Paychex Exec Insights: Operating Margin Ex-Float Income, New Sales Initiatives
On Thursday, Paychex, Inc. (NASDAQ:PAYX) reported its fourth quarter earnings and discussed the following topics in its earnings conference call. Here’s what the C-suite revealed.
Operating Margin Ex-Float Income
Jason Kupferberg – Jefferies: I wanted to start with a question on the operating margin ex-float income. We are looking at 37% for the fiscal ’13 guidance, which I think is pretty flat year-over-year, and I wanted to get your thoughts just in terms of what’s underpinning that? Because I think most investors have traditionally thought of the processing nature of the model, driving continued margin expansion over time. I mean, is this any sort of sign that margins are close to maxing out here? Is there room for ample margin expansion in a better macro environment, because I know you mentioned that the IT OpEx growth is going to actually slow in fiscal ’13. So I suspect there’s some multiple moving parts here but we just love your bigger picture thoughts on what this means in terms of margin potential of the business model.
Efrain Rivera – SVP, CFO and Treasurer: Thanks, Jason. The answer to that is when we put the plan together we had leverage in it from sales to expenses of approximately 100 basis points, so or approximately 37% will result in some leverage in the P&L. As I mentioned earlier in my comments we did make some investments that increased expenses primarily in terms of sales force expansion and also on restoring some benefits that we had not restored previously.
Jason Kupferberg – Jefferies: So going forward it sounds like you think there is a path to some continued margin expansion albeit at kind of a modest rate?
Efrain Rivera – SVP, CFO and Treasurer: There is a path to do that and that’s the way we built our plan. We look typically to grow expenses below sales and typically by 100 basis points and that’s what we baked into our plan.
Jason Kupferberg – Jefferies: Just based on where the laddering and the duration of your float portfolio stands right now and the forward yield curves, I mean, do you think fiscal ’13 will be the bottom in terms of interest on client funds?
Efrain Rivera – SVP, CFO and Treasurer: It’s real hard to tell. It’s like freeze the rates right now, Jason, I would anticipate and I also hold average float at the same level. I’d anticipate some contraction in the portfolio probably in the 3% to 5% range where interest rates stand at the moment, but they could change. Let me just say one thing on that that I think is critical. There’s a tremendous amount of volatility on interest rates and even within the last 90 to 120 days, we’ve seen the 10 year treasury, which we benchmark intermediate municipal bonds to go from 241 to under 150. So we’ll update on a quarterly basis, but that’s what we’re seeing. So, no we haven’t completely anniversaried it, but it will moderate from here on now.
Jason Kupferberg – Jefferies: Just lastly from me, in terms of balance sheet deployment, I think we got total cash and securities now, $800-ish million plus, getting closer to that $1 billion level that I think you guys have talked about in the past. Anything we should be aware of in that regard? Share buyback seem appealing here or what’s the M&A pipeline like?
Martin Mucci – President and CEO: Jason, this is Marty. I think we always continue to look at that and the Board does. Obviously it’s a Board decision, but we’re always discussing it at each Board meetings as we get closer, particularly to that $1 billion mark. We want to have flexibility for acquisitions because we’re looking aggressively at what’s out there and want to keep the flexibility, but at the same time, we certainly understand as we’re aggressive in the dividend that there’s other options with that cash as well. So something we continue to look at every quarter with the Board, nothing to report at this point.
New Sales Initiatives
Ratna Kumar – Evercore Partners: I’m calling in for David Togut. Could you please update us on initiatives implemented by your new Head of Sales, Mark Bottini?
Efrain Rivera – SVP, CFO and Treasurer: Yes, on the sales side, some of these things started right before Mark, I think Mark has done a great job in moving these and executing on these, one was a new compensation plan, some of the changes we made last year and some additional ones this year, the focus is very much on revenue and revenue growth. We also simplified the compensation plans dramatically last year to make them more direct and easier for the sales representatives to understand how they get paid on the next sale. We think that that’s going over very positively in the last fiscal year and continues to do so this year. We’ve also focused on technology and so new tablets were given to all the sales reps last year which allowed them to have everything on their tablet at a faster speed including sales force tools or tracking new leads et cetera. So they got more technology. We have also a proprietary program that allows them to load or initiate a client during a sale all on their laptop to avoid paper and that helps both sales and the operations team as well. I think between the comp plan, the tablets, a lot of training changes were made last year that went over well and also some recruiting. Since Mark has come in a little over eight months ago, he has been extremely visible out into the sales force and really assessing the leadership team and I feel we are going to be off to a good start this year as we kicked off the fiscal year this month.
Ratna Kumar – Evercore Partners: Can you quantify fiscal 2013 price increases?
Efrain Rivera – SVP, CFO and Treasurer: No, we are not going to disclose the level. We have mentioned that they were modest, I think they are not out of the range of what we had done historically, but we don’t specifically quantify that, we just think it is proprietary information.