian, when you look at first half versus back, I'm sorry, second half versus first half, the key thing that occurs is that in Q4 you have your highest margin quarter, so you have expenses that don't ramp anymore because now you have anniversary to Oasis and so expense growth is more moderate, but then revenue is higher, particularly in the third quarter where margins typically are going, approaching or above 40%. So I think that's what drives it. That quarter is unique in terms of the amount of revenue that it has and then the fourth quarter also has a high revenue and expenses aren't ramping along with the revenue driving margins higher.

Okay. I wanted to follow up then also on the on-demand pay product. Can you just talk about some of the early adoption levels on the employee side and how should we think about the funding mechanisms of these pay products and any potential impacts to the flow portfolio?

No, it's all done through third party, so there won't be any impacts on our flow. We're not taking any of the risk on it or anything else. We're just getting a percentage of the fees that are paid and it's very early. Brian, it's very early on the adoption. I mean, we've heard certainly the demand for it, but we rolled it out a few weeks ago, so it's really too early to say. But there seems to be a great demand for it and again, I think this is the most full featured from our full flexibility from an opportunity, so we're anxious to see how it goes. I'd be able to give you a better read after the next quarter.

Okay, that's fair. And for just the last one on Oasis, have you lapped this acquisition over I guess part of the third quarter? Anything to call out in the expected contribution of Oasis to 3Q? Anything seasonal in that mix between the two segments to note here?

Nothing that's not contemplated in the guidance. Yeah, nothing significant.

Okay, thanks.

Your next question comes from the line of Samad Samana with Jefferies.

Hi, good morning. Thanks for taking my questions. So the company's mentioned mid-market strength multiple times on the call this morning. I was curious if maybe you can give us an idea of what the average number of employees for new deals in the quarter looks like, just to see if it's impacting the mix versus the historical average closer to about 16 employees. And then I have one follow-up question. Oh,

it definitely is much larger than that. So it would pull that mix up. We don't normally give that number out. I would say, look, it's somewhere between probably 50 to 150 to give you a wide range. But the average is somewhere under 100 on a client ID perspective. It's much larger than the 15 or 16. That's what pulls that up.

I was wondering more about what the overall average then would have been for this quarter, just to get a sense of how much it's pulling up the overall average.

Right now it's pretty consistent. So I don't think it's moving it enough. I think we, I don't know if we really give that out other than annual, if that. But it has some, I think it would have some adjustment, but not much. Pretty consistent.

Okay. And then maybe just as a follow-up, as I think about the sales headcount investments that you're making, is there other products that you guys have rolled out? As I think about the mid-market, are you also hiring reps that are more geared towards selling to that 50 to 150 employee type of customer? And should we see, as we think about the ramping investments in the back half, should we continue to see that trend in terms of the type of salesperson you're hiring as well?

Yeah, I think we definitely are. We're promoting some from within and from a career path standpoint. And we're always excited about that. And by the way, that market goes anywhere, I don't want to get you the sense that that's what that market is. That market goes anywhere from 20, frankly 20 or 30 employees these days to 1,000. But I would say it's primarily in that 20 to 500 space. But it goes pretty broad. Yeah, we're hiring people with more experience, some from competitors, some from other industries, and then promoting some as well from internally. And we'll continue to invest in that. We're pretty much up to full, you know, up to full hires where we are now, but we're always looking for good people. And I think, you know, success is helping us from that standpoint recruit as well. That always helps.

Great, that's helpful. Thanks for taking my questions and hope you guys have happy holidays. Thanks,

you too.

Your next question comes from the line of Jeff Silver with BMO Capital Markets.

Thanks so much. I know the call has been going long. Just had a quick follow-up actually for Ephraim. I know you don't give a fiscal 21 guidance, but at least in terms of tax rate, is the tax rate that we're using or you're guiding for this year, is that something we should use for next year as well?

Yeah, Jeff, you know, look, I'm going to say right now, I don't see significant things that would change in terms of state taxes and stock comp expense, move it, but, you know, it's probably not a bad proxy right now.

Okay, fair enough. Thanks so much.

You're welcome,

Tim. Your next question comes from the line of David Grossman with Stiefel.

Good morning. So, you know, each of the PEOs reported some issue in the most recent quarter, and while each was different, there was typically some element of health insurance involved. So can you provide some context to, in contrast to what you're experiencing and what may or may not be happening industry-wide?

Yeah, I guess I'd say, I don't think, when we look at it, if you looked at retention in particular, and now we're through a couple of renewals, I would say it was, you know, a pretty fair, I think, you know, there's always a combination of underwriting and tightening up where we want our performance to be from a medical loss ratio, and we're pretty conservative and careful on that and what we're, and our underwriting standards. And so I think that had some impact on retention, but I don't think we had any necessarily abnormal impact on the rates that we got themselves. I think we got, you know, pretty fair renewals overall from the carriers, and then we have our own self-insured plan. I think we're performing pretty well there, and I don't think the carriers gave us anything that was that difficult. I think we just, you know, we have a little bit tighter underwriting standard that we wanted to put in place, or I guess tighter than at least what it was, and that had some impact on some clients. On the other hand, you know, David, the nice thing about us is we can take some of them over then to the insurance, agency, and write them through the carriers as opposed to taking the underwriting or some of the risk on ourselves. So I don't think, I think in contrast, I don't think we saw anything, I don't feel like we saw really anything that abnormal from the carriers in the renewals themselves, which bodes for, to me, you know, and for us I think bodes well for the future. There was no abnormality there that should continue or anything.

Got it. And then, you know, just going over to the mid-market, I know that has come up several times, but, you know, if you just had to isolate one thing that's changed most that may have impacted the momentum in that business, you know, what do you think that is, and do you think you're gaining share, or you just think you're doing a better job of retaining your clients as they migrate, you know, into that kind of mid-market category?

Yeah, I think the one thing is definitely the technology investment. I mean, look, we got a solid sales force and great sales leadership there and operational and service performance. And, but I think the biggest change has been the technology investment over many years now, but it's really come to fruition the last few years in particular as everything has come together. The mobile app, the HR administration, the data analytics, the artificial intelligence work, you know, everything that has come together now. We have a fully integrated solution for a mid-market that is very simple to use. And we're, I think that is really shown in the sales performance, particularly this year, but we could start to see it the last half of last year and then the first half of this year. The sales performance is better and the retention as well, but I really think it's the technology on top of good sales and operations leadership and performance. And just to think of it, I think we are taking some share, but you do know, as you know, that is a growing market for all players, and we just haven't gotten as much of our fair share in the last few years, in my opinion, as we should have, and we had to get the technology really to all pull together. We kept introducing good products, but now we've pulled it together. And we also now have moved to say, hey, if you want a product integration, if you want something, if you have the best HR time and attendance that you think is better than ours, we'll build the product integration for you as well, or we have the product integration already through APIs. And so I think all of that has really helped. I think the technology would be the number one biggest thing.

Right. And just can you help size it for us or just give us some context so that you can think about how impactful it can be to the overall growth rate?

What do you mean in terms of revenue, David?

Yeah. Yeah.

Yeah. So mid-market revenue, if you look at it in terms of total payroll revenue, we give you payroll, so I'm not giving you a number you can't figure out. It's been running about 25 percent or so of our overall payroll revenue. So you can figure out management solutions. You know what percentage is management solutions. You can get a sense of that bucket within management solutions. So if it accelerates, it's helpful. And I think that where it is helpful, and I think there was a discussion earlier about this, if you see continued trends then over time you see average client size go up and that's positive, but also you have more opportunity to attach ancillaries when you get those clients.

Got it. Thanks very much. I hope you both have a very nice holiday.

Thanks, David. You too.

Your next question comes from the line of Mark Marcon with Baird.

Hey, Marjaneff. Happy holiday.

Thank you.

Just a few follow-ups. First, just on the PEO side, when you talked about the carriers and what you're doing in terms of your own health insurance on the healthcare cost, what rate of increase are you typically seeing as you go into next year? For a -per-life type plan?

Yeah, you know, I think, Mark, I would say no one's given you the exact increase. I would say it's pretty competitive with the market, in some cases a little bit below. So part of the following up on what Marty was saying, because we try to manage the book very conservatively, we ensure that we manage those losses tightly so that we can go out to market with rates that are competitive in the market.

I appreciate that. And then with... I'm not sure if you're hearing that.

Yeah, a little bit there, Mark. Go ahead.

With regards to the percentage of

the

clients that you're... What percentage of your PEO clients actually are taking your insurance where you're self-insured for it?

Yeah, so I'll flip it around. We don't give the exact clients, but if you look at PEO revenue, PEO revenue includes at-risk revenue of 35 to 40% of that revenue. And you can get to that because we give you a breakout from that at any cost. So that gives you a sense. We don't break it out by specific clients.

Got it. And then with regards to the mid-market, you're obviously doing really well there. In terms of the new sales, is there any change, Marty, in terms of the composition of who you're getting those new clients from or how we should think about that with regards to you know, there's still a surprising number of companies out there with really old legacy systems versus some that have transitioned to newer systems. What's the composition look like in terms of the new sales that you're getting?

I think it's been a combination of taking some from competitors and I would say, you know, I think it's probably this year, I would guess it's run 50-50 on old legacy systems going to, you know, moving into a new platform. Software is a service platform of ours and really moving up the technology. And then probably the other half is more, you know, something they didn't like from a competitive standpoint. So I think we're taking some from market share and then some from as the market expands itself. And it's probably roughly around half and half, I'd say, at least this year to date kind of thing. Because you know that market, it does continue to expand and it's growing across, you know, the market itself is growing of those who just see the need particularly in this tight labor market to have something that's going to help them hire and onboard with, you know, all of that doing it paperlessly, then retaining them with integrated benefits and a mobile app and retirement plans. And so they're seeing the need that they have to go up that it's definitely is more critical to them in a tight labor market to move on to a more modern system. And I think ours is appealing to a number of those prospects. I fully appreciate

that. And then two longer-term questions. One would basically be you started off the whole presentation basically by talking about some of the effectiveness that you're seeing in terms of your sales and marketing efforts coming through. And you know sales, SG&A actually ended up declining as a percentage of revenue despite the strong sales growth. So I'm wondering if you can talk a little bit about the longer-term implications for the increased efficacy with regards to your sales efforts and what you're seeing there. That's the first question. And then the second question is basically you know how we should think about the effective yield for next year, the flow balance and the duration.

Okay, let me take the first one and then I forget. Yeah, that's fine. I think you know Mark the interesting thing is it's a sales and marketing kind of combined look. And you're seeing as we've talked about I think before, you know I shift more toward marketing. You know many times today most people are buying or making their decision. They're 70% or 75% of the way through the decision before they ever talk to anyone. And they're looking for much more online approach. They're being marketed to online. The way you market to them, the way you get leads, the way you nurture leads and then the way you sell. And we're trialing a number of things that will make us even more efficient from that standpoint where you're spending marketing dollars because a lot of the marketing is really the sales now. We certainly still have a lot of field reps that we count on that are building relationships and getting referrals in the field and talking to clients. But particularly the smallest clients who are starting up businesses are going online and looking to look, buy, demo and buy and even buy online and we're preparing for all of that. So I think we're looking for efficiency but even more so what's the best way to market and sell to a prospect or an existing client that's in business and try to be as efficient as we can. But it's really looking at how is that shifting from web to from live person to web, telephonic to e-commerce and positioning ourselves well for the future on that. I think we have a pretty good handle on it and we're trialing a number of things now that seem to be successful.

Hey Mark, on the yield question, I'd say the yield we go out this year, meaning this fiscal year, is probably the yield that we have we will plan for next year given that apparently the Fed has decided that it wants to hold. We do have a little bit of play there in terms of balances which have been increasing slowly and we do have a little bit of play with duration. But for planning assumptions that's what I would assume.

Just to be clear, the yield year on is basically the year, is basically what we should plan on for next year not the average for this year.

I

think it's going to be slightly lower but I'm just saying the back yield we have in the back half of the year is probably the yield we go in the next year with. We have a little bit of play with duration. You saw this year, this quarter duration was 3.1. We can extend it further but it will depend a little bit on the, or it will depend on the shape of the yield curve, how far we want to go out.

Perfect, thanks. Happy

holidays.

Thanks.

Thanks, same to you Mark.

We have time for one final question and that question comes from the line of Matt O'Neill with Autonomous Research.

Hi, thanks guys for excusing me. I know it's a long call. Most things have been asked and answered. I was just curious, has there been any noticeable evolution in the lead gen sources maybe moving a little bit all the way from the CPA channels and more towards the online channels and sort of as a follow up, if that's true, is that something that drives more price sensitive customers or not really any change on that side of it?

I think it definitely has moved some. We still rely a lot on being out in the field and building those CPA relationships. They're good partners with us as well as you know today everybody is doing their research online even if you're given a referral. In the old days you just call us and today you're going online. You're searching our website. Our investments have been in the website and in being able to demo the product, whether it's, you can demo it right on your mobile app if you download the mobile app. And so it has been about how do you get those leads and we put a lot of investment in that from a marketing standpoint as well as how do you then nurture those leads if they're not ready. That's different than it used to be. That's a whole nurturing piece that we have put in place for the last few years now about how to get information to clients and make sure when they're ready they come to us. And then we're moving to more of even an e-commerce where you can buy online, particularly with SurePayroll or other options you can buy online. That also lowers some costs. It increases marketing costs, but sales costs come down and balance a lot of that out as you're selling either online or through telephonic means and you're giving them more tools telephonically to help demo a product to a client and then sell it to them. So we're definitely seeing that change and I think that will shift costs from marketing or from sales to marketing. They become all kind of one of costs that you look at to be the most efficient, but it really is about how do you best sell to clients and they are definitely searching, demoing, and even thinking about or buying online. And we're into that already and we're looking, we might, we'll find ways to expand that as well.

Thanks for that and again, happy holidays.

Yeah, thanks Matt. Operator, so I think that's the last question, correct?

Yes, that's correct.

At this point we will close the call. If you're interested in replaying the webcast of this conference call, it will be archived for approximately 30 days. Thank you for taking the time to participate in our second quarter press release conference call and for your interest in paychecks. We appreciate it. We wish you all a happy holiday season. Thank you.

This does conclude today's conference call. You may now disconnect your lines.