Efrain Rivera - Chief Financial Officer
Total revenue and services grew 9% for the first quarter to $863 million and $846 million respectively. The growth was aided by the acquisitions of HROI and Lessor, more to come on those. Expenses increased 14% for the first quarter. The acquisitions of HROI and Lessor together contributed approximately 6% to the total expense growth for the first quarter. Accelerated investment in sales, marketing and product development as part of tax reform investments and PEO costs were major factors in expense growth.
Operating income increased 1% to $320 million. Operating margins were 37.1% for the first quarter. Margins were impacted by acquisition expenses, increased investment initiatives, higher growth and PEO costs and the composition of payroll processing days. Our effective income tax rate was 24.5% for the first quarter compared to 34.1% for the respective prior year quarter. The significant decline year-over-year in the effective tax rate is of course due to tax reform legislation. We anticipate that the effective tax rate will be approximately 24% for the remainder of the year. Net income increased 16% to $244 million for the first quarter and adjusted net income increased 18% to $242 million. Diluted earnings per share increased 16% to $0.67 for the first quarter and adjusted diluted earnings per share increased 18% to $0.67.
I will provide some additional color now in selected areas and start with a discussion of service revenues and we will discuss results under our previous categories and our new service revenue categories. Under our previously reported categories of service revenue, payroll services revenue growth was 1% for the first quarter in line with our expectations. Organic growth related to pricing for the first quarter was offset by the impact of client size mix and the composition of payroll processing days within the quarter. If you recall in June, I indicted that payroll revenue growth for Q1 would be below the low end of the range of our guidance. HRS revenues grew 18%, approximately 12% excluding the HROI acquisition. This growth is due to the growth in clients across our HR products, in particular Paychex HR Services, ASO and PEO, and retirement services.
Now, let’s talk about management solutions revenue. This includes as I discussed previously payroll service revenue together with other HCM products included in many of our product bundles. Management solutions revenue increased 3% to $688 million for the first quarter. This increase was driven by growth in client bases across our HCM services, including payroll, ASO, retirement services, and time and attendance solutions. Retirement services revenue also benefited from an increase in the asset value participants’ funds. The acquisition of Lessor contributed less than 1% to this growth. The growth was partially offset by the impact of unfavorable composition of payroll processing days in the first quarter compared to the prior year quarter, same thing that I mentioned on payroll.
PEO and insurance services revenue increased 39% to $158 million for the first quarter. We acquired HROI near the end of the first quarter of fiscal 2018. The incremental impact of HROI accounts for approximately one half of this growth. The remaining growth was primarily driven by continued strong demand for our combined PEO services as we continue to experience strong growth in the number of client worksite employees. In addition, our insurance services revenue benefited from growth in the number of applicants.
Interest on funds held for clients grew 25% for the first quarter to $17 million primarily as a result of higher average interest rates earned. And just to pause there for a second, we have assumed that there would be Fed rate increases in this fiscal – there will likely be more, but we only included two in our plan. The first occurred this or last month I should say and we anticipate there will be one more at least that’s what’s contemplated in our plans. As we get to midyear, we will talk a little bit more about what our expectation is based on where the Fed is at that point.
Turning to our investment portfolio, our goal as always is to protect principal and optimize liquidity. And the short-term side, primary short-term investment vehicles were bank demand deposit accounts and variable rate demand notes. In our longer term portfolio, we invest primarily in high credit quality municipals bonds, corporate bonds, and U.S. government agency securities. Our long-term portfolio has an average yield of 1.9%. Average duration is 3.1 years. Our combined portfolios have earned an average rate of return of 1.8% for the first quarter, up from 1.4% last year. Average balances for interest on funds held for clients were down modestly for the first quarter, primarily driven by the impacts of tax reform and client employee withholdings partially offset by wage inflation.
I will now walk through our thoughts on our financial position. It remains strong with cash and total corporate investments of $788 million as of the end of the quarter. Funds held for clients were $3.8 billion compared to $4.7 billion as of May 31, 2018. Funds held for clients vary widely as you know on a day-to-day basis and averaged $3.7 billion for the first quarter. Our total available-for-sale investments, including corporate investments and funds held for clients, reflected net unrealized losses of $36 million as of August 31, 2018 compared with $38 million as of May 31, 2018.
Total stockholders’ equity was $2.4 billion as of August 31, 2018 reflecting $201 million in dividends paid and $33 million of shares repurchased during the first quarter. Our return on equity for the past 12 months has been a stellar 45%. Please note that our return on equity calculation was adjusted to reflect the impacts of the adoption of ASC 606. At fiscal 2018 year end, we reported 46% return on equity, which would be actually 44% on a restated basis, because of those changes made by ASC 606. Cash flows from operations were $274 million for the first quarter. It was a decline versus the prior year quarter. The change was primarily a result of 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 offset by higher net income.
Fiscal 2019 guidance. Now, I will turn to guidance for the upcoming fiscal year ending May 31, 2019. I will remind you that our outlook is based upon our current view of economic conditions continuing with no significant changes. Our guidance for fiscal 2019 is unchanged from what was provided in June, which was given reflecting adoption of ASC 606. Under our previous revenue categories, there is no change to payroll revenue guidance in the range of 2% to 3% and HRS revenue guidance in the range of 10% to 11%. Payroll services revenue was below the low end of the range in the first quarter as anticipated due to the composition of payroll processing days. Growth in payroll revenue will be at or above the high end of the range for Q2 and Q3 and Q4 is anticipated to be within the range. HRS revenue growth for the first quarter was significantly higher than the range due to the timing of the HROI acquisition. Growth for Q2 and Q3 is anticipated to be within the range. For Q4, growth is anticipated to be below the low end of the range due to a more challenging compare caused by the strong growth in the PEO in the latter part of fiscal 2018.
We will also provide you with revenue guidance under our new categories as we transition to this approach in the future. Management solutions revenue is anticipated to grow by approximately 4% for fiscal 2019 as compared to fiscal 2018. Our Q1 results were obviously lower than this due, as I mentioned before, to the composition of payroll processing days. We anticipate that Q2 and Q3 will be above 4% and we anticipate that Q4 will be in line with the full year guidance.
PEO and insurance services revenue is anticipated to grow in the range of 18% to 20%. Growth in the first quarter was obviously significantly higher due to the timing of the HROI acquisition. We anticipate that growth for Q2 and Q3 will be in the range of 15% to 17% and for Q4 in the range of 11% to 13% due to the factors that I mentioned before, i.e., a challenging comparison with strong PEO growth in the latter part of fiscal 2018. All other guidance remains unchanged.
Finally, just as a reminder, we have provided on our IR website a presentation entitled service revenue disaggregation, which reflects historical revenues as originally reported and as they would be under the new categories. We have also published an updated presentation entitled impacts of ASC 606 and other items that reflects the impacts of adoption of 606 and other non-GAAP adjustments for fiscal 2017 and fiscal 2018.
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