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Paychex, Inc. (NASDAQ:PAYX)
Q2 2018 Earnings Conference Call
Dec. 21, 2017, 9:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome and thank you for standing by. At this time, all participants are in a listen-only mode until the question and answer session of today's conference. To ask a question, you may press *1 and record your name at the prompt. This call is being recorded. If you have any objections, you may disconnect at this point. Now, I'll turn the meeting over to your host, Mr. Martin Mucci, President and Chief Executive Officer. You may now begin.

Martin Mucci -- President and Chief Executive Officer

Thank you, and thank you for joining us for our discussion of Paychex's Second Quarter Fiscal 2018 Earnings Release. Joining me today is Efrain Rivera, our Chief Financial Officer. This morning, before the market opened, we released our financial results for the second quarter, ended November 30th, 2017. Our Form 10-Q will be filed with the SEC within the next few days. You can access our earnings release and Form 10-Q on our Investor Relations webpage. This teleconference is being broadcast over the internet and will be archived and available on the website for approximately one month. On today's call, I'll review the business highlights for the second quarter and Efrain will review our second-quarter financial results and discuss full-year guidance, and then we'll open it up to your questions.

Well, we are halfway through fiscal 2018, and we have continued to deliver solid results across all of our major human capital management product lines, with growth of 7% in total service revenue for the second quarter. In particular, our HR outsourcing services, retirement services, and time and attendance solutions have continued to perform very well. On August 21st, we announced our acquisition of HR Outsourcing Holdings, Inc., or HROI. HROI is a national PEO that serves small- and mid-sized businesses in more than 35 states. The integration of HROI has progressed favorably. Combining the HROI team with our experienced PEO sales and service operations teams has further strengthened our presence in the PEO market. This is particularly relevant during a time of regulatory change like we're seeing now. This expansion -- along with our certification by the IRS under the Small Business Efficiency Act -- positions us for accelerated growth in our comprehensive HR outsourcing solutions.

Small business job growth continued to moderate slightly during the second quarter after the sharper uptick experienced last year following the conclusion of the presidential election. By contrast, hourly earnings have improved to an annual increase of nearly 3% based on our data. The combination of this level of wage growth and consistent moderate small business job growth are indicators of a healthy small business sector. We believe these promising indicators will continue to create opportunities for new sales in the small business market.

At HR Tech in October, we introduced our new product bundles that are now on the market. These bundles include new simplified pricing, and included in two of the mid-level HCM bundles at no extra cost are Paychex Flex Onboarding Essentials, providing a paperless employee onboarding experience, and do-it-yourself handbooks. In addition, we introduced a retina scan InVision time clock. We are excited about these new offerings that respond to the evolving needs of our clients, and we are pleased with the initial response from our clients and prospects.

We are committed to delivering best-in-class technology solutions for our clients and business partners. We recently announced the release of same-day ACH debit functionality for our clients using direct deposit. With same-day ACH, employers have the ability to reverse a payroll and have money debited from employee bank accounts on the same day, avoiding the costly time lag associated with payroll reversals. This enhances our position as a leader in the payments industry.

We also announced real-time integration between Paychex general ledger services and Sage Intacct. Paychex and Intacct are certainly two key service providers to the accounting industry, and our CPA partners are important to our business, and this integration provides better tools which allow them to gain insight into their data and their clients' data on a real-time basis.

We also introduced Accountant HQ, a website for accounting professionals to help them service their Paychex clients even more effectively with a comprehensive online dashboard that provides a single source of immediate service, access to authorized Paychex client data, robust reporting capabilities, and valuable accountant resources.

We consistently evolve our service offerings to meet the needs of our client base. An example is that we just had a recent announcement that Millennium Trust Company and Paychex have teamed up to offer a simple IRA to employers with 100 or fewer employees with innovative features including auto-enrollment and investment fiduciary services. This is becoming a popular requirement from some states across the U.S.

We are proud of the recognition we have received regarding our solutions for our clients and our leading-edge technology. Inc. recently recognized Paychex as the best HR outsourcing for small business overall. They noted that our product Paychex Flex offers a full range of services for HR outsourcing, including payroll tax, payment, benefits, recruiting, and training, and we do so without requiring a long-term contract. More uniquely, Paychex also offers an on-site assistance program that puts HR professionals -- our HR generalists, or HRGs -- in the office with customers when they need more help.

We are proud that Paychex Flex was recently awarded a Gold Excellence in Technology Award for Best Advance in HR or Workforce Management Technology for Small- and Mid-Sized Businesses from Brandon Hall Group. In previous years, we won the bronze award. This year, we moved up to the gold standard, and we appreciate that. This shows evidence of the strength of our technology as well as our service performance.

As I noted last quarter, this is the seventh consecutive year we were ranked the largest 401(k) record keeper by total number of defined contribution plans by PLANSPONSOR magazine, and our Paychex Insurance Agency hit the rank of 21st largest agency from Business Insurance magazine. We are very proud of all this recognition because it comes from and is deserved by the 14,000 employees that make it happen. From sales, to service, to technology innovation teams here at Paychex, we're very proud of them and the results that they've achieved.

Providing excellent service to our clients remains a top priority, of course. We completed the realignment of our service organization at the end of the last fiscal year, and our investment in this service realignment was an important strategy to help support long-term growth, as well as an example of our priority and commitment to providing the best service possible to our clients. With the realignment completed, we are seeing benefits from this change.

One last comment before I turn the call over to Efrain: Yesterday, of course, Congress voted in favor of tax reform legislation. We are currently reviewing the terms of the bill and analyzing the impact it could have to Paychex. Efrain will talk more about this later on. Tax reform will provide a great benefit to us and a lower effective tax rate. We do expect that a portion of the potential benefit will be reinvested to drive future growth for the company and our shareholders. I will now turn the call over to Efrain Rivera to review our financial results in more detail. Efrain?

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

Thanks, Marty. Good morning. I'd like to remind everyone that today's conference call will contain forward-looking statements. Refer to the customary disclosures. I'll start by providing some of the key highlights for the quarter, provide greater detail in certain areas, and then wrap up with a review of the 2018 outlook.

Service revenue, as you saw, grew 7% for the quarter to $813 million. Approximately 3% -- a little less -- of that growth was attributable to HROI. Interest on funds held for clients increased 23% for the second quarter to $14 million as a result of higher average interest rates. You're starting to see the benefit of all those cumulative increases in interest rates. Expenses increased 7% for the quarter. HROI, though, contributed about 5% of this growth, so we had very good growth expense control in the quarter. Comp-related costs were up modestly, and continued investment in technology and growth from the PEO both contributed to the slight uptick in expenses.

Our effective income tax rate was 35% for the second quarter compared to 35.2% for the prior year second quarter. Both periods reflected net discrete tax benefits related to employee stock-based compensation. This impact to the second quarter accounted for $0.01 of EPS and was immaterial in the prior-year quarter.

Let's talk about payroll service revenue. It increased 1% in the second quarter to $445 million. The growth was driven by an increase in revenue per check, and it was tempered by the impact of client size mix from the same quarter a year ago. Recall that as we ended the year, we had a slight drop in client size, and that's reflected in payroll service revenue growth.

On the HRS side, we grew 15% to $368 million for the second quarter. It reflected strong growth in the client base across major HCM services, including comprehensive HR outsourcing services, retirement, time and attendance, and insurance, which all saw good growth in the quarter.

Within Paychex HR services, we continue to see strong demand, which -- along with the acquisition of HROI -- is reflected in continued solid growth in the number of client worksite employees served. So, we're seeing growth there and we're seeing growth in other areas of the PEO.

Insurance services benefited from continued growth in the number of health and benefits applicants and higher-average premiums within workers' comp insurance offering. Retirement services revenue also benefited from an increase in asset fee revenue and earned on the value of participant funds. So, all of those are contributing to the positive results in HRS.

Year to date, let me just say that total service revenue growth was 5%, of which about 1.5% was attributable to HROI. Recall that Q1 was a lower quarter, and we built from there. Operating income growth was 7% with margins of 41.2%, up approximately 50 basis points year over year. Net income and diluted earnings per share grew 6% on a GAAP basis to $445 million and $1.23 respectively. Adjusted net income and adjusted diluted EPS were both up 8%, and that just takes out the benefit of the discrete tax item, so we recognized them both here.

Investments in income -- as you know, our goal is to protect principal and optimize liquidity. On the short-term side, primary short-term investment vehicles are bank demand deposits and variable-rate demand notes. In our longer-term portfolio, we invested primarily in high-credit quality municipal bonds, corporate bonds, and U.S. government agency securities. The long-term portfolio has an average yield of 1.8% and an average duration currently of 3.3 years.

Our combined portfolios have earned an average rate of return of 1.5% for the second quarter, up from 1.2% last year. We're starting to realize the benefit of gradually increasing interest rates, as I mentioned earlier. Average balances for interest on funds held for clients was relatively flat for the second quarter, primarily as the impact of wage inflation was offset by client mix.

Now, let's look at our financial position. It remained strong. Cash and total corporate investments were $820 million as of November 30th, 2017. Funds held for clients as of the same date were $4.9 billion compared to $4.3 billion. Funds held for clients vary widely, as you know, and averaged $3.7 billion for the quarter. Total available-for-sale investments -- including corporate investments and funds held for clients -- reflected net unrealized losses of $14 million as of November 30th compared with net unrealized gains of $32 million as of May 31, and that's just a reflection of rising interest rates. Our longer-term portfolio has seen an increase in unrealized losses for this reason.

Total stockholders' equity was $2 billion as of November 30th, 2017, reflecting $359 million in dividends paid and $94 million of shares repurchased during the first half of fiscal 2018. Our return on equity for the past 12 months was a stellar 43%, and I would just point out that it was only a few years ago when return on equity was 34%, so we have really worked hard on driving that number. Our cash flows from operations were $519 for the first six months, and I would just also point out that we had a very strong cash flow quarter. The increase was 26%, although there's some timing in that that also is a function of our cash-generating power.

Let's look at the guidance for 2018. It's unchanged from what we provided last quarter. This guidance, though, doesn't reflect any impact from tax reform legislation. What we tried to do in both the press release -- and, you'll hear it in a second -- is frame what we think the ongoing benefit from tax reform will be for us. I would just caveat heavily that we don't know the exact details of the legislation, and there will be regulations written that interpret the legislation that could have some impacts and changes to what we're discussing. Obviously, we are anxious to see the final bill just like everyone else is, but we recognize that it will have an important impact on us.

Payroll revenue is anticipated to grow in the range of 1% to 2%. Overall, we anticipate full-year growth that will be at the lower end of the range, with growth for the second half of 2018 comparable to the growth in the first half of the year. HRS revenue, by contrast, is anticipated to increase in the range of 12% to 14% for the full year, incorporating HROI. We were below the low end of the range for HRS growth in the first quarter at 7%, above the range for the second quarter at 15%, and now anticipate being above the range for the second half of the year. Total revenue is expected to grow approximately 6%.

Interest on funds held for clients is expected to grow in the mid- to upper teens. This doesn't include the most recent increase in the Fed funds rate that was made earlier in this month, and the reason for this is it's comprehended within that range and we think by the time the increases roll through, the impact for this year will be modest. Obviously, it will be beneficial to next year, but impact at this point is going to be modest.

Operating income margin is anticipated to be in the range of 39% to 40%. Effective income tax rate -- excluding any potential impact from tax reform legislation -- is expected to be in the range of 35% to 35.5%. Let me just add a note of explanation here. If you recall our guidance, when we started the year, our guidance was that our tax rate would be between 35.5% and 36%. That's what we consider our normalized tax rate currently when you don't include discrete tax benefits. The discrete tax benefits that we recognize year to date relating to stock comp expense drive that rate down, so when we say 10% to 12% benefit, we're working off of a normalized rate between 35.5% and 36%. At this point, I would anticipate that we will provide more guidance, but it could be anywhere along that spectrum. At this point, if I had to peg it, I'd say it's at the low end of the range rather than the high end.

Net investment income is anticipated to be in the range of $9 million to $11 million. Adjusted net income is expected to increase approximately 7%. Adjusted net income excludes the impact of the discrete tax benefit recognized in fiscal 2017 and the first half of fiscal 2018 relating to employee stock-based compensation payments. We currently don't plan any additional discrete tax benefits for the remainder of the year. We simply don't know whether we'll realize any. Please refer to our non-GAAP financial measures discussion in our press release and in our investor presentation for reconciliation of non-GAAP measure to GAAP-basis net income for the second quarter and six months of the year. GAAP-basis net income is anticipated to increase approximately 5%.

Adjusted diluted earnings per share is anticipated to increase in the range of 7% to 8%, and again, we lay this out in the presentation that we posted to the website. As I've mentioned about three times now, this measure excludes the impact of the discrete tax benefits recognized.

Finally, as I mentioned before, we haven't recognized any benefit of tax reform in our guidance. We anticipate it to be in the range of 10% to 12% on our annualized effective income tax rate. I mentioned how we measure that. That is before we include any discrete tax amounts for employee stock-based compensation payments. Again, one more caveat: This is based on our current understanding of the legislation. It may be subject to change upon further review of the final law and interpretive guidance that may be issued.

As discussed previously -- Marty said it, and we said it in the press release -- when you have an opportunity, we expect that a portion of the benefits will be used to be reinvested in the business to drive future growth, and we will provide additional guidance in upcoming quarters. One final comment on that -- and, I suspect that this will be true for many companies -- although the statutory rate will drop to 21%, that won't be the effective rate because there will be puts and taxes in terms of benefits and deductions that are no longer allowed under the law, and that's the analysis that we're undergoing.

The other thing that I would say is that we're undergoing an analysis of the opportunities that we have to reinvest some of that benefit to drive growth and efficiency and enhance our customer experience, and we're actively working on that as we speak. With all of that, I will turn it back to Marty.

Martin Mucci -- President and Chief Executive Officer

Great. Thank you, Efrain. We will now open the call to questions. Operator?

Questions and Answers:

Operator

Thank you. We will now begin the question and answer session. If you would like to ask a question, you may press *1. Please unmute your phone and record your name when prompted. To cancel, you may press *2. One moment, please, for our first question. Our first question is from the line of Danyal Hussain from Morgan Stanley. You may now ask your question.

Danyal Hussain -- Morgan Stanley -- Analyst

Good morning, Marty and Efrain. Thanks. Just on the tax rate -- I know, Efrain, you talked about this being very preliminary at this point, but could you just walk us through where there are offsets at this point -- to your understanding -- versus that federal rate decrease? For example, are you losing the domestic production...?

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

Yes, that's an important one, Danyal. There are changes in the deductibility of executive stock comp, and then there are other deductions to which we avail ourselves, so the combination of all of those will drive us up from the 21% rate.

Danyal Hussain -- Morgan Stanley -- Analyst

Got it. So, what it is that gets you from 10% to 12% -- just an understanding of --

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

Yeah, it really is an understanding of the range. There's some complexity on a number of items in the bill that we're looking at. There also may be some tax planning opportunities that we think we might be able to take advantage of, and we're in that discussion.

Danyal Hussain -- Morgan Stanley -- Analyst

Okay. And then, just to clarify, you said the low end of the range, but you're referring to that 10% to 12% -- the low end of the decrease?

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

Yes, right. I said if I had to peg it, I'd peg it at 10% rather than 12%.

Danyal Hussain -- Morgan Stanley -- Analyst

Okay. And then, just one follow-up -- I know you also caveated this -- the reinvestment. Could you just talk about what that means? Is it sales, product, incremental M&A? To what extent can you quantify it all?

Martin Mucci -- President and Chief Executive Officer

I think it's all of those. We're taking a look at the opportunities. Once we have a sense of the size of this -- there's some technology -- while we're feeling good about the technology investments that we are making and the level that we're making, there are some things that are always there that we'd like to accelerate. We'd rather not mention those yet because we're going through those, and we'll want to talk to the board about them as well in an upcoming meeting this quarter, but it's a number of technology investments that could accelerate. We just think that it's a great opportunity to focus -- obviously, to take some to the bottom line, but also, to take the opportunity to invest in sustaining long-term growth, both top-line and profitability.

Danyal Hussain -- Morgan Stanley -- Analyst

Okay. Thank you very much.

Operator

Thank you. Our next question is from the line of Mr. James Berkley of Barclays. You may now proceed.

James Berkley -- Barclays Investment Bank -- Vice President

Thanks. Good morning, Marty and Efrain. I just wanted to touch on -- did you see any potential impact from hurricanes in the quarter? If you could just size that, and if you did see an impact, are you starting to see a rebound at all, similar to what you saw with Sandy?

Martin Mucci -- President and Chief Executive Officer

I think there's been some -- not as big of a rebound as Sandy, but I don't think -- particularly when you look at Florida, while it was widespread, the damage wasn't quite as catastrophic. We're definitely seeing some small business improvement there coming back, as you'll see -- particularly in what you'd expect: Roofers, contractors, and things like that. I wouldn't say it's been significant yet, but I think it will be a smaller increase but a longer period of time because it appears that the work is going to go on for a while with the repairs. They're not as catastrophic, so you don't see a big, huge change, but you see an increased number of small businesses in those areas of improvement, and I think they'll probably hang around a little bit longer. I wouldn't say it's significant -- certainly, not making any significant change to the results. Was there something you wanted to add?

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

Just that it was modest.

James Berkley -- Barclays Investment Bank -- Vice President

Okay, thanks. That's helpful. And then, just a quick follow-up: Any detail around the size or timing of some of the synergies you guys are expecting or starting to see with the HROI acquisition on both revenue and cost? That would be helpful.

Martin Mucci -- President and Chief Executive Officer

One thing we are seeing is much faster than we expected by at least a quarter or so, the integration has gone extremely well. The plan was to combine a lot of the sales teams -- not all of it, but a lot of the PEO sales teams across the country -- with HROI, and we've got very experienced sales and operations teams that we have in PEO, and their leadership, and that seems to have picked up the pace of the PEO at a great time for PEO sales anyway. And so, I wouldn't say we could quantify the benefit yet, but it's certainly right at the level that we expected, and probably a little bit better from a sales and...not a profit per se, but certainly an integration and cost perspective -- both very positive in this first quarter with them.

James Berkley -- Barclays Investment Bank -- Vice President

All right. Thanks a lot.

Operator

Thank you. Our next question is from the line of Mr. Jim Schneider of Goldman Sachs. You may now proceed.

Jim Schneider -- Goldman Sachs -- Analyst

Good morning, Martin and Efrain. It's good to hear you. I wanted to start out by talking about what you're seeing in terms of midmarket sentiments. Clearly, with ACA uncertainty in calendar 2017, there were a lot of questions and stalled decision-making, which we've talked about many times. Looking forward, now that there appears to be the repeal of the individual mandate, can you talk about whether you've seen any kind of improvement in terms of clarity of decision-making or increased decision-making in the midmarket segments?

Martin Mucci -- President and Chief Executive Officer

Well, I think it's a little bit early. We're right in selling season now, and while we feel there's some momentum out there, I think that midmarket is very competitive, as it has been. There's no real change to that in the number of competitors or anything. At this stage, I don't see a lot more decision-making. As we said, we had a lot of decisions made because of ACA, and we certainly aren't seeing it back to that level, and if anything, I think it's a little slower because people made those decisions for a fully integrated HCM model that included payroll, insurance, and everything else.

So, we're feeling good about selling season for midmarket, but I wouldn't say it's anything like a big pop in demand that we saw with ACA. I think ACA is still very confusing. While the individual mandate is lifted, it's not clear what the reporting requirements are going to be, and in fact, they don't seem to be -- they're not eliminated yet. There are a lot of reporting requirements that'll have to be done, so we're seeing good retention on our ACA products and some interest from new clients in still taking those products to be sure that they can monitor, record, track, and report -- or, we can report for them -- their insurance.

Jim Schneider -- Goldman Sachs -- Analyst

Okay, fair enough. And then, if you look forward, you talked about reinvestment, you talked about potential M&A as one aspect of that reinvestment of the benefits from the tax reform. So, could you update or refresh your thoughts on overall M&A beyond the tuck-ins you've done before? Are you potentially considering something of bigger scale that would be a little bit more transformative to the business or not?

Martin Mucci -- President and Chief Executive Officer

Well, that's always a possibility. We're looking at a number of opportunities in M&A, and there's a lot of opportunity out there. Evaluations are still pretty high, so we're being very selective. I'm very proud of the fact that while we've looked at hundreds of opportunities over the years, we've picked very few and we've been very selective, which has turned out to be very good: Advance Partners, HROI just recently, SurePayroll, et cetera. So, we're going to be very selective about what we pick and the good opportunities out there. I would say that we'll look at this as an opportunity to possibly invest a little bit more. I would say transformation is always out there, but it really has to be something we're very comfortable with if that is to happen.

Jim Schneider -- Goldman Sachs -- Analyst

Great. Thank you, and happy holidays.

Operator

Thank you. Our next question is from the line of Mr. David Togut from Evercore ISI. You may now proceed.

David Togut -- Evercore ISI -- Managing Director

Thank you. Good morning. Marty, you talked about the beginning of the critical year-end holiday selling season -- particularly, the midmarket -- but I'm wondering if you could broaden your comments to talk about the small business payroll outsourcing and HR services market. In particular, does the passage of tax legislation -- particularly the reduction of the statutory tax rate -- impact the propensity of a small business owner to buy your services?

Martin Mucci -- President and Chief Executive Officer

It's obviously very early since it just passed, but I certainly think there is increased opportunity. Whenever there's more complication and change, there's more opportunity for them to outsource and to go to someone. Look, this is going to be a huge compliance workload in the next month to 45 days to take all the changes, the IRS getting through all this, everyone understanding it, getting back into forms, and explaining it to clients. I think that's good for us, obviously, because the more complexity from that standpoint -- typically, complexity can stop new businesses from forming. I don't see that happening here. In fact, as I think you're saying, some may be encouraged given the tax changes, and I think existing clients will find that the value of Paychex is really -- they can really see an increased value of Paychex going through all this change. So, I think there's some real opportunity there.

From a selling-season perspective overall, it's pretty early. We saw some momentum in November on the small business side that we're hopeful will continue. We'll see. A lot of things are shifting. The go-to-market strategy that we've put into effect put more on the web -- making changes on our website, adding chat to our website, making it easier for clients to search Paychex, understand what Paychex is, and then buy either online or through telesales -- it looks like it's starting to pick up, but it's early, David. We'll have to get to the end of January to really see what the big impact is on small business. By the way, HR services -- as we've noted, and you've seen -- is growing very strong. It's a very strong market for PEO, retirement services, and time and attendance, for example. They're all growing well.

David Togut -- Evercore ISI -- Managing Director

Understood. And then, I'm curious if you saw anything during ADP's proxy fight with Pershing Square, particularly their greater disclosure about their innovation strategy with their new intended back-end payroll engine and tax-filing engine -- whether any of that disclosure impacts the way you think about your own innovation path, particularly given the excess cash you'll have under the new tax bill.

Martin Mucci -- President and Chief Executive Officer

No, I don't think so. ADP has always been a good competitor. I think we feel very comfortable with the technology investments that we've made in Flex, and we just introduced our new product bundles in October -- our Express Payroll product on the low end, SurePayroll's investment... No, I think we feel good about the investments, but there are always some things that you'd like to do a little bit more in a quicker period of time, and that's really -- from a technology side, we're reviewing whether we can do that. It really hasn't been influenced by ADP. They continue to be a good competitor, and we feel very comfortable competing against them.

David Togut -- Evercore ISI -- Managing Director

Thanks. Just a quick final one from me: As you contemplate the use of proceeds from the tax cut, you particularly mentioned higher R&D, but what about dividend payout? You have a terrific payout ratio of around 80%. Should we expect accelerating dividend growth once the tax cuts come through, and would the payout ratios stay at approximately the same level?

Martin Mucci -- President and Chief Executive Officer

Obviously, that's a board decision, so as we approach the next board meeting in the next month, that'll be a good discussion to have. I think the board has been very consistent with paying out a generous dividend compared to others, but with how big of a change this is, I think they'll continue to evaluate whether that's the proper level, but I don't have any doubt that we'll continue to be a leader in the way we payout, and it'll certainly be consistent with what we've done in the past.

David Togut -- Evercore ISI -- Managing Director

Understood. Thanks, and happy holidays.

Operator

Thank you. Our next question is from the line of Mr. Brian Keane of Deutsche Bank. You may now proceed.

Brian Keane -- Deutsche Bank -- Director

Hi, guys. I just want to ask about payroll services growth. Efrain, I think you suggested that the growth would be toward the lower end of the range. I'm just trying to think a little bit about the causes of that. I think you did mention client mix, so I just want to make sure I understand it.

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

Brian, I think the two biggest impacts to that -- and then, there's one additional factor that could impact it in the back half of the year, but if I go through the first six months of the year, what you're seeing are the impacts of going from an average client size in the upper 16s to about 16, and we disclosed that, so we got that drag in the first half of the year, and that's impacting us. On the pricing side, our range is about 2 to 4, and we're netting around that 2% range, so the combination of those two is driving us to where we are. In the back half of the year, the wildcard will be how strong the selling season is. If we have a strong selling season, we could start to build up from that number, and we are anticipating and hoping that we will.

Brian Keane -- Deutsche Bank -- Director

So, as client size gets smaller, then the revenue yield is lower?

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

Yes.

Brian Keane -- Deutsche Bank -- Director

Okay. And then, just my question on the tax reform: So, it sounds like you're suggesting that some of that benefit might get reinvested, so it would potentially go into investments, which would lower margins, and therefore, we wouldn't see the full 100 percent impact to the bottom line. I just want to make sure I got that correct.

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

Yeah, let me add some nuance to that, Brian. The concept here is not that we simply reinvest and up the amount of expense, as we have in the business. The idea is that we reinvest over a period of time -- say, over the next couple of years -- and that those investments pay out in future growth in the company in two forms: 1). Top-line growth, and 2). Earnings growth by becoming more effective and efficient. That's our thought process here -- not that we think the current rate of spend needs to be upped and that we have an opportunity, but that we have -- as Marty suggested earlier -- the opportunity to look at a range of different projects both on the operations side and on the technology side to see if we can accelerate them, and if they were on a roadmap that was three to four years, could we do that in two, and can we start to pull some of those projects forward? We have a robust list of things that we are looking at.

Brian Keane -- Deutsche Bank -- Director

Okay, very helpful. Happy holidays, guys.

Operator

Thank you. The next question is from the line of Mr. Gary Bisbee of RBC Capital Markets. You may now proceed.

Gary Bisbee -- RBC Capital Markets -- Marketing Director

Hey, guys. Good morning. I'll start by following up on this client mix shift. So, in your 10-K for fiscal '17, you said total payroll clients was flat at 605,000, so if the mix is -- does this mean the midmarket clients or larger clients actually declined, but it was offset by growth in smaller clients?

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

No, Gary. I think that the growth that we saw was on the lower end of our client base. We didn't see a decline in the midmarket in terms of the number of clients, but as a percentage of the client base because the rest of the client base shifted down to lower-sized clients. Over the last couple of years, we've been seeing more growth on the low end of the client base than on the higher end of the client base.

Gary Bisbee -- RBC Capital Markets -- Marketing Director

So, let me ask about that metric -- that 605,000. I know that's rounded, but the number you put in the 10-K every year -- is that just payroll, so is the number bigger if you have some segment that's doing HRS, but not buying payroll?

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

No, that includes clients that run payroll. That would capture -- so, some of those clients have additional ancillaries, but we'd count them if they were payroll clients.

Gary Bisbee -- RBC Capital Markets -- Marketing Director

Right, OK. And so, the next question -- continuing on the theme -- so, you've talked about the new bundles, the simpler pricing, and adding some things there. I know it's early, but how is that being received in the market as your people are headed out at key selling season? Is that helping competitively? Is there any feedback you have at this point?

Martin Mucci -- President and Chief Executive Officer

Yeah, Gary. It's positive feedback from a couple of different standpoints. One is the bundles being a little more competitive by adding things that other competitors don't have, like paperless onboarding -- the two midlevel bundles have paperless onboarding -- and this new do-it-yourself handbook. We've always had a handbook product, but it's very extensive, so we give information to the client and we work with them personally over the phone or in person to put that together.

We found that the new do-it-yourself online handbook that is a little more simple and more self-directed by the client is getting very good feedback in that bundle. And then, on the low end, Express is getting good feedback. So far, it's good feedback. It's early in selling season. You can't really see it until January -- particularly in small business -- and it's harder to predict, but we're getting positive feedback on it from what's in the bundle. We think we hit it right, so we'll see how the selling season comes out.

Gary Bisbee -- RBC Capital Markets -- Marketing Director

Okay, great. And then, just a final one from me: In your remarks, each of you alluded to PEO and ASO being poised for some acceleration over time. Was that comment aimed at the comment you made about integrating the sales force of HROI with your own and that going well, or was there some other reason that you're optimistic about the positioning of the combined business there?

Martin Mucci -- President and Chief Executive Officer

I'd say both. 1). The integration is going very well, so we added good leadership at HROI and their experience with a very experienced team on the Paychex side across the country. So, I think that's been positive, and I think it's helping the growth in PEO, but overall, I would say that right now, PEO and HR outsourcing are doing well in general. I think it's just because of all the changing regulations, and it's been very positive from that standpoint. When you think about it -- just think about minimum wage changes and how many are in different states.

What we're finding -- and, I mentioned this before -- even before tax reform changes, what these businesses are going through now was the fact that while federal regulations are trying to be reduced -- and are being reduced to some degree -- state regulations are making it even more complex if you're a multistate employer. Different minimum wage changes, Paid Family Leave Act is different in New York than in New Jersey and other states, and now, a lot of rules are even coming out on scheduling employees. So, I think it's just that a shared employer is getting a lot of attention right now.

Gary Bisbee -- RBC Capital Markets -- Marketing Director

That makes sense, thanks. Happy holidays and merry Christmas.

Operator

Thank you. Our next question is from the line of Mr. Kartik Mehta of Northcoast Research. You may now proceed.

Kartik Mehta -- Northcoast Research -- Managing Director

Good morning, Marty and Efrain. Marty, as you look at the selling season and compare it to what you've seen in the last couple of years and the changes that are going on -- more people that are going to the internet to look for payroll -- has that at all changed how you're managing the sales process and what you're investing in? Ultimately, could some of the investments you're talking about as a result of tax reform be related to that?

Martin Mucci -- President and Chief Executive Officer

Certainly, and we've already started those investments. Kartik, we've talked about how we've really upped the investment in digital marketing and getting more leads. We've invested in the website. We've now rolled out different forms of live chat on the website. Definitely, what you're saying -- small business -- micro in particular, fewer than five employees -- they're 60 percent of the way through the sales process just in the search online by themselves, and they're ready to buy, so the change that we made at the beginning of this fiscal year where we added more sales reps in the virtual teams or telesales has really started to pay off. We're learning and tweaking on the leads, and how to get more leads, and how to do it in the most efficient way, but that certainly could be part of the investment.

Now, if you go back to what Efrain said on top of that -- to be clear, this is not just about saying, "Okay, we're going to raise the level of ongoing expense." We're looking for some technology investments that could be made over this or the next fiscal year, that while we're getting the biggest benefit of tax reform, we could accelerate those investments to maybe speed that up. We're feeling pretty good -- again, on selling season, I won't comment because it's too early, particularly for small businesses, but we're very bullish on how virtual sales are going to take off. The field also gets very focused on the five-plus and larger clients and has more time for that. When clients want to call in and buy, telesales is ready to do it.

Kartik Mehta -- Northcoast Research -- Managing Director

Marty, in the past, you've focused on acquiring companies that are private and bolting on those companies. As you look at this tax reform, do you think there's any change in valuation? I know valuation has kept you on the sidelines, but do you think there's any change in valuation because of tax reform? Could that have any impact on what you look at or what happens to valuations?

Martin Mucci -- President and Chief Executive Officer

I suppose. It certainly depends on the company and their profitability. With many of these companies, it depends on their size and profitability whether the tax reform will even impact them or not, or whether they have carry losses, forwards, and things like that. So, I think it could have some impact. I don't think we're seeing that right now, but that certainly would measure into things that we're looking at.

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

The other thing I'd add, Kartik, is that the inability to deduct interest expense above certain caps makes certain targets more attractive than they otherwise would be at the margin. Now, I just want to caveat that I am not saying that we have a target in mind, but that those opportunities will be there. It's not a great place to be if you have a significant amount of debt in your capital structure, and companies like Paychex that don't operate that way can bring value in those situations. So, I would say at the margin, those opportunities will be more attractive.

Kartik Mehta -- Northcoast Research -- Managing Director

Efrain, just one last question: The interest on client funds -- does the rate change and/or the tax reform at all change how you will invest these funds?

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

Yeah, it actually could have an impact. We were reticent -- we had an internal discussion about attempting to modify guidance with all of these changes going on, but it certainly could impact the composition of the portfolio, which could, in turn, impact the effective tax rate. The point I'm making is that you may end up in a world where corporate taxable bonds are more favorable investment vehicles, which would drive your effective tax rate up but won't have much of a change on the bottom line. We're looking at the composition of the portfolio to understand if it makes sense over time to change the ship from almost all municipals and some corporates to more corporates and fewer municipals. So, that's all part of the raft of considerations that we need to think about.

Kartik Mehta -- Northcoast Research -- Managing Director

All right. Thank you, Marty and Efrain.

Operator

Thank you. Our next question is from the line of Mr. Ashwin Shirvaikar of Citi. You may now proceed.

Ashwin Shirvaikar -- Citigroup Research -- Managing Director

Thank you. Good morning, Martin. Good morning, Efrain. I wanted to go once more to the derivative impact of tax reform. You addressed that the propensity to outsource might go up because these things are complex, but what are your SME clients saying to you about potential higher employment and things like that? Down the road, can that affect that client mix metric that's hurting payroll?

Martin Mucci -- President and Chief Executive Officer

Frankly, at this point, they're not saying anything because I think they're still trying to figure it all out, but I think that they will certainly -- to the degree that a small business gains a benefit on tax reform -- many small businesses aren't that profitable, so they might not pick up that much gain, but I think the overall feeling is they'll have an opportunity to invest in their business, hire more people, and they'll do it in that way so that they can expand.

So, that certainly should be another positive opportunity for us to -- even existing clients will be able to add more employees, which will help us with more checks, and they may now say, "Okay, I can spend on a 401(k) and make a contribution, so I'll take a 401(k)," and we're looking at all of our marketing to our clients and prospects to say, "Hey, this may be the time that you want to invest in health insurance, 401(k), retirement plans, an IRA, or something else that Paychex can provide to you," and make it easy for them as they see their benefit.

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

To build on what Marty said, our thinking as we go forward is that the tilt in the future will be toward comprehensive outsourcing solutions -- bundling benefits, bundling other ancillaries. If there was a trend to do that in the past, there's more now, and we think we have shown by our investment dollars that we think PEO is going to be a beneficiary, but to Marty's point, we think there are going to be other areas of the business on the ancillary side that will benefit from more available cash in the hands of small- to medium-sized businesses.

Ashwin Shirvaikar -- Citigroup Research -- Managing Director

Understood. For the near term, is it possible to quantify -- or, have you put in your forward expectations -- the strength of any one-time reporting related to this complexity in the next one or two quarters?

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

I think it's early, and I think where you would see it and where it would be easier to do is on the PEO side more than anything else. But, I think we're early in the process to see what's going on.

Ashwin Shirvaikar -- Citigroup Research -- Managing Director

Got it. One more along those lines -- lower withholding because of this affected investment plan?

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

We think the impact will be between $200 million to $300 million on client funds. At the margin, we think that's about $0.01 EPS going forward -- I'm sorry, on an annualized basis. I don't want to cause an estimate revision at this point. This is yet another -- Kartik asked earlier about the portfolio of client funds. It will decline as a result of this. It's a modest impact given the portfolio, but it will have an impact, and we're rolling through all of those impacts to be able to speak with more certainty as we go forward.

Ashwin Shirvaikar -- Citigroup Research -- Managing Director

Got it. One question not related to any of this: The cash flow for the last six months has been quite good. How much of that is timing, and is it sustainable for the course of the year?

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

Yeah, I think 26% was high. I don't have an exact percentage. Obviously, 26% through the first half of the year -- there were some unique items that occurred. The fourth quarter was artificially low, and the first six months were probably artificially high, but I think double-digit is certainly where we're going. I'd just add one other point on that: Our cash generation has been tremendously strong, so we continue to deliver high-quality earnings.

Ashwin Shirvaikar -- Citigroup Research -- Managing Director

Got it. Thanks, and happy holidays, both of you.

Operator

Thank you. Our next question is from the line of Mr. Rick Eskelsen of Wells Fargo. You may now proceed.

Rick Eskelsen -- Wells Fargo -- Analyst

Good morning. How are you? Thank you for taking my question. Just the first one -- again, following on the tax reform theme -- you guys are talking about reinvesting. I assume some of your competitors are probably looking at similar things. In terms of overall market competition and what you see, what impact do you think you could see from tax reform on the competitiveness of the market?

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

I'd say this, Rick, and Marty can build on it. If you've got more in your war chest, you're in a better position, so I would say those who have more in the war chest are in a better position to be able to compete in a landscape where resources matter. I would say we're -- that's one reason why, as we looked at the opportunity, we said there are opportunities to accelerate some high-value projects, and that it's time to start to think about doing that over the next couple years.

Martin Mucci -- President and Chief Executive Officer

As Efrain said, it's an interesting point when you think about how there are companies that are going to gain from this in our competitive environment and there are others that won't because they don't have the profitability and the tax reduction that we're going to have. We'll be able to invest more where others aren't going to gain that much. I think it'll continue to put companies who are already profitable and who have been paying a high tax and will now pay lower -- that should help us -- if we plan this right and invest correctly, this will make us even more competitive than we are today, with some others who can't do the same level of increased investment.

Rick Eskelsen -- Wells Fargo -- Analyst

Thanks. That's helpful. Building on that a little bit, I have two questions on CapEx. I noticed it was a little bit higher this quarter. Based on your disclosure, I think it's due to the campus buildout.

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

Yeah, the campus buildout. Look on the presentation we posted on the website. I think we said CapEx is going to be $180 million to $190 million for the year. I think it's going to come in a little bit lower. You can see what we spent in the quarter on the campus. One thing that I think is very important to emphasize -- I keep saying this -- the buildout of the campus permits us to consolidate leases and save expenses on an operating basis going forward, so that's why we did it -- no reason other than that. Efficiency -- from a financial standpoint, it was a very attractive deal for us.

Rick Eskelsen -- Wells Fargo -- Analyst

Is the campus buildout primarily going to happen this year? Thinking about CapEx and the investments you guys have talked about, how should we think about some of those investments on the technology and CapEx side going forward?

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

It's primarily this year, Rick. We may have some spillover capital into next year, but most of it occurs this year.

Rick Eskelsen -- Wells Fargo -- Analyst

And, in the longer term, with you accelerating some investments, should we look for that CapEx number to drift up slightly in the coming year?

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

It could. If you look at what we've been spending, we're somewhere in that 3.5%-of-revenue range. Sometimes, we bounce up a little closer to 4%. That's our normalized CapEx -- sorry, capital expense amount. We could bounce a little higher if we saw projects that made sense. It's not going to -- I wouldn't anticipate at this point that it would bounce up to the level that we're spending this year because of the building.

Rick Eskelsen -- Wells Fargo -- Analyst

Great. Thank you very much. Happy holidays.

Operator

Thank you. Our next question is from the line of Mr. Jason Kupferberg of Bank of America Merrill Lynch. You may now proceed.

Jason Kupferberg -- Bank of America Merrill Lynch -- Analyst

Great. How are you guys doing?

Martin Mucci -- President and Chief Executive Officer

Good, thanks.

Jason Kupferberg -- Bank of America Merrill Lynch -- Analyst

Good. Just one more on tax. I just wanted to push a little bit on the reinvestments. I know it's premature to have precise numbers as far as how much you may reinvest, but can you just roughly dimension it for us? Are we talking about 10% of the benefit, 40%...? Just some rough order of magnitude to give investors a sense of how you guys are thinking about the reinvestment opportunities.

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

Jason, this is about as precise as I can be: I would say it's half or less.

Jason Kupferberg -- Bank of America Merrill Lynch -- Analyst

Okay, I'll take it. Thanks.

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

The reason why -- I don't mean to be flippant, and that wasn't a flippant comment. It is actually a serious comment. The process when you're doing this is that you collect a lot of opportunities, and Marty and the management team will sit down and say, "What do we think are things that we think will really move the needle as opposed to just being opportunities to spend and give us a bit of an incremental bump?"

And then, we're going to go through a conversation at the board level to discuss what their comfort level is, and then we're going to look at it all together, and does it make sense from both an investor standpoint and from a business standpoint? And so, we're in Inning 1.5 to 2 of that process. It will certainly accelerate over the next month or so, but it is a little bit early. We know the opportunities there. We certainly wouldn't drop all of it into the opportunities, but we think we do have opportunities to spend, and we're going to rank and order them, and then do that.

Jason Kupferberg -- Bank of America Merrill Lynch -- Analyst

All right. So, you think that by the time of the next earnings call, we'll have --

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

Oh, yeah, definitely.

Martin Mucci -- President and Chief Executive Officer

Yes.

Jason Kupferberg -- Bank of America Merrill Lynch -- Analyst

Okay, great. I don't think I heard much about bookings and retention in the quarter, at least qualitatively. I know you don't give hard numbers, but you were facing some easier comparisons. I know you were targeting bookings to be positive on a full year-over-year basis for '18. Is that still on track, and are you seeing further upticks in retention after the implementation of a new client service model?

Martin Mucci -- President and Chief Executive Officer

I think retention has been very consistent through the years, so I think that's been positive. It's near all-time highs, and we're rebounding back from last year where we dropped off just a little bit, so I think it's been pretty consistent and positive there, and again, we'll have the best sense after January. It's certainly the same for sales. Jason, we don't normally talk about it until after we get through the selling season, but we had some momentum in November, and it's always hard to tell exactly, but we're feeling pretty good about it, and we'll see how we come out with the new bundles, with the service model changed and with the go-to-market stuff that we've done with the virtual team inside and the increase in web investment. We're feeling good; it's just early and a little tough to talk about until we know.

Jason Kupferberg -- Bank of America Merrill Lynch -- Analyst

Okay. And just a last one: On core payroll, we have a slight tweak here to the low end of 1% to 2% for the year, so around the edges, what changed in your mind over the last three months? It doesn't sound like the hurricane impacts were any worse than you had feared, and I think we had talked about the smaller client sizes last quarter, but I just wanted to see if there was anything discernible that led you to the lower end.

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

Beyond the things that I mentioned, the speed and the pace of ramp always impacts payroll revenue growth. We tweaked it based on what we're seeing in terms of the pace of the ramp through the year. I think that's the reason we tweaked at this point.

Jason Kupferberg -- Bank of America Merrill Lynch -- Analyst

Just the ramp of the metric itself, you mean? In other words, now you're taking a checkpoint halfway through the year and just feel like the low end is more likely?

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

Yes.

Jason Kupferberg -- Bank of America Merrill Lynch -- Analyst

Got it. All right. Have a great holiday. Thanks.

Operator

Thank you. Our next question is from the line of Mr. Tim McHugh of the William Blair Company. You may now proceed.

Tim McHugh -- William Blair & Co. -- Partner and Analyst

Yes, thanks. Just to follow up -- the comments you referenced once or twice on November -- is that related to macro data or your company-specific comment? If it's company-specific, can you elaborate on what the momentum was that you're referring to that makes you feel better?

Martin Mucci -- President and Chief Executive Officer

Yeah. Just generally, you're starting to head into that selling season, and we had some momentum there -- that was specific to us, Tim, not in the macro sense. As you're getting into this year-end time, we felt pretty good about -- the first part of the second quarter was kind of like the first quarter, and November seemed to have a little bit of an uptick, but that doesn't make the selling season, so we hate to comment much more than that. We just feel pretty good, and particularly, if you look at the HRS side of it, we certainly saw a nice uptick in the PEO side. So, I'm feeling pretty positive coming out of November, but again, I could tell you a lot more after this next quarter.

Tim McHugh -- William Blair & Co. -- Partner and Analyst

Okay. One other question: HROI -- when I do the math on the revenue, contribution, and expense impact, it looks like it broke even, maybe even slightly worse than that.

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

Yeah, it was modestly negative, Tim, but really not a significant impact.

Tim McHugh -- William Blair & Co. -- Partner and Analyst

Why? Was that integration expense?

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

You always have integration costs. When we do a deal, we're assuming that we've got to do a number of investments, and then there's the amortization associated with the deal itself that adds to expense, and that starts to lessen as we go through the quarter.

Tim McHugh -- William Blair & Co. -- Partner and Analyst

Okay, thanks.

Operator

Thank you. Our next question is from the line of Mr. David Grossman of Stifel Financials. You may now proceed.

David Grossman -- Stifel Financial Corp. -- Analyst

Thank you. Good morning. I was wondering if I could just go back to the unit growth question for the things coming up in terms of the impact of mix on that number. My recollection is that as a typical economic cycle matures, you have a tendency to be adding new business creations and improvements, and our mix naturally skews toward smaller clients or companies than the average. That's a natural phenomenon, so that's pressuring payroll growth to the lower end. Are there other dynamics that are at work that drive that number down? Typically, you would get volume in terms of total units that would offset that decline, and I'm wondering if this cycle is different or if there's anything else going on in the business that may be impacting that growth for that number.

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

David, I think it really boils down -- you can summarize it by saying that last year, we didn't have client growth. We talked a bit about why that was at the end of the year. A lot of that related to service disruptions and the spike in attrition that we had. We dropped by a point. When you put that together with the sales result and the mix shift that we're seeing, you're driving payroll service revenue to the rate that we're experiencing. So, I think what's a little idiosyncratic now is that we're anniversaring some of that retention issue that we had last year, and it's driving payroll service revenue down.

David Grossman -- Stifel Financial Corp. -- Analyst

Right. So, I guess this question was asked in a different context: The difference -- since we knew about the retention and the headwind that we would have going into this year, is the difference primarily related to a pricing dynamic, then? What is it that specifically is --

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

No, it's not a pricing dynamic. I would say at the margin, pricing is a little bit more competitive in small-market payroll under 50 than it was last year, so we're realizing about 2%. But again, I'm comparing growth against last year, where I started to experience some of these effects in the back half of that year, so the front half is a little more challenged than the back half will be.

David Grossman -- Stifel Financial Corp. -- Analyst

Got it. Okay. And then, the second question I had relates to the TEO. When you back out the distortion from HROI, can you give us a sense of how the worksite employees growth is organically trending?

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

I don't know that I've got the exact number. We haven't disclosed it. But, I would say this, David: It's pretty solid. It's certainly upper single digits, and maybe double digits. I'd have to go back, but I would say that's the range. I won't be more specific than that, but if I can think about the point behind your question, we've obviously had very good worksite employee growth, but it's not all because of HROI. We've had worksite employee growth on our PEO, also.

Martin Mucci -- President and Chief Executive Officer

Yeah, I'd say it's been pretty consistent. We went over 1 million worksite employees that we serve, and that was before HROI, so I think those numbers are in that range. That's the range.

David Grossman -- Stifel Financial Corp. -- Analyst

Got it. Any thoughts at a high level on how passthroughs are impacting revenues this year? Is there any notable difference in terms of insurance passthroughs in terms of how they're impacting revenue growth in that segment?

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

Not really, David. I think there's a little bit more impact -- by the way, I just looked it up, so the best that I will say on it is that our organic worksite employee growth was double digits, so we're seeing nice performance. Marty alluded to that. I didn't have the number in front of me, but I looked it up. So, passthroughs are not -- I should say that at the margin, there is more passthrough because of the addition of HROI. It's not significantly distorting the growth numbers. I would say that as the percentage of business that we're deriving from PEO growth, you'll see more. One other thing I would say -- and, I'll take it under advisement as to whether we report it more regularly and do that every single year in our 10-K passthrough, so we'll look at whether we add that disclosure, so you get a sense of what that is.

David Grossman -- Stifel Financial Corp. -- Analyst

Right. And, one last thing on the PEO -- you made this acquisition. I don't remember what your historical exposure was to the blue-gray segments, so I'm just curious -- you made this acquisition. How do you see the market evolving over the next couple of years vis-à-vis what your historical perspective was two or three years prior to this?

Martin Mucci -- President and Chief Executive Officer

Do you mean general, for the PEO?

David Grossman -- Stifel Financial Corp. -- Analyst

Yeah.

Martin Mucci -- President and Chief Executive Officer

I think we're still looking at it consistently, as we always have. That's one of the things we liked about HROI, that they were very consistent with the way they went after clients and selected clients. We had a very good compliance way to look at it, and underwriting. I think they were very consistent as well, so I don't think we're increasing risk as we take on these PEOs and as we take on a company like HROI because they're very consistent with the way we looked at it, and I don't see us getting more risky. We don't see it that way. We've always been pretty careful on that and have had a very strong PEO because of that. So, we've had the growth without taking on additional risk over the parameters that we've always had in the past.

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

We also think that segment of the market will continue to grow, and particularly grow in areas where HROI is strong and we're strong.

David Grossman -- Stifel Financial Corp. -- Analyst

Right. Okay, guys. Thanks very much. Have a great holiday.

Operator

Thank you. Our next question is from the line of Mr. Mark Marcon of Baird. You may now proceed, sir.

Mark Marcon -- Robert W. Baird &Co. -- Analyst

Hi, Marty and Efrain. With regard to HROI, was the contribution this past quarter somewhere around $20 million?

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

I think you can derive that, Mark. It's in that range.

Mark Marcon -- Robert W. Baird &Co. -- Analyst

Okay. And then, with regard to the effective yield for the back half of this year given the recent rate increase, how should we think about that in terms of -- we'll think about the float balance coming down by 200 to 300 --

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

But, that won't be in the back half of the year, Mark. I'd just caution you to --

Mark Marcon -- Robert W. Baird &Co. -- Analyst

Yeah, I know, with the duration and everything. That's why I was asking the question.

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

No, I think we still feel comfortable with the guidance that we've given, so that's where we peg it at. The reason why I can't be more specific than that is that we're looking at the composition of the portfolio, and over the next three to five months, it could change, but we're comfortable with where we are right now.

Mark Marcon -- Robert W. Baird &Co. -- Analyst

Okay. And then, with regard to the small business formations, there's been a lot of discussion about the way passthroughs are going to work. Wouldn't you think that there's going to ultimately end up being a little bit more in terms of small business formations that could end up occurring because of this change, and if so, how would you take advantage of that?

Martin Mucci -- President and Chief Executive Officer

Well, I do think that you would expect that given the reform that you're seeing, and that that would drive some of that. I obviously haven't seen it yet, but you certainly get that feeling that that'll happen. We would take advantage of it by being out there and marketing to the fact that if you're going to incorporate as a small business for the first time in particular, you would best have someone like Paychex there to support you. So, we're already looking at how marketing can take advantage of anything that comes out of tax reform, and that is certainly one of them.

Mark Marcon -- Robert W. Baird &Co. -- Analyst

Great. And, with regard to the capital expensing provisions and the ability to deduct all of that related to the next five years, to what extent would you end up really taking advantage of that? Are there ways to take advantage of it to a greater extent than just marginally increasing your CapEx?

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

There may be, Mark, and I would just say it's early in the process, so we're going to take a look at that.

Mark Marcon -- Robert W. Baird &Co. -- Analyst

Okay. In terms of these very short-term, one-time impacts, to what extent are you going to have to spend more in the very short term just to get the systems into compliance? It sounds like the IRS is basically not going to give the new withholding tables until February, so it's going to be a bit of a scramble here in terms of calendar Q1.

Martin Mucci -- President and Chief Executive Officer

Yeah, I don't think -- we're already working with the IRS almost daily on what's happening and how we'll be able to support them, and that's the strength of a company of our size, and our compliance team and tax team -- they're ready, they know it's going to be a scramble, they're expecting it, and we work very closely with the IRS to help them and work with them so that everything is up and running as quickly as possible. It's not going to cost us additional expense in the quarter or something like that. I'm sure there's going to be a lot of extra work, but our teams will be ready to do it. I don't see any big investment or change because of it.

Mark Marcon -- Robert W. Baird &Co. -- Analyst

Okay, great. Anything to think about with regard to your deferred income tax liability?

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

Yes. There will be a revow, and it will produce a benefit, and we're working through that.

Mark Marcon -- Robert W. Baird &Co. -- Analyst

Okay. Obviously, everybody will know to look through it, but I just brought it up.

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

No, I know. I appreciate it, Mark. But, yes, we're not ready to quantify it yet, but there will be some one-time benefits.

Mark Marcon -- Robert W. Baird &Co. -- Analyst

Okay, great. Happy, happy holidays.

Operator

Thank you. Our next question is from the line of Mr. Jeff Silber of BMO. You may now proceed.

Henry Chien -- BMO Capital Markets -- Analyst

Hey, good morning, Marty and Efrain. It's actually Henry Chien. Thanks for squeezing me in. I wanted to ask a more high-level competitive positioning question. There does seem to be a ton of investment going into the HR services and HR bundles from both ADP and software providers. I was just wondering if you could share any updated thoughts on how Paychex is doing this season in terms of HR sales, and where Paychex is doing better, or how you're thinking about positioning in general.

Martin Mucci -- President and Chief Executive Officer

Henry, I think the competitive environment is pretty much the same. Everybody's investing. We feel very good about the investments we've made. In fact, we've really taken it to -- we've taken our entire development team a year or more ago to agile teams. We develop and roll out changes much faster now.

We rolled out the new bundles in October that include -- so, it's not just payroll bundles. They're bundles with HR components to them like paperless onboarding for our clients so that you can basically post, recruit, hire, and bring them on, all in a paperless fashion as part as one of our bundles that they can by, or make a do-it-yourself handbook, because we've found that instead of the more complicated handbook and thorough handbook that needs personal interaction, more clients want to do it themselves and have a scaled-down one that they can complete at their own pace when they want to do it.

All that innovation has been quick, and rolls out, and rolls out very successfully, and we haven't even talked on the call at all about mobile. Our mobile adoption and the use of our mobile app has picked up dramatically, and it's been more by the employees of the clients versus the employers. So, these innovations have been very good. We see tax reform as an opportunity -- as we've said a number of times -- to possibly accelerate a few things that are on the outskirts of what we've wanted to do and bring them forward a little bit, but we're very comfortable with our level of innovation and competitiveness in the market, and I think it's been pretty consistent. You've got to innovate, you've got to have great service, you've got to deliver, and I think Paychex and our folks are doing that.

Henry Chien -- BMO Capital Markets -- Analyst

Okay, that's great. And, just in terms of the kind of macro environment, it's sounding like the smaller client sizes and the number of business formations have been picking up from your view. Is that a normal pattern that you've seen from your experience over cycles, and is there anything that we should watch out for or that you're watching out for to be careful of in terms of the micro employment?

Martin Mucci -- President and Chief Executive Officer

We haven't talked too much about the formation itself, but it's flattened out. It's pretty close to the levels it was pre-recession. I think the big thing after this recession was how long it took. It didn't pop right back. It took a lot longer, but it was sustained longer. The thing I mentioned earlier was that in our monthly employment report, what we're seeing is that small business job growth -- under 50 employees -- has moderated, but there's still job growth and consistent job growth, but it moderated down, as you'd expect since we're around full employment. But, the wage increases are now picking up, and part of that is scarcity of the resource because of full employment, so the wage increases are now getting up from that 2%, getting closer to 3%, and running around 2.8% or so.

So, you're seeing a pretty good wage increase, and then you're seeing the moderate small business job growth -- that's all pretty positive. The thing to look out for may be what was mentioned a couple of questions ago, which is with the passthroughs and the tax reform, does that generate new business formation for someone who was not going to formulate a business before? Now, it may make sense for them. We may see a pickup in that. It's just a little bit early to tell.

Henry Chien -- BMO Capital Markets -- Analyst

Okay. Thanks so much for the color.

Operator

Thank you. Our last question is from the line of Mr. Tian-Chen Wong of JP Morgan. You may now proceed.

Tian-Chen Wong -- JP Morgan

Real quick, I wanted to clarify on the pricing side. With all the bundling and pricing simplifications, any change in pricing in the quarter and your outlook? I didn't think so, but I just wanted to make sure.

Martin Mucci -- President and Chief Executive Officer

No. Really, the bundles were more combining the features, making the pricing simpler in the way that we presented to the client. We don't see that as changing the revenue per client or what we're getting from them in price. We haven't seen it yet -- it's early. We didn't expect it and haven't seen it yet.

Tian-Chen Wong -- JP Morgan

All right, that's great. Thank you. Have a safe holiday.

Martin Mucci -- President and Chief Executive Officer

Any more calls?

Operator

At this time, there are no further questions on queue.

Martin Mucci -- President and Chief Executive Officer

Great. At this point, we'll close the call. If you're interested in replaying the webcast of this conference call, it'll be archived for about 30 days. Thank you for taking the time to participate in the second-quarter press release conference call and your interest in Paychex. We appreciate it. Please have a great holiday. Thank you.

Operator

Thank you, and that concludes today's conference. Thank you for participating. You may now disconnect.

Duration: 81 minutes

Call participants:

Martin Mucci -- President and Chief Executive Officer

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

Danyal Hussain -- Morgan Stanley -- Analyst

James Berkley -- Barclays Investment Bank -- Vice President

Jim Schneider -- Goldman Sachs -- Analyst

David Togut -- Evercore ISI -- Managing Director

Brian Keane -- Deutsche Bank -- Director

Gary Bisbee -- RBC Capital Markets -- Marketing Director

Kartik Mehta -- Northcoast Research -- Managing Director

Ashwin Shirvaikar -- Citigroup Research -- Managing Director

Rick Eskelsen -- Wells Fargo -- Analyst

Jason Kupferberg -- Bank of America Merrill Lynch -- Analyst

Tim McHugh -- William Blair & Co. -- Partner and Analyst

David Grossman -- Stifel Financial Corp. -- Analyst

Mark Marcon -- Robert W. Baird &Co. -- Analyst

Henry Chien -- BMO Capital Markets -- Analyst

Tian-Chen Wong -- JP Morgan

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