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Paychex, Inc. (NASDAQ:PAYX)
Q4 2018 Earnings Conference Call
June 27, 2018, 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. After the presentation, we'll conduct the question and answer session. To ask a question, you may press * followed by the number 1. Today's call is being recorded. If you have any objections, you may disconnect from the conference. May I introduce our speaker for today, the President and Chief Executive Officer, Martin Mucci. Please go ahead.

Martin Mucci -- President and Chief Executive Officer

Thank you. Thank you for joining us for the discussion of the Paychex fourth 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 fourth quarter and fiscal year ended May 31, 2018. You can access our earnings release on our investors relations webpage, and our 10-K will be filed with the SEC before the end of July. 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 fourth quarter, Efrain will review our fourth quarter and full-year financial results, and discuss our guidance for Fiscal 2019. Then will open it up for your questions.

We were pleased with our strong finish to Fiscal 2018 and the progress we made on key initiatives. Our total revenue growth was 9% for the fourth quarter and 7% for the fiscal year, including our acquisitions of HROI and the Lessor Group. As of May 31, 2018, we served over 650,000 payroll clients. We acquired HROI, a national PEO in August of 2017, and acquired the Lessor Group, a payroll and HR service provider headquartered in Denmark, at the end of February 2018. We are pleased with both of these acquisitions, which have so far exceeded our expectations and are progressing well, and we believe these acquisitions position us well for long-term growth in both our PEO and international businesses.

At the start of Fiscal 2018, we implemented certain changes on our sales go-to-market strategy. We started off slowly in the first half of the year, but gained momentum in the second half. We are particularly pleased with the sales performance in our comprehensive HR outsourcing services, including our PEO business, which performed well in both sales and client retention. Excluding Lessor, our payroll client base was comparable to last year.

Client retention was greater than 81% of our beginning fiscal year payroll client base at the end of last year. We had just completed a realignment of our service organization to allow greater flexibility and customization of the service our clients receive. During that transition, we experienced a slight reduction in retention. If Fiscal '18, client loss trends improved as the year progressed, and in particular, we showed strong retention in our comprehensive HR outsourcing solutions for the year.

Job growth among small businesses has moderated and the unemployment rate is the lowest we've seen in many years. These reflect the tightening labor markets. We are well positioned at Paychex to help business owners make positive changes to wages, benefits, in their challenging employee recruiting environment that will aid them in competing for top talent.

Within the small business sector, entrepreneurship has also neared peak levels since the recession, which has helped create jobs and drive the economy. Overall, business owners have a positive outlook on small business economic environment and hiring. We are constantly evaluating strategic opportunities to bring value to our customers and help them grow their businesses, and this past month we launched several new innovative offerings that are being well received to start.

First, we introduced Paychex Promise, which was its first-of-a-kind offering in the payroll and HR industry. Paychex Promise is a subscription-based service that delivers peace of mind to business owners through protection against payroll interruptions and solutions to address the routine challenges of running a successful business. The primary offering is payroll protection, which extends the collection period of payroll funds from a business' bank account by 7 days without interruption of service. This will allow business owners to pay their employees and remit taxes on time regardless of cash flow timing issues.

This is particular helpful for small businesses that many times have cash flow timing challenges. The service also provides access to other tools to help businesses build their credit file, stay on top of regulatory changes, and resolve fraudulent events. We are pleased with the positive reaction to this service received so far in the market, with over 1,000 clients joining us so far.

Second, we announced a partnership with Workplace by Facebook, to introduce a social collaboration tool to the company's HCM suite. This platform allows for a secure space for companies and their employees to connect, communicate, and collaborate in the digital age, fostering increased productivity and efficiency. The partnership with Workplace allows client employees to gain access to their Paychex Flex information without logging into Flex directly. We're bringing the information to them in their social collaboration space.

We are committed to delivering best-in-class technology solutions for our clients and business partners. In April, we added new features to our financial advisor console to enhance the user experience, to manage their book of business with Paychex and, of course, earlier this year we announced AccountantHQ to help our accounting partners.

We were honored to be named to the Forbes 2018 list of the World's 100 Most Innovative Companies, indicating that investors believe Paychex is among the firms most list likely to continue to develop the next big innovation. I'm very proud of our service organization for the receipt of a bronze medal for the Customer Service Department of the Year from the American Business Awards for the second consecutive year. This honor is part of the ABA's Stevie Awards, which are widely considered to be the world's top honors for sales and customer service.

Paychex clients are empowered to choose the way in which they like to be serviced. Dedicated payroll specialists, dedicated relationship manager, 24 by 7 call center, social media options, or a self-service approach. This flexible service, these many options, along with responsiveness, reliability, and the knowledge of our service givers allows Paychex to back up our leading edge technology with world-class service.

We were very excited to celebrate our 15 years of partnership with the AICPA CPA.com through the Paychex Partner Program. The Partner Program designates Paychex as the performed provider of payroll, HR, and retirement services, and offers special benefits to the clients of the program members. Paychex and CPA.com partner to enhance the CPA profession's role as an entrusted advisor to their clients and we provide unique value to CPAs in the program through the accountant-specific experience in the Paychex AccountantHQ and the dedicated accountant service model.

Paychex is a significant beneficiary of the Tax Cuts and Jobs Act, as we talked about last quarter. As we discussed, we have already initiated our plans to use a portion of these benefits to accelerate investments in the business in the areas of sales and marketing, and product innovation. These investments continue into Fiscal '19 and will provide additional product offerings in next-generation platforms that will position us well for longer-term growth.

The substantial portion of the tax savings, of course, is going to our shareholders. In April, we announced an increase in the quarterly dividend of $0.06 or 12%, to $0.56 per share. This increase was a fiscal quarter earlier than our typical dividend increase and was one way to share the savings directly with our shareholders. During Fiscal '18, we also paid out $740 million in dividends to our shareholders, which represents approximately 80% of our net income.

We also continued to repurchase Paychex common stock to offset dilution, using about $143 million for that purpose in Fiscal '18. In summary, our fourth quarter closed out another successful year for Paychex. We are an essential partner to our clients, helping them succeed and grow their businesses through recruiting, engaging, and supporting their employees.

Our innovative technology, full suite of HCM product offerings, and flexible service model is a powerful combination that positions us for sustainable growth within our market ecosystem. Our organic business, combined with our new acquisitions, have positioned us well for Fiscal 2019 and beyond. I greatly appreciate the work of all of our employees and the management teams and their efforts every day for our clients and their colleagues. I will now turn the call over to Efrain Rivera to review our financial results for the fourth quarter and the fiscal year. Efrain?

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

Thanks, Marty. Good morning to everyone. I'd like to remind you that today's conference call will contain certain forward-looking statements. Refer to the customer statements in that regard and our related risk factors. In addition, I'll periodically refer to some non-GAAP measures such as adjusted operating income, adjusted net income, adjusted diluted earnings per share. These measurements include certain discreet items and one-time charges. Please refer to the press release and investor slide presentation for a discussion of these measures and a reconciliation for the fourth quarter full-year Fiscal 2018 to their related GAAP measures.

We posed on our investor relations site our normal quarterly investor presentation. In addition, we're providing a supplemental presentation that outlines the impact to our financial statements of the new revenue recognition standard, ASC606, Revenue from Contracts with Customers. This is effective for us at the beginning of Fiscal 2019. The changes are modest and you'll see that, but they have an effect on the quarterly period, and so you'll need to look at that to understand what's going on.

This presentation also reflects the impact of tax reform and other non-GAAP measures. My discussion on the fourth quarter and full-year results on this call will be under current revenue recognition standards. When I discuss our forward-looking guidance for Fiscal Year '19, I'll be providing guidance incorporating the impact of ASC606. Again, it's relatively modest, but it does impact the quarters and there's one tax item that you'll just need to look at when you look at that presentation. I'll be hosting a separate call at 11:00 to walk through the impact of ASC606 and other items for those who are interested in participating.

I'll start by providing some of the key highlights for this quarter and then provide greater detail in certain areas. I'll touch briefly on full-year results and wrap with a review of the Fiscal '19 outlook. Revenue growth, as Marty mentioned, was 9% for the quarter, and grew to $871 million. This was aided by HROI and Lessor. As Marty said, they performed well.

Expenses increased 11% for the fourth quarter. The acquisitions of HROI and Lessor together contributed approximately 7% total expense growth for the fourth quarter. Higher PEO direct insurance passthrough costs were a factor in expense growth, as well as higher head count due to accelerated investment in our sales and product teams.

The effective income tax rate was 28.7% for the fourth quarter, compared to 35% for the respective prior year quarter. The significant decline year-over-year in the effective tax rate was due to tax reform. This effective tax rate for the fourth quarter was lower than we anticipated, due to discreet tax benefits recognized in the fourth quarter related to employee stock-based comp and an adjustment in the fourth quarter to the revaluation of deferred tax liabilities. So, you can look at that. It's in the press release and it's detailed.

Net income increased 17% to $229 million for the fourth quarter. Adjusted net income increased 13% to $219 million. Diluted earnings per share increased 17% to $0.63 for the fourth quarter and adjusted diluted earnings per share increased 13% to $0.61. We call out some of the items simply because some of them are very difficult to predict. I'll provide some additional color in selected areas.

Payroll service revenue increased 3% in the fourth quarter to $453 million. The increase resulted from the Lessor acquisition, which contributed approximately 1% to growth, and an increase in revenue per-check, which improved as a result of price increases net of discounts. HRS revenue increased 17% to $401 million for the fourth quarter, of which the acquisition of HROI contributed almost 8%. The remaining growth was driven by strong growth in client base across most major HCM services, including our comprehensive HR outsourcing services, retirement services, time and attendance, and insurance services.

Strong demand with our Paychex HR services, which is reflected in continued double-digit growth in the number of client worksite employee service. PEO, in particular, reflected strong growth. As of May 31, 2018, PEO ending work site employees, and this excludes HROI, were 19% higher than at May 31, 2017, and were higher than our number at the end of February 28, 2018. I got a number of questions on that following the third quarter call. We had a very strong year in PEO and expect that momentum to continue.

Insurance services benefited from continued growth in the number of health and benefit applicants and higher average premiums within our Workers' Comp insurance offering. Retirement services revenue also benefited from an increase in asset-fee revenue earned on the value of participant funds. Let's talk about interest on funds held for clients. They increased 27% for the fourth quarter to $18 million, primarily as a result of higher average interest rate earned.

Turning to our investment portfolio, our goal is to protect principal and optimize liquidity. On the short-term side, primary short-term investment vehicles are bank-demand deposit accounts and variable rate demand notes. In the longer-term portfolio, we invest primarily in high credit quality municipal bonds, corporate bonds, and U.S. government agency securities.

Our long-term portfolio has an average yield of 1.9%. Average duration is now 3.1 years. Our combined portfolios have earned an average rate of return of 1.7% for the fourth quarter, up from 1.3% last year, and we're beginning to realize the benefit of increasing interest rates. You just saw that the Fed recently raised interest rates again. Average balances for interest on funds held per client were down modestly for the fourth quarter, primarily driven by impacts of tax reform on client employee withholdings and the impact of average client-size mix, partly offset by wage inflation.

I'll provide a few points on the results of the full-year Fiscal 2018, just so we keep the year-to-date in context. Revenue growth was 7%, payroll revenue up 2%, and HRS revenue was up 14% compared to Fiscal 2017. HROI contributed less than 6% to the growth in HRS revenue for the year. The impact of Lessor on payroll revenue growth for the full year was negligible.

Operating income growth was 4% and adjusted operating income, which excludes a one-time charge following termination of certain licensing agreements, reflected growth of 6%. Net income and diluted earnings per share grew 14% and 15%, respectively, on a GAAP basis to $934 million and $2.58 per share. Adjusted net income and adjusted diluted EPS were up 15% and 16%, respectively, to $920 million and $2.55 per share. This figure is comparable to what you'll see for 2018, when we restate for ASC606, but I'll talk a bit more about it. The quarter shifts a bit and you need to pay attention to that.

Now, financial position. It remains strong with cash and total corporate investments of $720 million. As of May 31, 2018, funds held for clients were $4.7 billion, compared to $4.3 billion, as of May 31, 2017. Funds held for clients vary widely on a day-to-day basis and averaged $4 billion for the fiscal year.

Our total available for sale investments including corporate investments and funds held for clients reflected net unrealized losses of $38 million as of the end of the year, compared with net unrealized gains of $32 million as of the end of 2017 fiscal. Our longer-term portfolio has seen an increase in the end realized losses due to recent increases in market rates and interest. Total stockholders' equity was $2 billion as of May 31, 2018, reflecting $740 million in dividends paid and $143 million of shares were purchased during Fiscal 2018. Our return on equity for the past 12 months was a stunning 46%.

Our cash flows from operations were $1.3 billion for the fiscal year, a significant increase of 33% over the prior year. This change was primarily the result of higher net income and timing impacts within working capital, largely related to income taxes and our PEO payroll and related unbilled receivables for payrolls not yet processed as of the reporting date. The prior year reflected larger outflows impacted by higher accounts receivable balances related to growth in our payroll funding business for temporary staffing agencies.

Fiscal 2019 guidance. I remind you that our outlook is based on our current view of economic conditions continuing with no significant changes. Payroll revenue is anticipated to grow in the range of 2 to 3%, incorporating a full year of Lessor. Growth in payroll revenue for the first quarter will be below the full-year range. It'll be closer to approximately 1%, and the remaining quarters with be at or above the high end of the range. The gating is impacted by the composition of processing days within questions, particularly the first quarter. It normalizes as we go through the year. But we have some impact because of that composition in the year.

HRS revenue growth is anticipated to increase in the range of 10% to 11% for the full-year. The HROI acquisition impacts the gating of growth for Fiscal 2019, with the growth for the first half being above the high end of the full-year range, while the second half is slightly below the low end of the range. If you'll remember, we acquired HROI at the end of first quarter, so we've got a little bit of incremental revenue from HROI in the first quarter.

Interest on funds held for clients is expected to increase in the range of 15% to 20%. The guidance contemplates two additional rate increases in calendar year 2018, but no further increase. Let me just clarify; that means that at this point, we anticipate that we'll have two more raises in the year; in all likelihood in the fall and at the end of the year, based on what the Fed has said. We're incorporating that guidance nothing further than that.

Total revenue is expected to grow approximately 6% to 7%. Operating income margin is anticipated to be approximately 37%. We anticipate that operating margins will be impacted by accelerated investment initiatives, as well as some impact from anticipated growth in PEO passthrough insurance costs. Effective income tax rate is expected to be approximately 24%. Investment income net is anticipated to be approximately $15 million.

Adjusted net income is expected to be in the range of 11% to 12%. Adjusted diluted earnings per share is expected to increase approximately 11%. We anticipate that the growth in adjusted diluted earnings per share for the first, second, and fourth quarters will be a bit higher than the annual anticipated growth rate and growth for the third quarter will be approximately 5%, as Q3 of Fiscal 2018 was impacted by the change in the corporate statutory rate. In order to understand this guidance, you need to refer to the ASC606 presentation that either is posted or will be posted shortly to the website. There is some shifting in quarters. We do a very comprehensive reconciliation from as-reported GAAP to what we are calling our adjusted number.

As I previously mentioned, this guidance is presented reflecting the adoption of ASC606, which is effective for us in Fiscal 2019. Again, there is a schedule that's been posted to the website or will be posted shortly.

We finalized our evaluation of the new standard and the most significant to Paychex will be the deferral of cost to obtain and cost to fulfill our contracts over the average life of clients. Currently, sales commissions and bonuses, as well as salaries related to client onboarding activities are primarily expensed when incurred. These costs will now be deferred and recognized over the average life of a client. The impact of this adds slightly more than $0.01 to adjusted diluted EPS for 2018, and we anticipate a similar result for Fiscal 2019. So, the impact one year to next is relatively small. It doesn't shift margins significantly, but it does have impacts on the quarters.

There are minor changes to our revenue, which will be immaterial on an annual basis, as I said, but will impact the gating of the fiscal quarters. The changes from the new standard are all timing related and have no impact on the cash flows of the company. We'll implement the new standard using the full retrospective method, which will result in restatement of prior year's results and allow for more meaningful comparisons. By restating Fiscal 2018 under guidance, the result is overall growth rates for veterinarian, adjusted net income and adjusted diluted earnings per share that are comparable to those anticipated prior to implementing the new standard. So, the growth rates will be pretty consistent.

As I previously mentioned, we've included a presentation on the IR website to provide greater transparency on the impact of the new standard. It summarizes the impacts of the new standard and recasts financial statements from Fiscal 2017 and '18, as well as quarterly impacts for Fiscal 2018, including the impact of tax reform and other non-GAAP adjustments. You'll need to refer to that presentation to get next year right, especially the quarters.

ASC606 also requires us to make additional disclosures in the footnotes to our financial statements concerning our revenue streams. As I had mentioned previously, our breakdown of revenues between payroll and HRS is becoming less meaningful, as we are selling more product bundles and payroll becomes an allocation out of those bundles. This trend resulted from our evolution to an integrated HCM provider. We believe that under new guidance, there's a more meaningful way to disclose the drivers of our revenues. Therefore, as we move into Fiscal 2019 and begin to provide new disclosures around revenue, we'll begin to align revenue guidance in the same manner starting in Q1. This will provide more disclosure, not less. You'll still see payroll and HRS.

In the future, our revenue will be desegregated into two categories. One will consist of revenues associated with our integrated suite of HCM products. The second category which we'll break out will be PEO and insurance revenues. We'll continue, as I said, to provide supplemental information on payroll and HRS revenue during our transition. To align models, there won't be any change. We'll be talking about all of those details. We're not going to change your models in the short run. Between now and the end of our first quarter, we'll also provide on our investor relations website a schedule of historical revenue detailed under the new revenue disclosures, so that you can update models accordingly.

I'll be holding a separate conference call at 11:00 for approximately one-half hour for those who wish to participate. I'll go through ASC606 and really talk about what 2018 looked like under that standard. Again, there's a shift in quarters and there's one tax item to discuss, but otherwise it's pretty similar, certainly, on the overall year basis. I'll take you through the presentation that's on the website on the impacts at that point of ASC606 and other items. Now, I'll turn it back to Marty.

Martin Mucci -- President and Chief Executive Officer

Great. Thanks, Efrain. Operator, we'll now open up the call to any questions.

Questions and Answers:

Operator

Certainly. We will now begin the question-and-answer session. If you would like to ask a question, please press * followed by the number 1 on your phone. Please unmute your phone and record your name clearly when prompted. Your name is required to introduce your question. To cancel it, please press * followed by the number 2. One moment, please, for incoming questions.

Our first question is coming from of David Togut from Evercore ISI. Your line is now open.

Rayna Kumar -- Evercore ISI -- Analyst

Good morning. This is Rayna Kumar on for David Togut. Thanks for taking my question. On your third quarter earnings call, you provided preliminary payroll revenue growth guidance at 3% and now it's been revised to 2% to 3%. What's changed in the business since then?

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

Very little. I think when we looked at the composition of days, I just mentioned that, we saw that there was going to be an impact to revenue from one less day. It's in the range of about 25 to 30 basis points. When I looked at that and look at where the range was, I just thought it was better to be a little bit more conservative than we had been when we were in Q3. By the way, Rayna, I also said it was preliminary. I also provide other guidance on margins that change. So, we did some more refinement. This is where we ended up.

Rayna Kumar -- Evercore ISI -- Analyst

Understood. That's helpful. Could you call out fourth quarter bookings growth and also discuss your expectations for FY19 bookings?

Martin Mucci -- President and Chief Executive Officer

I'll take that one. I think we don't give bookings growth in detail, but I would tell you that kind of what we saw in Fiscal '18 was that we had go-to-market strategy at the beginning of Fiscal '18 that shifted a number of, particularly the micro sales into an in-house virtual team or telephonic sales team. We miscalled that one a little bit as far as how long it would take to gear that up and some of the leads and so forth. So, we started off kind of the first half of the year lower than we had expected, but really gained some great momentum. And so we're feeling very good that through selling season in January and third quarter and then into fourth quarter, we actually ended up in the fourth quarter at the best quarter of the year for us from a performance year-over-year in selling and it gives us great momentum. We see that carrying into June right now.

So, we really started on the low end of what we had expected, below what we expected, and then have come back with great momentum as the inside teams, in particular, have gotten used to handling the leads, gained tenure, and their productivity is up substantially form the first quarter of '18.

Rayna Kumar -- Evercore ISI -- Analyst

Got it. Just one final question from me. For your 2019 service revenue guide, how much of a benefit are you incorporating for acquisitions from HROI and Lessor?

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

There's a modest impact to payroll service revenue, about 1%, and Lessor is pretty minor, certainly less than 1%.

Rayna Kumar -- Evercore ISI -- Analyst

Thank you.

Operator

Thank you. Our next question is coming from Jason Kupferberg of Bank of America Merrill Lynch. Your line is now open.

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

Thanks, appreciate you taking the question. I just wanted to clarify one of the things I think I heard in Marty's prepared remarks. I'm just trying to get an organic client growth at year end. I think I heard flattish year-over-year X Lessor. Is that right? I guess if so, I think that would be two straight years where we're pretty flat on that metric. Do we expect organic growth there in Fiscal '19?

Martin Mucci -- President and Chief Executive Officer

Yeah, we do. You're right, it's been pretty comparable. Without Lessor, it would be pretty comparable to last year. Again, I think while we saw some improvement in retention, which we saw drop last year, the previous year, '17, we saw an improvement in retention across the board as we settled onto the new model and so forth. In sales, we started out on the first half of the year, as I said, low and had to dig ourselves out of that. Through selling season and then into fourth quarter, it gained a lot of momentum.

But we ended up about comparable on the client base without Lessor and so yes, you're right. We definitely expect gain this year. I think we've got great momentum going into June in the first quarter. Coming out of fourth quarter again, our best sales quarter of the year, which it isn't always, but this has been our best fourth quarter and we've really ramped up the inside sales team as back to meeting their productivity that we had expected at the beginning of the year.

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

Okay. Understood. I just wanted to ask a follow-up on the organic outlook for next year, just getting into the segment level. We were trying to parse that out a little bit. We were kind of landing maybe around 1.5% for core payroll and 8% to 9% on the HRS side. Are those ranges about right? I know you talked about it earlier in the context of total services revenue, but I wanted to break it apart so people have the models right.

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

Yeah. If we're between 2% and 3%, and you pick the midpoint, then you're going to get about 1.5% on organic. Then I would say it's about a point, maybe a little bit less, little more, it depends on how you look at it on the HROI contribution. So, take that out and I think you're closer to 9% to 10%.

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

Okay, all right. That's helpful. My last question, in the quarter itself, it looked like the operating margins actually came in like 50 bps above the high end of what you had guided to. Was that just timing of investments and some of those getting pushed to the right or were there some other factors that surprised you to the upside?

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

I think it was primarily timing of investments, Jason. You make an estimate of where you think expenses will come in. It was a little bit lighter than we thought.

Martin Mucci -- President and Chief Executive Officer

I think one point on that, Efrain, as we talked about before at some of the conferences in the last quarter, I think we estimated, we were pretty conservative on the margins from the investments that we said we would make from tax reform. So, we kind of went a little bit on the lower end and we had brought that back a bit. So, you saw 37%, approximately 37%, and then you've also seen the guidance that Efrain's given on that going forward. So we feel like, as we've looked at it and tightened up the investments that we've already started to make from tax reform and accelerate those investments, that's where we're going to be. Which I think some interpreted to be a little lower than that; we don't see that happening.

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

Okay. Appreciate the comments.

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

Thank you.

Operator

Our next question is coming from Jim Schneider of Goldman Sachs. Your line is now open.

Jim Schneider -- Goldman Sachs -- Analyst

Good morning. Thanks for taking my question. Efrain, on the margin guidance, it seems like the 37% number you're guiding to now, a little bit better than the 36% you talked about preliminarily on the last conference calls. Can you maybe just give us a sense of are you finding some kind of extra core savings in the business elsewhere to offset some of the investments or are the investments a little bit less? How should we think about the outlook for margins now? And, I guess, more importantly, as you look forward from here, do you think you can return to akin to market expansion?

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

Let me take the second. The answer so the second is that's our anticipation that starting next year, meaning '20, not '19, we begin with a cadence of margin expansion and how much to be decided as we go through the year. I would say, Jim, all of the projects that we contemplated in Q3 are still the ones that we're working on. I think the difference is we refined a bit what our estimates were for the spend on those projects and it came in a bit better than our initial estimate suggested. I think that's what it is. It doesn't mark a significant departure from what we were contemplating doing, just a little bit more pencil sharpening.

Jim Schneider -- Goldman Sachs -- Analyst

Fair enough. Then, I guess, maybe Marty, you could maybe take this one. Just curious about the overall employment picture you're seeing in the SMB and down-market space. Clearly from a macro perspective, I think, as we've talked about several times before, those job ads have kind of been disappointing through the cycle and that segment of the market. So, I'm wondering if you're seeing anything in the market that gives you a little bit more hope that the SMB job growth just on an overall economic basis is going to be better and why?

Martin Mucci -- President and Chief Executive Officer

Jim, I think it's going to be steady. I think that the optimism that I see comes from -- if you look at the optimism indexes like at FIB and so forth, they're very strong. I mean, they continue at historical highs. So, people in small businesses saying, "Hey, I'm looking to hire and my issue is I just can't find the right people for the positions." So, we certainly continue to see that, whether it's low unemployment rate, and the wages aren't going up quite as fast as you'd expect either. Still hanging around 2.6% to 2.7% wage increase. But there is a lot of optimism there. People are looking to hire. There is job growth, it's just moderated and we're still getting job growth and we're still getting a lot of optimism. So, we're pretty optimistic on what we'll continue to see. It isn't going to be huge growth because we've come back from the recession slowly and that job growth is moderated, but there is still job growth.

Jim Schneider -- Goldman Sachs -- Analyst

Very helpful. Thank you very much.

Operator

Our next question is coming from Ashram Ramkhalawan of Citi. Your line is now open.

Ashram Ramkhalawan -- Citi -- Analyst

Hi Marty, hi Efrain. I guess my question was going back to the idea of longer-term operating margin expansion. Could you size the level of investment you're making this year and future margin expansion? Is it as simple as that incremental opportunistic investment phases out or are there other factors that you can point to with regards to maybe pricing or other factors that you can point to that help margin expansion?

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

Yeah, Ashram, I'd say what we said -- and this goes back to the beginning of the year -- we said that we'd invest between 33% and 50% of the benefit accruing from tax reform; that's what's contemplated in our numbers. Over time, that will phase down. There will be some probably incremental IT spending that will remain from those projects, but if we execute appropriately, that will be offset by savings in other areas of the business and also better revenue growth.

So, I don't have a specific cadence that I'll give you because we need to walk through the year and look at the payoff on the projects, but we know exactly where we would take costs out if we don't think that the projects are generating the returns that we expect. We know how to leverage. That's not difficult for us. This is a year where we decided it was more appropriate, given the ability we had, to invest more heavily and see if it produced the kinds of returns that we anticipate it will. I would say early on, we feel comfortable that we're getting those returns. We'll walk through the year and then see how the projects progress.

Martin Mucci -- President and Chief Executive Officer

Yeah, we're following it very closely. As we've said, we really came out better, stronger on the operating margin that we originally thought this year and think that, as Efrain mentioned, we do know how to leverage, so we're watching closely to say, are we on track coming out of '19 for '20? What else do we need to do? We're constantly watching that. We are pleased that all of the investments that we're making are on track and we believe that, as Efrain said, will bring both revenue and growth, and expense reductions as well. They're across the board in both service and in product acceleration as well.

We're pleased with the investments we've made. We think, frankly, we came out stronger this year than we originally had expected when we first looked at tax reform. Once we tightened up all the numbers and what we were investing in, we feel good they're the right things and we'll get back the margin expansion exactly. The timing is more difficult because of the investments and getting everything done, but we certainly feel that, as we have said, we'll be back on a margin expansion ride.

Ashram Ramkhalawan -- Citi -- Analyst

Got it. So, it's safe to assume based on that statement that you're seeing early signs of sales productivity increases, retention improvements, things like that, which would be metrics that would can look forward to as you make these investments, right?

Martin Mucci -- President and Chief Executive Officer

Yes, but I wouldn't say the improvements in client retention and sales productivity and sales performance that we just mentioned are not necessarily, they're not driven by those investments because those investments just started, but we certainly feel positive about the investments we're making. We'd give you a better view of that six months from now, as we get a little further into the investments. But we feel like at this point they're certainly on track. We just started the accelerated investments in the last quarter.

Ashram Ramkhalawan -- Citi -- Analyst

Excellent. Can I just ask, the strong growth in PEO -- what would you attribute that to? Is there some share gain in there that you're thinking about or higher demand for [inaudible]? Any color there?

Martin Mucci -- President and Chief Executive Officer

I think one very good sales execution, our integration with HROI and the team there with our excellent team, I think kind of really hit at a great point at the same time that there is just a huge demand for more HR support. When you think about the federal regulations, and I've mentioned this before, are coming down, there is a tremendous amount of state regulations that are going up. There is all the issues with immigration. The entire issue of harassment. Everything is driving more HR concerns and risks, particularly for small businesses that don't have the expertise. Small to mid-sized businesses and that's fitting very well into the PEO business when you tie that into our insurance experience as well. I think it's a very strong demand in that marketplace and a very good execution from our sales and service teams.

Ashram Ramkhalawan -- Citi -- Analyst

Thanks. Happy fourth next week.

Operator

Our next question is coming from

Kartik Mehta -- Northcoast Research -- Analyst

Good morning, Marty and Efrain. I just wanted to understand a little bit about FY19. I think, Marty, you said that you would anticipate client growth coming back in FY19. But organic growth on the payroll side is going to be, I think around 1.5%, let's say. I'm wondering, are there some changes happening or do you think there will be less price? Just to better understand the client growth versus organic growth expectations for FY19.

Martin Mucci -- President and Chief Executive Officer

Yeah, probably a little bit less on the price. I think, as you see it, particularly on the small end, it continues to be very competitive. We're feeling very good about the product offerings that we have and introducing consistently innovating with do-it-yourself handbooks and paperless onboarding and now Paychex Promise. I think we're being a little more conservative on the fact that if we take a little less price, let's drive the client growth. Plus, we're probably being conservative for how much we can do on the retention as well. We saw some improvement this year. Things really quieted down on the service model, so we're getting more positive affirmation about 7 by 24 service and the dedicated, not only payroll specialists, but managers for the mid-size. I think it's just a bit of that. We've seen a mix change, so as Efrain as mentioned many times on the call over the last couple years, we've seen a little bit of a mix of size of clients. So, when you put all that together, I think that's our overall guidance.

Kartik Mehta -- Northcoast Research -- Analyst

Efrain, just your thoughts on use of cash. Obviously, balance sheet just is flush with cash. You should generate a ton of cash again in FY19. Is the thought that you want to wait for the right opportunity maybe the acquisitions you're looking at, the prices change, or is it that there just aren't acquisitions that would fit what you're trying to accomplish?

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

No, no, no. Absolutely not. That's an interesting question, Kartik. I'd point to Lessor. Lessor, we were in discussions for multiple years on that asset and eventually pulled the trigger and bought it. Advanced Partners -- we were in discussions for multiple years on that asset and then bought it. The fact that we didn't pull the trigger -- and I'd say probably to some extent even HROI we could say that. The fact that we don't pull the trigger in a given year doesn't mean we're not in relatively advanced stages on discussions on assets that we think make sense within our portfolio.

I can say that we have acquisition targets that would use that cash plus very quickly if we thought that it made sense to do it. I would say the pipeline is very flush with opportunities and I would anticipate over the next year that we'll have an opportunity to do other acquisitions if we think that the due diligence makes sense. By the way, implicit in that statement is the fact that they already meet some level of strategic fit based on our screening criteria. So no, it's just really for us the timing has to be right. The numbers have to be right. Sometimes we are very deliberate in our approach to doing it, but I think there's a pretty robust pipeline of opportunities out there.

Kartik Mehta -- Northcoast Research -- Analyst

Makes sense, Efrain. Thank you very much, I appreciate it.

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

You're welcome.

Operator

Our next question is coming from Brian Keane of Deutsche Bank. Your line is now open.

Brian Keane -- Deutsche Bank -- Analyst

Hi, guy. I just want to ask about competition. How do you think competition has impacted your financials? I think last quarter you talked about the mid-market being a little more competitive and now a little bit on the small end on pricing. But I'm just trying to figure out in the big picture, given the years of experience you guys have, how do you feel the competition is having an impact?

Martin Mucci -- President and Chief Executive Officer

Yeah, Brian. I would say it's been about, it's about the same. I think as I mentioned, the small probably putting a little more pressure on price on the small end. But not significantly too much different than what we've seen. Then on the mid-market, I'd say it's about the same. There's no really new players there. I would say that some of the innovations that we've made and some of the changes that we're doing right now in our sales model that we've started in the fourth quarter that will roll into the first quarter here on the mid-market are helping us position well. So, we're pretty nimble about changing how we're going at it.

I think we've found some things that we could be doing a little bit better in the mid-market. But product-wise, we have the most thorough and complete integrated product out there. It's not just payroll and HR. It is integrated on a single employee record. But we're connected single way to 401(k) to HR. We have the largest HR generalist team out there, nearly 500 of them. All of everything positions us well from the competition. I don't think most competitors have anything that's as complete as that. I think it's about the same and we should be doing better.

Brian Keane -- Deutsche Bank -- Analyst

Okay. Then, you talked a little bit about future operating margin expansion. What about on the revenue side? What does the future long-term revenue growth look like? Does it look pretty similar to this full-year guidance?

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

Brian, I would say we'd like to see payroll service revenue higher than it is currently. We're working very hard to make that happen. On the HRS side, certainly double digits is where we expect to be. While I recognize that there's a lot of emphasis on payroll and rightly so, and it's competitive, PEO is doing very well and we're very bullish on how that business is doing. We see a long trajectory of growth on that business. I would say, and you can do the math, we had almost 20% work-site employee growth organic. That's excluding HROI. I would say that probably ranks pretty high in terms of where we stand in the industry.

We think we've got some momentum there. So, we feel pretty good about double-digit and I think that we're working hard to get the payroll. We'll talk more about HCM, integrated HCM rather than just payroll. Because I think that, as Marty said, that integrated suite is what we sell, not just payroll, which frequently is just an allocation from that bundle. But we can do better and that's our expectation.

Martin Mucci -- President and Chief Executive Officer

I think that mid-to-high single digits is what we've been talking about for at least 8 years. I think if you look at the overall kegger all together, it's over 7 and we're trying to make sure that's solidly over that number over time. We have a lot of opportunity to do that. As Efrain said, it's becoming much more of an HR play, which is what we had expected and planned that our business would go. That's why, as he talks about the future of how to report, it really is so much more about not just payroll by itself, but always payroll and HR, or payroll, HR, and 401(k), etc. We're trying to -- 6 to 7 is the guidance now. We're obviously trying to get that a little bit higher longer term to be in that mid-to-high single digits.

Brian Keane -- Deutsche Bank -- Analyst

Okay, helpful. Thanks for the comments.

Operator

Our next question is coming from Rick Eskelsen of Wells Fargo. Your line is now open.

Rick Eskelsen -- Wells Fargo -- Analyst

Good morning. Thank you for taking my question.

Martin Mucci -- President and Chief Executive Officer

Hi, Rick.

Rick Eskelsen -- Wells Fargo -- Analyst

Hi, how are you?

Martin Mucci -- President and Chief Executive Officer

Good.

Rick Eskelsen -- Wells Fargo -- Analyst

The first one, and I'm sorry if I missed it, but I was wondering if you could talk a little bit more about the composition of the float income outlook and what you're expecting with balance growth, especially with what it did this quarter?

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

The Fed just raised rates a little while ago and we've got two rates baked in the remainder of the calendar year, one in the fall and one at the end of the year. That's what the guidance contemplates. We looked at the probability of a raise and when it got pretty higher for the second raise, we included that in our guidance. So, that's what we're expecting at this point; nothing beyond that. Although, there is a chance obviously that rates could continue to rise after the end of this calendar year.

Rick Eskelsen -- Wells Fargo -- Analyst

For the balance growth, it seems like tax reform and some of the withholdings impacted this quarter. Does that continue throughout most of next year?

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

I'd say, if anything, it'll be flat to modestly up, that's where I think we're going to be.

Rick Eskelsen -- Wells Fargo -- Analyst

Okay, thank you. You mentioned several times about how pleased you have been with the acquisitions, especially with HROI and what seem like is going on the PEO business. So, I'm wondering if you could just sort of talk a little bit more about what explicitly you've seen from HROI, whether this has changed your appetite particularly in PEO for acquisitions and then just more broadly on the PEO market? Thank you.

Martin Mucci -- President and Chief Executive Officer

Sure. I think what we've seen is really a great fit from a culture standpoint and the synergies that we could get from our underwriting team with them. Also, they have connections that we didn't have. From a carrier standpoint, when you put us together, the synergies from the insurance carriers is very important and we see future opportunities with that as well. You have to have great plans, obviously, to grow in cities where we haven't been historically.

We're pretty bullish on the PEO marketing. Again, we were kind of one of the first in this business when you go back from an ASO perspective, where there was not co-employment. We're the -- I believe only one out there that when you take all those ASO and PEO products, we're servicing well over a million worksite employees. As Efrain said, we've seen very solid double-digit growth again this year. Those needs are just becoming more and more difficult and small to mid-sized businesses are really struggling with state-by-state regulations with the harassment policies that they need to have in place to protect them. There's a lot of risk for them. When they hear risk, they're ready to outsource. When you go in with a great insurance product as well, they can add value to their employees, which helps with the retention and engagement. It really is a great overall picture for us in the future. So, I think the market is very strong. Acquisition-wise, we're constantly looking at that space. I think we know it very well. As Efrain said, we're always looking and ready to buy if the time is right and the value is right.

Rick Eskelsen -- Wells Fargo -- Analyst

Thanks. Just one follow-up, just confirming on the dividend, the change in the timing. Is that just a one-year thing and as we look forward to next year it should go back to sort of normal timing?

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

That's kind of a Board decision, Rick. So we accelerated one quarter, brought it forward. Marty and I don't have a clear answer on that one, but I think you probably could anticipate we'll go back to the normal cadence. The Board will ultimately decide that one.

Rick Eskelsen -- Wells Fargo -- Analyst

Thank you very much.

Operator

Our next question is coming from David Grossman of Stifel Financial. Your line is now open.

David Grossman -- Stifel Financial -- Analyst

Thanks. Good morning. I'm wondering if I can just follow-up on a couple questions that have been asked already. One relates to the investments that you're making. I know that both of you have referenced some of things that you are doing. I was hoping you give a little more detail behind some of the major initiatives and maybe help us understand those that you expect to favorably impact your revenue growth, and then those that you expect to favorably affect your longer-term leverage in the model?

Martin Mucci -- President and Chief Executive Officer

David, it's Marty. I can give you a couple. I think this is what you're looking for from the accelerated investments. One is the HR space and what you find is how do you drive more flexibility for clients in our combined payroll and HR model? So, whether that's from user interface flexibility, whether it's allowing them to do a lot more things that they want to do and then build the product out the way they want it. So, from a user interface they want things a certain way. You can have all the product functionality behind it, but you can isolate by designing some of the software more from a UX and UI perspective and we're spending a lot of time on that.

There is additional feature functionality. I wouldn't want to get too detailed into that from a competitive standpoint, but I think we have a very full-featured HR and payroll solution that also integrates with insurance and 401(k), but we're finding that the clients always want more flexibility from that standpoint. They also want more self-service. So, you'll see -- and this helps on both a service operations cost perspective and a sales perspective, more and more clients want their employees to do more themselves and the employees want to do more themselves.

As you know a lot of the generation these days don't want to talk to anyone, but they certainly want to be able to chat. They want to be able to going in question, hey, can I change my address? Can I change this? Can I change my deductions? Can I look at this information? So, we already have 25 different things that clients' employees can do themselves, but we're trying to expand that list, which also takes pressure off of the operations and service teams to not answer the same old stuff, but to be more available for more detailed questions and more responsive to those.

So, in general, that's where some of these technology investments are really going. One, it increases the efficiency and service performance to the clients and their employees. And the other also just responds from a product standpoint to something that I think we're going to be able to sell much more of. Everything we design we've gone to mobile first. Everything we design is mobile-first, meaning that what you see, you're going to be able to get to everything on your phone.

We've made some significant investment in an Agile approach to development, in developing everything from mobile app, which by the way is rated very close to a 5 out of 5 these days and we're feeling very good about that. So, it's the whole way we've looked at the technology. The needs have accelerated and we thought this was a good opportunity to accelerate the development.

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

So, a couple of others to build on that, David. So, the other two areas are in sales and marketing and operations. Sales is pretty simple; we're adding more salespeople, particularly in small business and mid-market. We're also adding more salespeople in the PEO space; more than we would. We typically would add 2% to 3% in a given year. We're accelerating the amount of sales add, salespeople adds there. We are also significantly increasing our digital marketing spend there to drive a better result.

As Marty said, part of what we saw in Q4 was really good returns on that investment. We hadn't really started to heavy up the spending yet and we're optimistic about what that produces. So, that's the sales and marketing bucket. You can titrate that up and down depending on what the results you get are.

Then, on operations side, there is work that we're doing from an efficiency of the footprint perspective. That is part of the spend in next year, and also looking at ability to automate some of those functions in the back end. So, we've got numerous projects that we think will produce both top line growth; Marty mentioned the platform opportunities that help both sales and back office, and then on the operations side, that's more of an efficiency play. So, all three of those are what we're working on.

David Grossman -- Stifel Financial -- Analyst

Good. Thanks for the color on all those items. Let me ask one different question, which relates back to the PEO. WSC growth I think you said was about 19% organically. I know HRS includes many different segments, but the category organically I think was growing around 8% to 9%. So, is the PEO organically really growing 19%? If not, is it growing more in line with the overall category 8% to 9%? Can help us understand why the unit growth is far exceeding the revenue growth?

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

So, two pieces of that. So, make sure to disaggregate just a little bit. So when we say PEO, PEO is not HRS and PEO itself is not total worksite employees. As Marty mentioned, PEO is a subset of our worksite employees. I think we'll post when we post the K what our worksite employees served are. It's lower than 19% because ASO is in that number. So, it'll be solid double digits, but it won't be 19%.

When we call out PEO, we're calling out specifically a portion of HRS revenue, not all of HRS revenue. If I isolate just the PEO portion of the business excluding HROI because HROI obviously contributes but if we exclude that, we're getting teens growth in PEO at this point and you're getting worksite employee growth of about 19%.

So, you need to disaggregate some of the pieces of the business. So HRS growing at 17%, obviously you have to pull the pieces apart, organically more in Q4 like 9%, but within that you got a PEO piece of the business that's growing pretty rapidly and we think that continues. So, hopefully that clarifies a bit.

David Grossman -- Stifel Financial -- Analyst

So, just to quickly clarify that. Was the PEO worksite employee growth in the teens or it was 19%?

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

19%, and then revenue growth was in the teens. So PEO revenue growth was around 15%.

David Grossman -- Stifel Financial -- Analyst

Is there a dynamic that -- is that a mix, is that pricing, what? Can you help us understand why those are different?

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

I think, David, it's really simple. It depends on the size of the clients you're signing up. So, smaller PEO worksite employees or smaller PEO client, you get more per client. Larger clients -- and we've signed a number of larger clients -- you get less per worksite employee. That's really the dynamic. It's interesting. When you step back and look at the business, think about PEO for a second. The backbone of the PEO platform is Flex within Paychex. That solution works really well in the PEO context. And we're doing very well there selling pretty large clients.

When we look at the market, what we say is there seems to be a growing number of mid-market clients who want to comprehensive outsource solution and that trend is going to continue into the future. Now, as you go up market, you get a little bit less per worksite employee than you do when you go on lower market.

David Grossman -- Stifel Financial -- Analyst

Got it, great. All right. Thanks very much for that.

Operator

Our next question is coming from Jeff Silber of BMO. Your line is now open.

Henry Chien -- BMO Capital Markets -- Analyst

Hey, guys, it's Henry Chien calling for Jeff. Thanks for squeezing me in. I was curious to learn a little more about what you did to improve retention and hoping you could provide a bit more color or talk a little more about what's changed in your sales strategy that you kind of alluded to, at least for the upcoming sales season? Thanks.

Martin Mucci -- President and Chief Executive Officer

I think on service what happened is, as I mentioned last year in Fiscal '17, we went through quite a movement of client. So, we're increasing the number of online clients and we changed our service model on how to handle call-in clients versus multi-product clients and the normal payroll clients who are call-out clients. So, we were moving different service teams around and therefore moving the clients around. That caused some disruption that cost us probably a percent on the retention in 2017 and from an all-time high.

So, as that settled out 2017 and we've kind of completed most of that, then we started to see the retention calm down. The tenure of our payroll specialists and our service givers across the board built up. Our tools got better when we got used to handling the different teams, and everything started to come together. So really, retention is improved and better in almost every category we have from payroll to 401(k), to insurance, you name it. We had a very good year in retention. We think that will continue as things continue to calm down and we get better tenure in those teams. So we had a nice improvement this year.

Promoter scores, which we don't give out, but we saw an improvement there as well across the board in the satisfaction that our clients have. From a sales perspective, what we did was at the beginning of the year, we had a go-to-market that as I said, pulled some of the micro client, more and more clients as you know, are searching online, reviewing our products and platforms, testing the product, comparing the product, and a lot of the sale is 60% complete, particularly on the small end, before they even get to a sales rep.

So, we were handling more of that inside and we were we built out a telesales team inside, expanded it, and we expanded it quickly at the beginning of the year. The tenure wasn't there. The leads weren't quite where we thought they were, and as we refined our lead process during the first half of the year and built tenure in the sales team, that built a very good momentum in the second half of the year and now positions us very well going into June and this fiscal year. So, that was the major change in sales. We have number of other things but those were the major ones.

Henry Chien -- BMO Capital Markets -- Analyst

Okay, got it. Thank you. And any thoughts in terms of your client target mix and any thoughts on moving beyond the small micro-sized businesses and is that sort of factor in the sales strategy?

Martin Mucci -- President and Chief Executive Officer

Well, I mean, listen, our strategy is still really 1 to a 1000 and some above that, but that's our sweet spot and we have really, mostly the two sales teams that sell kind of up to 50, and then 50 to a 1000 or so, we would not be changing that strategy. But you're seeing on the SurePayroll side, they're growing very strong. The micro, we're refining how we handle each market and maybe even changing the segments a little bit about what is a micro and what is a little bit larger, and what's the over-50 kind of thing. But we're not changing the overall strategy. We're still very successful and with over 650,000 clients, we're not looking to necessarily change what we're doing or change the market we're going after, because we think we're very well-positioned to capture more of it.

Henry Chien -- BMO Capital Markets -- Analyst

Got it, OK. Thanks so much.

Operator

Our next question is coming from Mark Marcon of R.W. Baird. Your line is now open.

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

Hi, Mark.

Mark Marcon -- Robert W. Baird -- Analyst

Good morning, Marty and Efrain. Wondering if you can give us a little more color in terms of how you think the PEO space is going to evolve over the next 3 to 5 years, particularly in small versus large, where you think the penetration is now and where do you think it's going to go? Because there has been a lot of emphasis on that. What the acquisition opportunities are like? And just how you're thinking about the space generally? And then I want to come back and just ask one margin question with regards to the guidance and just making sure we understand it on an apples-for-apples basis.

Martin Mucci -- President and Chief Executive Officer

Sure, Mark. I think on the PEO space, obviously we're very bullish on it. We've been in it a long time. We also like the ASO or PEO, and I think what we've learned to do is transition between -- we're one of the few that can transition between what the client wants. What we have found is probably an increased acceptance of PEO over the last year or so.

So, as you have very good insurance plans in our markets that we're in, there is much more acceptance of the co-employment and the PEO kind of structure in those states, and from an insurance carrier perspective. I also think ACA pushed a lot of that and what stays and what goes of ACA almost doesn't matter at this point, but when it started, it got a lot more clients and prospects looking at insurance and whether to bundle that in and that feeling has stayed. With insurances, the other thing that I would say is helping the PEO and insurance side is the very low unemployment rate. The tough labor market makes it that more and more small businesses, small to mid-size businesses want and need to have insurance to recruit and engage their employees.

You're seeing that while the wage increases have not gone up as much as we would think in a tight labor market, benefits have and that includes health insurance. So, I think the PEO market really, we think, could continue to grow for many years. It's really -- don't think of it so much as the co-employment as the ability to provide total HR support, including insurance needs from a very tight relationship and service model.

So, we feel very good about it. That's why we're continuing to grow. From an acquisition standpoint, we know the opportunities that are out there. You've got to look at them very carefully. We think we've done that. If the right opportunity comes up, we'll be ready, I think we'll be very ready to go that way.

Mark Marcon -- Robert W. Baird -- Analyst

Where do you think that penetration is, Marty? In terms of thinking about it more holistically in terms of both on the small a medium-sized business range in terms of what percentage of what you view is being the addressable market has been, has actually gone to a more holistic HR outsourcing including the insurance component?

Martin Mucci -- President and Chief Executive Officer

I think it's pretty small. And I think it's continuing, the acceptance as I mentioned, is continuing to grow. So, I think the opportunity is growing and the level that's been penetrated is pretty small. For years, a lot of it was selling PEO to PEO, so if somebody already had a PEO, you could sell them from a competitor or something on that. What we've started to see I'd say in the last year and half, again, I think ACA really pushed some of this forward, was more and more clients saying, I have to have insurance. It's also a recruitment and engagement tool for employees. So, I think that that's going to continue to grow.

The acceptance of it, as that grows and other clients here that you have a PEO, OK I'm not as concerned about what co-employment means. By the way, the ASO side of our business is doing very well, as well. We have both those opportunities. Remember, with our Paychex insurance agency, which is the 21st largest in the country, if you're not a good risk for the PEO from an underwriting standpoint, we could transfer you over to the Paychex insurance agency and look for an opportunity for you there, and still serve you with an HR generalist, which is really the greatest benefit of the whole thing is having HR person who's there to support you.

We've expanded that service model. For example, if you look at the Workplace by Facebook, one of the great benefits is not just that in Workplace you can gain information on your check stub and your 401(k) balance, but you can ask questions to the HRG while you're in Workplace by Facebook. So we're trying to expand that service model of the HR generalist as well.

Mark Marcon -- Robert W. Baird -- Analyst

That's great. Then a related question would just be, there's more pass-throughs. I'm just trying to understand when we take a look in the presentation that you've posted, we're looking on the operating margin for FY '18 of 38.2%, the guidance is toward 37%. When we think about the year-over-year transition, how much of it is due to investments versus how much of it is due to mix, just because you've got more pass-through expenses coming through?

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

The mix, Mark, is modest at this point. If PEO starts to accelerate significantly beyond where it is, it's going to start to affect more of a drag, but you're going to get better revenue growth. For next year it's more driven by the investments, there's a little bit of impact based on mix.

Mark Marcon -- Robert W. Baird -- Analyst

Okay. Then just the cadence that was asked about earlier, should it go back to kind of the normal sort of leverage that we would typically end up seeing or is the mix going to impact that?

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

Well, it depends on the growth rates for PEO, Mark. So, part of what we're talking about giving additional disclosures, we'll give you some insight into that. We think we still can leverage at least at current growth rates for the PEO. If that were to significantly increase from where it is now, then obviously that's going to impact margins but you're going to get better growth. So, it's a little bit of 6 of one and half a dozen of another.

Mark Marcon -- Robert W. Baird -- Analyst

Can I sneak one more? Paychex's Promise? Are you taking much risk on in there?

Martin Mucci -- President and Chief Executive Officer

Well, we don't think so, because the client has to go through a review process. It's a very quick process, but we are reviewing what that risk is. But we feel that it's the kind of insurance for the client, particularly on the small side that have cash flow issues, that worry about that 2 days or 5 days or 7 days that they might have an issue, that we think this is something that given our size and financial strength that we can do, but we're doing it very carefully.

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

We run it through a lot of credit algorithms, Mark, so we keep up pretty close eye on it.

Mark Marcon -- Robert W. Baird -- Analyst

Great. Thank you very much for the color.

Martin Mucci -- President and Chief Executive Officer

Okay, Mark.

Mark Marcon -- Robert W. Baird -- Analyst

Happy Fourth.

Martin Mucci -- President and Chief Executive Officer

Thank you.

Operator

Our next question is coming from Tien Tsin Huang of J.P. Morgan. Your line is now open.

Tien Tsin Huang -- J.P. Morgan -- Analyst

Good morning. Thanks for all the details. I just wanted to ask given all the success and demand for comprehensive outsourcing and PEOs you've talked about a lot, is that stealing incrementally from traditional payroll or maybe even do-it-yourself? Just trying to understand how you might think about the secular theme there?

Martin Mucci -- President and Chief Executive Officer

I don't think so much from do-it-yourself. I think from mid-sized payroll, it definitely I think could be taking some share from there because that's where it's expanding for the most part. If you have 15 to 20 employees and up, it's attractive to you. So, it certainly could be taking from payroll only, but again, we're here to offer whatever the client needs on a full-suite basis. If you want full PEO, that's fine. That is certainly growing faster than the mid-sized payroll only or payroll plus just HR.

Tien Tsin Huang -- J.P. Morgan -- Analyst

Understood. So, from a resourcing standpoint including inorganic investments, would your risk appetite then go up maybe on the PEO side or maybe just to be little bit more aggressive on the distribution? Just trying to understand how you are balancing the risk versus the growth.

Martin Mucci -- President and Chief Executive Officer

You mean from an acquisition kind of standpoint?

Tien Tsin Huang -- J.P. Morgan -- Analyst

From an acquisition standpoint or even organically, if you want to expand what you've done in Florida?

Martin Mucci -- President and Chief Executive Officer

Sure. We've really already expanded. I mean, we sell pretty much nationwide, obviously the largest concentration is in those states where it's most popular: Florida, Texas, Georgia. But HROI has assisted in that well, as we have gone even more national. When you look at acquisitions and you look at investment, you do try to get some sort of scale in certain areas so that you can have better insurance carrier relationships and plans as well.

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

Tien Tsin, you asked two questions related to risk. One Marty answered with respect to both the appetite for broader business development and the appetite for PEO. The answer is yes. The appetite with respect to underwriting though, we're really tight on that. My appetite for risk is pretty low in that sense. I think you can underwrite good business. We have very stringent controls on that and a lot of reviews on the state of both the MPP and the Workers' Comp portions of the portfolio. So, yes, it's a little bit more balanced kind of answer to the question.

Martin Mucci -- President and Chief Executive Officer

On the underwriting, we've always been extremely tight on that and feel like we're at a very good place on continuing to do that. Again, with that balance of risk, we always have the insurance agency and the ASO product to say if you're not a good fit there and we don't want to underwrite this, we do have an insurance agency with multiple other plans that can usually get you the insurance that you need.

Tien Tsin Huang -- J.P. Morgan -- Analyst

Understood. Just wanted to make sure. Thank you so much.

Operator

Our last question is from James Fossett of Morgan Stanley. Your line is now open.

James Fossett -- Morgan Stanley -- Analyst

Thank you very much for the question and most of mine have been answered. I just wanted to ask, you mentioned that employment or pace of new employment has been slowing as the market tightens. I'm wondering what are the things that Paychex is doing or is adjusting to try to help its customers better attract employees? You've referenced that a couple of times, but I'm wondering if you can give some specific examples. And then, how well do you think those kinds of assistances can carry into when the market maybe isn't so tight? Thanks.

Martin Mucci -- President and Chief Executive Officer

Well, I think, yes, it's even more important now that it is tight, right? So, what we've been able to do is, we have over 500 HR generalists. So, if you buy our ASO or PEO product and you have an HR person, a lot of these small to mid-sized businesses do not have a full-time HR person. They don't know how to recruit necessarily. What we can do is help them with recruiting. We can help them on how to build the job description, how to recruit, how to on-board and retain and engage employees. That's where a lot of the benefit of that HR person comes from who has multiple clients by the way, and can use that data and that experience to help small and mid-sized businesses. The biggest issue for businesses today right now is finding and hiring, recruiting and hiring the right people for their jobs. That's where we actually, the HR person that we have can help them a great deal.

Also from a product standpoint, when you think about it, being able to have an easy way to take prospect information. So, I want to go work for your small business. If you're with Paychex, you can go online and do that paperlessly. That transcends over into the business. They can review those resumes that are all online, all paperless. If you get hired, it's a paperless experience to bring you on.

And then, of course, that transcends into a mobile app which you can show the new employee to say we're modern, we're with Paychex, you have a mobile app, you can get your pay, your pay stubs, change your 401(k), etc., etc. is all here. So, I think frankly it's been very appealing to businesses that are struggling to hire to use someone like us and our products and our services.

James Fossett -- Morgan Stanley -- Analyst

That's clear. I guess it's really more of an emphasis on what Paychex can already deliver rather than you introducing any new capabilities. Does it make sense for you to look at adding additional or are there things that you can add to help in that recruitment employment process?

Martin Mucci -- President and Chief Executive Officer

Well, sure, I think there's always more things that we can do. What's the best way to recruit? How is that being done? Things like video interviewing, right? So, we can partner up with someone who can help a small business, who could never afford to do video interviews, which is very popular, becoming more and more popular now, right.

So, I don't want you to necessarily come in. If I want to recruit, you do a short video, you send that with your resume, which is all paperless. We continue to look to evolve those HR support products to give you the best ability to recruit and hire and retain the very best employees. So, we're constantly looking at ways to do that and do it also in a digital way, much more through chat bots and artificial intelligence, and also give you data analytics, right? So, when you think about as a mid-sized client that has data analytics on what your turnover is, where your turnover is, how it compares to other businesses, those kinds of things are good tools that can help businesses that wouldn't normally have that available to them.

James Fossett -- Morgan Stanley -- Analyst

That's great. Thank you very much.

Operator

Speakers, we show no questions in queue at this time.

Martin Mucci -- President and Chief Executive Officer

At this point, we'll close the call. If you're interested in replaying this webcast of this conference call, it'd be archived for approximately 30 days. I do thank you for your continued participation in our fourth quarter press release call and for your interest in investment in Paychex. Efrain?

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

For those of you who want to talk about ASC606, we should have posted the presentation to the website. I'll hop on the call in about 5 minutes or so, and we'll walk through that in about half an hour or so. It will be a primer on all things ASC606. I look forward to having the conversation. Thank you.

Martin Mucci -- President and Chief Executive Officer

Thank you, everyone.

Operator

That concludes today's conference. Thank you all for your participation. You may now disconnect.

Duration: 84 minutes

Call participants:

Martin Mucci -- President and Chief Executive Officer

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

Rayna Kumar -- Evercore ISI -- Analyst

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

Jim Schneider -- Goldman Sachs -- Analyst

Ashram Ramkhalawan -- Citi -- Analyst

Kartik Mehta -- Northcoast Research -- Analyst

Brian Keane -- Deutsche Bank -- Analyst

Rick Eskelsen -- Wells Fargo -- Analyst

David Grossman -- Stifel Financial -- Analyst

Henry Chien -- BMO Capital Markets -- Analyst

Mark Marcon -- Robert W. Baird -- Analyst

Tien Tsin Huang -- J.P. Morgan -- Analyst

James Fossett -- Morgan Stanley -- Analyst

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