Barrett Business Services Inc (BBSI) 2006 Q2 法說會逐字稿

Good afternoon. At this time, I would like to welcome everyone to the BBSI second quarter earnings conference call. All lines been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (OPERATOR INSTRUCTIONS).

Thank you. Mr. Mulholland, you may begin your conference.

Thank you. Good morning. This is Mike Mulholland with Bill Sheretz. Today we will provide you with our comments regarding the Company's operating results for the second quarter ended June 30 and our outlook for the third quarter of 2006. At the conclusion of our comments, we will respond to your questions.

Our remarks during today's conference call may include forward-looking statements. These statements along with other information presented that are not historical facts are subject to a number of risks and uncertainties. Actual results may differ materially from those implied by the forward-looking statements. Please refer to our recent earnings release and to our quarterly and annual reports filed with the Securities and Exchange Commission for more information about the risks and uncertainties that could cause actual results to differ.

Turning now to the second-quarter results. As reported, the Company earned $0.36 per diluted share in the second quarter as compared to $0.31 for the same quarter of 2005. The increase in net income on a quarter-over-quarter basis equated to 44.2%. The percentage increase in EPS was far less to the follow-on equity offering last July, which makes the number of shares outstanding not comparable for an EPS basis.

Page one of our release summarizes the Company's revenues and cost of revenues on a net basis as required by Generally Accepted Accounting Principles. Our comments this morning, however, will be based upon growth revenues and various relationships to growth revenues because management believes such information is more informative as to the level of our business activity and more useful in managing our operations.

Total gross revenues for the second quarter of 257.4 million increased 40.2% over 2Q of '05. Organic growth for the Company on a quarter-over-quarter basis was 29%. The performance of Pro HR, our January 1 acquisition, continues to track with our expectations.

Staffing revenues for Q2 '06 declined a little over 14% or approximately 5.1 million on a quarter-over-quarter basis. Bill will address this issue in his comments.

PEO gross revenues for 2Q '06 of 226.8 million increased 53.3% over 2Q '05. On an organic basis PEO gross revenues for 2Q '06 grew 34.3% over a year ago. PEO growth trends in California continue very strong. Gross revenues were up 40% on a quarter-over-quarter basis.

Turning now to gross margin, our gross margin percent for the second quarter declined 72 basis points, primarily due to the increasing mix of our overall business towards PEO, which was 88% of our total gross revenues as compared to 81% a year ago. PEO has a lower markup rate thus direct payroll costs are a higher percentage of total revenue, thereby decreasing the overall gross margin percent as compared to the staffing business - assuming all other components remain relatively unchanged.

Sequentially, 2Q '06 gross margin percent increased 167 basis points over 1Q '06. Remember that our gross margin percent for the first quarter of a year is typically the lowest for a calendar year due to the effect of statutory payroll taxes for the employer as taxable wage limits are exceeded by wages paid to employees. The employers' payroll tax burden declines and gross margin increases.

Our workers compensation expense for 2Q '06 continues to reflect the results of our customer underwriting standards. SG&A expenses for 2Q '06 of 7.9 million were less than 3.1% of gross revenues - the same rate of gross revenues as in 1Q '06. Two-thirds of the sequential increase in terms of dollars between 1Q '06 and 2Q '06 was attributable to quarterly profit sharing for our management employees.

Turning now to the balance sheet, cash and marketable securities at June 30 totaled 61.6 million, down 3.7 million from December 31. This decrease was due in part to the $5.5 million all-cash purchase of Pro HR on January 1; the early retirement of $1.2 million long-term note with our principal bank, offset in part by cash generated from operations during the quarter.

Trade accounts receivable of 33 million increased 6.7 million over year end, due to higher revenues in June as compared to December - offset in part by the benefit of 11 day sales outstanding in receivables. Higher payroll and payroll taxes at June 30 simply represent increased business activity in June, as compared to December and to seasonally higher payroll taxes at midyear.

Turning now to our outlook for the third quarter of 2006, as reported in yesterday's earnings release for 3Q '06, we are expecting total gross revenues to range from 273 million to 278 million. The midpoint of approximately 275.5 million equates to an increase of about 30% over 3Q of '05. We are anticipating diluted earnings per share for 3Q '06 to range from $0.47 sets to $0.49 per share with the midpoint equating to an approximate increase in net income of about 30% over net income in 3Q of '05.

Our comparative EPS expectations are in the context of estimated net income to a year ago, because the share account is not yet comparable due to the follow-on equity offering in late July of last year. We will, however, have comparable share account for EPS comparison purposes beginning with the fourth quarter.

At this time Bill Sheretz will comment further on the recently completed second quarter, as well as our outlook for the third quarter. Bill.

Good morning. Let's address the negative first if it is a negative. That being the temporary side of the business which was down a little over $5 million. And I will give you a little flavor.

Most of it is agricultural-related and most of it due to the weather. One account, which was a year ago, was 1.3 million. We chose not to do business with them as they did not pay us about 135,000 at the end of the season last year and we are in a lawsuit with them. So I felt that probably doing business with them and not having been paid was the right thing to, do. But as I looked down the list of companies that are down on a year-over-year basis and I'm looking at one, two, three, four, five, six, seven, eight, nine, ten - all of them above $0.25 million dollars -- they're all agricultural related.

We were doing and we still are doing quite a bit of business with UPS. However they lost a Buymart account in Seattle which was where we were supplying drivers from the dock to UPS, and that is down about $1.3 million.

So in general while the staffing side is down, the agricultural business most likely from what we can tell is going to pick up rather dramatically, which is not reflected necessarily in our numbers the second half of the year. So most of these will make up probably the 5 million of the - my guess - of the shortfall. In fact, we should go positive somewhere out here year-over-year.

We have signed a -- to getting on to the really good news, we opened in Salt Lake around a very large staffing account and that is going extremely well for us. We have a couple other opportunities that I will be very surprised that we don't take advantage of before the end of the year.

Could be acquisitions. The acquisition pipeline has filled up. As you know my statement with acquisitions are, there may be a lot of them. The odds -- the odds are good and the goods are odd. So we are still sorting through those and we want to be very careful. But we have other opportunities in greenfield to open branches around very large accounts and we continue to work on those fronts.

So, we have a lot of things in front of us here in general. The Company is running very well and with not a lot of stress. We are still not completed totally on the [IOWAK] acquisition and the big issue there is getting them converted to our system. They did kind of a breakout billing and we do not and we are hopeful that we should have that done within the next 30 days or so. Once that is done, we are going to be a lot more aggressive on where we move the Company.

Other than that things are - as I've kind of repeated - there's nothing wrong going on here. I am extremely pleased with the quarter and the outlook for the year looks very positive. In general the economy I haven't seen any signs of slowing - other than the construction side of the world.

Yes, I would say that I haven't really watched my competitors on the staffing front and what they are doing. But we don't see particularly any big downturn on staffing, other than our agricultural business. So, probably, foretells that the Fed is going to raise interest rates at least a couple of more times. Would be my kind of call at that.

With that, why don't we open it up for questions?

(OPERATOR INSTRUCTIONS)

Tobey Sommer.

Thank you, good morning. Maybe I could start with -- you mentioned building the Salt Lake around a substantial staffing company. Maybe looking back at the staffing customers, I should say. Looking back at your office network, what kind of opportunity do you see on an ongoing basis to kind of cross-pollinate the staffing and the PEO businesses along the existing footprint?

I think that goes on all the time. In the case of the Salt Lake, we will start with the staffing piece. And we are in the process of recruiting some top talent to develop the market in the PEO front end, the permanent placement as well. So we will look for Salt Lake to be a branch that is online to do $100 million.

In terms of the rest of the Company that kind of goes on every day. I don't know if it's a primary focus, but it certainly is a focus we have on how to manage big branches.

Along the same vein and in the Idaho, Colorado markets that you acquired, have you -- what's been the customer response to kind of the procedures and value that Barrett may be able to offer incrementally to those customers?

We certainly changed the face time. We hired a full-time risk manager so that we put more face time. I think that has been received very positively by the customer base.

The big hurdle that we have got to overcome is getting our invoicing and our payroll system down. As an example, in our Boise office we have five payroll people and that is just absolutely ludicrous in our Company. We have branches that are three times our Boise size doing it with two people. So we are spending way too much time screwing around with payroll where that time could be devoted to HR and risk, particularly in the dollar side.

But I think it has been very positive for our way of spending face time as opposed to spending time trying to get a payroll done.

One other question and I will go back in queue.

You led off in your commentary saying something about the acquisition pipeline. Has there been any changes that you would describe relative to private PEOS and their valuation expectations given like, maybe, the recent correction in the stock market or anything like that?

Well, they all want to be millionaires. You know I kind of joke and we kid that is what I do for a living. I make millionaires.

I don't think they are -- you know entrepreneurs are a fairly smart number of bunch of people, albeit that some of that kind of works against them when they are trying to sell their business a little bit. But I think they sense that we could be on the way to a downturn in the economy and now would be a great time to get out because we are -- if you look around even though the market is kind of tipped over a little bit on the three of us, from our highs, but nonetheless they are still not looking -- they are still looking at evaluations that are a bit high for my taste, but you still have to fit them right.

It's not necessarily all evaluation. It just has to fit right with our mix and we are going to be very picky because our opportunities in front of us are going to be multiple faceted. It's not going to be, well, we don't have anything to do. We might as well make an acquisition. We have plenty of things that -- so the acquisition front, while interesting and certainly we are pursuing it, may not be playing a star role here for us in the very short term.

Thank you. I will get back in the queue.

Jeff Martin with Roth Capital Partners.

Good morning. Bill, could you give us, you typically will run through the client's addition, nutrition, numbers. Could you give those to us for PEO?

Yes. I forgot about that. We added 85 new clients in the quarter and we lost 29. Of the 29 -- I'm doing this from memory now. I've got it memorized.

Seven left on their own volition. I believe 14, we asked to leave; and I think this -- what's that, another eight or seven went out of business or were sold to somebody else. So that is kind of the -- that's a little higher than I would like but it is still in the 10% range and it's really critical with the rates in particular coming down. We are getting fairly testy about what kind of risks we're taking out there.

And looking back at the last eight quarter trend it seems like the last three quarters, the number of accounts that have left has come up a bit but still has the number of clients added. Are you seeing a higher attrition rate for a -- little bit higher attrition rate for any reason or is that kind of a normalized level you would expect?

Jeff, I don't know that I can put my finger on it. Some of the people who have left for their own volition, I think some of that has to do with workmen's comp, where people believe that we're not a partner that we are just a workmen's comp answer. That still remains a very low number of customers who do that.

So I watch that and I think it is just the nature of the beast. I don't think you can be 100%. If you were 100%, you would miss too many opportunities. So do we run credit on our customers? Absolutely. Do we cancel credit customers because they can't pay us? You bet. Things change at our customer base.

It is -- after all these are relatively small customers. I don't really break out for you units and say, well, of the 29, 21 of them are less than $1 million. Numbers can be whatever you want to make of them.

In general I haven't spotted any trends in there. We keep a fairly detailed record of what our customers think of us and if we are spending enough face time and if they believe that it's a value proposition. So I'm not -- would I like it to be a better ratio? Would I like to get to 95%? Maybe.

I think in some ways that would be a negative. We are constantly kind of, much like what you do. You get good stocks and not so good stocks and your portfolio is full of good stocks. You've got to eliminate some of the bad ones. That's kind of the way it is.

Sure. I like the analogy.

Are you seeing hiring from within your existing client base much? And what has the trend been the last couple of quarters?

We have kind of looked at that, but in general it's been pretty stable. The economy is not increasing but it doesn't appear to be tipping over either. It's kind of in a nice place, to be frank about it; and of course as you all kind of know, my worries are that the federal -- they are going to have their way. They are going to tip it over and then they go "See?".

But right now from what I see, other than the construction side which I have mentioned a number of times, new housing and those kinds of things which I think was kind of borne out with the numbers today a little bit -- although the West was up 8% which kind of surprised me to be frank about it. Just, anecdotally, what I hear around here. But I suppose some of those things are already in the pipeline and take a while for that to cool down.

Sure. One other question, on the lead flow source on PEO, are you seeing much of a shift? Or is it still kind of that same 50% broker, 25% customer referral? 25% direct?

It appears to be about the same. We had a great [signing] period - July 1 - and the submissions since then for the month have been very strong. We've added a couple more salespeople. I wouldn't try to read anything into that that it's a big trend. I think the market is a multifaceted market that you market to. It's from CPAs to venture capitalists to insurance brokers to friends and such.

In general, the fastest-growing is the referral part of our business as opposed to the broker network and/or our own salespeople. But not much has changed for the last two or three years.

Great. Thanks, Bill.

Tony Tristani with Halpern Capital Management.

Good morning. Couple of questions. On the PEO side, in general how many offices do you have now? I think it was 36 and/or maybe you can give us an idea where you are going to be at year-end? Because I know some are greenfield. Some were acquired, etc.

I guess the way we count offices I suppose that you would add Modesto because we split that out and, now, Salt Lake City because that is brand-new. We weren't there. I would think that maybe one or two more this year.

Maybe.

Go ahead.

40 by year end kind of? Roughly?

Yes that's probably -- you know I mean we don't kind of build the way we run the Company around that kind of the goal. We just take advantage when it's there, but we have -- there's lots of things in the pipeline that certainly could get us to 40.

With the greenfield offices you opened, etc. and Pro HR and new offices and new geographies, do you still have a roadmap of where you want to go, new geographies and/or the current acquisitions or deals that you are looking at? Are they attractive to get you into those new geographies? Can you just talk about that in general?

I know there's nothing imminent and nothing you want to say is going to be close, but anyway and just thinking about what geographies you still see open that you would like to go into, etc.? Thank you.

Again it's the Western states from, certainly now it's Utah, which we have kind of got that one at least started there. In Colorado, Denver, Phoenix, Las Vegas, Reno - you'll notice that I mention cities more than states. So those are still on the radar screen and what we get an acquisition candidate or it's being presented to us and people are looking at what kind of matrix we are after -- and there are several -- but one of them is, where are they?

I'm not very interested in making an acquisition in California to be quite frank about it because I don't think we need to do that there. It doesn't really serve the purposes of what we're trying to do in terms of [less in] California being a big percentage of the total business that we do.

So on a priority list, the geographic expansion is really close to the top of diversifying the Company's base in other states. Even though we continuing to grow very fast in California, which is fine and very appreciative of that, but we are looking to diversify geographically.

And on the deals that you are looking at, have prices come down? Are they still in the kind of same whatever it is - 4 to 6 EBITDA kind of ballpark range?

I guess we would look at them if they were any different than that. I suppose if they were low, but if they were low that would be an indication that there was a lot of work to do.

So we make that known upfront, if you want to play it's going to be in this range and that is kind of the end of that story.

Thank you and I have a question for Mike. Your -- I know it's probably just timing, but if I look at your working capital ex cash it declined by $5 million or you have had $5 million more investment. I guess your liability stretched out and your -- I mean your liability came down, your current assets moved up.

Is that just a timing issue? It seems like the same thing happened in the second quarter of last year versus the first quarter.

Yes, sequentially, it's really a timing issue. I mean when you compare the June 30 balance sheet to the December balance sheet, there are seasonal things happening, tax rate factors. The amount of accruals is also driven by the business level. Sequentially, business increases.

The other issue that has a surprising material effect on the amount of current liability - particularly for accrued payroll and payroll taxes - is the day of the month in which the month or quarter end - has a huge difference.

Right.

I wouldn't read anything into that. You know we are very pleased with a turn rate on receivables being 11 days. The working capital fluctuations are more, again, more seasonally driven.

So I mean net, net in the second half of the year was when we start seeing that cash coming back in?

Exactly. Let's not forget we had some transactions in the first half of the year that consumed a fair amount of cash, 5.5 million for pro HR and we paid out, paid off in total our loan remaining piece of bank debt - a $1.2 million long-term note.

Yes I realize that, Mike. I was just really looking from the end of this past quarter. Sequentially from the end of Q1 to the end of Q2 I noticed the build up there. So but I'll come back in plus more in the second half I guess.

Yes and there's probably, Tony, there could be a $10 million swing on a Thursday Friday. If you want to see a lot of cash it will be on Thursday. If the quarter ends on Thursday it will just be a big jump. But if it ends on Friday, it goes the other way.

Thank you very much. I will go back into queue.

Frank Magdlen. The Robins Group.

Good morning. Bill, what would -- acquisition-side, what's the largest piece you would feel comfortable taking on?

In terms of dollar volume or in terms of cash?

Consideration.

Yes. Consideration and then the size of the deal, the size of the operation and your ability to integrate it into your system.

That's a tough question. Yes; it just depends on how good it was and how easily I felt that the cultures would match and how much risk the Company would take. In general, as long as the Fed's raising interest rates I would be fairly reticent to bet the Company on one roll of the dice. I don't think that is smart.

Until the Fed starts to back off the worst thing you could do is risk all your capital in front of a downturn in the economy. But doing these smaller ones at $5, $6, $10 million, $20 million even, I don't see that as a significant risk to us.

But to pay $80 million for something that would double us, this would be the wrong time to do it in my opinion.

All right. I noticed in the quarter your -- what is going on with your workmen's comp expense? Maybe I read it wrong; it seemed like it was up a little bit more than trend.

Than what? The first quarter?

Yes or the trend.

I don't know. I see it kind of -- I haven't paid much attention to the percentage but it's been very good and fairly consistent from my point of view.

So nothing special going on there?

No workers comp expense -- I think, benign and improving. The workers comp expense for the second quarter was 3.32% of gross revenues compared to a year ago of 4.3%. We have had outstanding experience rate or cost trends of claims have been rather unremarkable. And I think that is reflected on the balance sheet, as you see an easing or lessening of the overall level of accrued liabilities.

Remember the rates in California year-over-year are down about 30%. So we have to be competitive we have to stay in that market so it only makes sense that our -- it better makes sense that our claim cost is coming down because the premium level has come down as well.

We are just kind of maintaining a position that is relative to the rest of the market. And if you would look at the insurers in California they have all experienced fairly good results there and all of their claim expenses come down in line with what the rate reductions have been in California as well.

And you are seeing those trends on our P&L and on our balance sheet.

Thank you very much.

Dan Mazur with JMP Asset Management.

Good morning. Congratulations on a great quarter.

Yes, we like the quarter. How are you?

I'm doing good. Just following up on California. There's been a lot made of the price reductions and I just want to see on the attractiveness of your program with your risk management approach and the incentive program. Is it still pretty attractive in the market? Are you still -- I mean it sounds like July 1 is off to a good start and getting good submissions. Are you still seeing great traction in California?

We are. I think the ability of somebody to save a third of their premiums is attractive at quite a few different levels and unless rates absolutely go stupid - in which case if rates go stupid, you are going to see a mass exodus of insurers in California again.

So there are some self-policing mechanisms in place that the rates will only go so far and then they will stop or people will just flat leave and there'll be no competition. We have chosen - as many insurers have chosen - to be very selective about where we even give the new rates. So not everybody gets those new rates. And I think that is the much across the board the way the insurers have seen it.

However it's still very attractive to be able to save a third of your workmen's comp premiums given your lodge experience ratio. And again we are only talking to people who are - most likely - are going to achieve that level anyway.

Yes, that makes sense. Just on the change in your commission program, do you still feel pretty good that is not going to impact your ability to assign clients through that channel?

That happened back in May. We see no change. We are still getting a ton of submissions and there are a couple of sour grapes that won't send us [bad] business and that's okay. But -- that whole PEO broker world is -- they live at the bottom of the food chain anyway. I could care less about those people. Our top brokers are doing just fine.

Great to hear. Congrats on a great quarter.

(OPERATOR INSTRUCTIONS). [Sean Willard] with Rubicon.

Good morning. Couple of questions or follow-ups to some of the questions. You talked a little bit about Idaho and the fact that you are still going through the accounting changes and the overhead operations and such.

But that opened Colorado for you and it also made you a significant player in Idaho. How is it going from a growth standpoint from revenue, new customers, cross selling other products, that kind of thing?

Until we get the accounting piece fixed, I'm not very concerned about trying to institute any new programs. We have signed a number of new customers. That's been good. We've lost a few customers. That's not been so good but net, net, net we are doing just fine.

But the biggest hurdle we have to overcome there is to getting them down to kind of a boring existence of day-to-day activities. Mike Elich is in Boise today and I've kind of really kind stuck my finger in the light socket and made it clear that we are going to get this done very shortly.

So in fact, the way I see the world is, we are not going to do anything else until we do get it done. So that has put everything on a hold basis here, because I believe in putting one put in front of the other. If we are successful in getting everything done then we will go on to the next deal.

Salt Lake was a terrific opportunity. It got handled by Mike and Greg and Christy here, and our San Jose manager, and we were lucky enough to find some good talent so that went fairly smooth. But I'm not too interested in having eight plates spinning at the same time. So we are hopeful that will get this transition totally completed in the next 30 days or significantly so that we can get on with developing our people and running the model that we know to be very successful.

Follow-up question on your expansion as far as offices go. When you talk about greenfield you - in the past at least - have tended to look at that differently. For example you don't just open an office and start to build business around it thinking something is going to show up. You typically have a couple of key customers in an area that you want to service locally.

What kind of parameters do you normally look for as far as customer size or revenue potential or -- how do you do that for a new office?

The Salt Lake deal was somewhere between $5 and $11 million. So that was kind of a no-brainer. When we opened Bakersfield it was around about a $5 million customer. San Diego, we did kind of as a greenfield because we had a lot of business that simply kept coming at us. The same thing with Redding, and we were turning it away and we said, "Geez, we don't need to turn this away. We can certainly open an office." And it's almost there even though it wasn't around a very specific customer.

At this moment in time I'm pretty reticent to just pick a city and open a branch. I think there's enough opportunities for us in terms of customer-specifics and/or acquisitions that will be coming in with pretty loaded. Pretty loaded up.

So we are in a unique and very enviable position from my point of view of being able to do that.

Last question. We are three plus weeks into the quarter now. What is your weekly run rate looking like?

Good. All-time records. No. It's very good.

Growth consistent, no surprises from that standpoint?

Maybe a little upside I suppose. We are still -- we still -- we anticipate most of this agricultural business to come online in August. Right now we had a couple, three weeks that were very big and then they shut down for plant maintenance this time of year for the first two or three weeks of July.

And then August 1 we have anticipated our billings probably picking up somewhere around a million a week. So I'm adding new lines to the chart on my graph.

(OPERATOR INSTRUCTIONS) Tobey Sommer with SunTrust Robinson.

I guess, based on your commentary regarding new offices am I right to assume that you don't really have any new offices in your guidance?

Yes. The way we do guidance is we take the last two or three weeks of the month that we are in and we roll it forward. No, we do not -- we don't -- I know better than to try and build something out in front myself that for whatever reasons that I may not want to do.

So, no, we have nothing in the quarter or our guidance other than what we already have. I mean, it's kind of -- that is how we do guidance. It's just what we have. It would anticipate no new customers and it would also anticipate not losing any customers and it would also anticipate not opening any new branches.

Anything on the regulatory front, any catalysts? I think it was only a few months ago that there was some movement on a PEO legislation Washington state. Anything noteworthy on the horizon or that has taken place recently?

The PEO world seems to be a whipping boy for state. Most of it centered around licensing and most of it very much unwarranted. My answer to the states would be simple. Make us put up $1 million bond and then your issues will disappear, but instead they want to do fingerprints, background checks, eight hours' worth of continuing education, photographs. I mean, good God almighty.

So that comes and goes as some little PEO goes out of business and the state regulators all run around with their hand up their butt, trying to figure out how to save the world. I guess I don't have a very good opinion of that either.

Just wondering if you could update us on, Mike, what your thoughts are for Cash Flow From Operations and CapEx for '06? You got some insight there?

No firm estimates. I think you can sort of roll forward the P&L from an EPS standpoint. And there are some estimates out there for the full year which we have said at least two or three times that we are comfortable with - at least for the full year estimates we have seen.

CapEx, we are probably over the big hump of CapEx once we get the June 30 quarter out, we had about 0.5 million of tenant improvements here in our new building which we are very pleased with. And we will continue to have sort of normal, pretty insignificant CapEx investments in our IT systems.

So I don't see any big bumps out there from a CapEx standpoint. So I think, as you look at your model and roll the quarters forward with our guidance for 3Q, and we have said repeatedly over the years and quarters that as three -- as a quarter is set up and we deliver that pretty much sets up the next quarter and the quarter thereafter.

So as you interpolate yourself 4Q in the year, CapEx is going to be a pretty -- or cash flow is going to be a pretty simple roll-forward of what you are seeing from the P&L. There should be no aberrant transactions that would change a normal roll-forward from your projected cash flow.

We are working on a [Cap A] Reinsurance program but I don't think that will change. It's going to probably cost at least initial marketing capitalization of around $5 million.

So I think that probably stayed on the balance sheet probably as investment in a subsidiary company I guess. But beyond that we are just trying to look to get the best return on our cash and barring an acquisition, most of our earnings are going to turn up in cash on the balance sheet.

One last question. In terms of looking at your customers and new sales, any change in the typical profile of new sales? You know, slightly larger, slightly smaller or just kind of status quo?

It seems lately we've seen some fairly large companies. Landing big fish like that, one of the guys down in Florida calls them whales. I'm going to refuse to do that, but I would be happy if we signed eighty 30- or 40-person companies as opposed to getting 20 at 200.

There's risk involved with the bigger companies in terms of the financial risks, competitive risks that are out there in the market. But lately it does seem like that we've seen some larger ones, some very nice companies in fact.

So is the growth rate in the employee base that you serve on the PEO side of the business growing at a faster rate than the number of clients themselves?

I would think that we don't use that matrix much. Probably, actually, there is more customers at a smaller base. But it's just recently that we have run into -- there's bigger guys. If you get one or two a quarter those are huge wins. It's not like that is -- out of the 87 customers we got in the quarter there were two or three of pretty good size.

Tony Tristani with Halpern Capital management.

Thank you. On the PEO side of the business on the growth side, is there seasonality to that? Seems like it kind of builds as the year goes on but I'm not sure if that is seasonality or just growing your business organically. Is there any discernible trend there?

Not that I've seen. I think - in general - I think that summer months or longer days people work were more over time. There's a lot more activity. We do have about 8 to 10% construction exposure and that's the best times of the year and you don't get -- in the first quarter of the year you get floods. You get snowed out, where people can't even get to work. So there's that stuff that goes on.

We are not exposed to hurricanes but I suspect those people down in Florida and Louisiana would say, yes, there's some seasonality every fall. Here come the hurricanes.

So I think we are more weather-related. We are certainly weather-related on the agricultural front. Last year was a drought and this year they got torrential rains and that's what delayed almost everything going on over there. And I don't totally understand it but that's at least the people in the know are telling me.

So, no. I think there's always some seasonality with it. It's not a huge number. It is on the staffing front but it isn't on the PEO front.

I guess that my question is leading to when you plan your business, what are the drivers or what are the gates for you to increase your gross adds? Last two quarters Q1 and Q2 you had 85 gross customer adds and very strong numbers.

I wonder how you plan -- I mean, you have 36 offices, when you add salesforce or brokers -- how do you plan the business, growing that number moving forward? How does that -- obviously you guys do it very well and I just don't know what the driver is there.

I would love to tell you that there's this special book that we have that everybody reads and it is all formalized. But you know what the truth is, is that we have some very talented people who want to drive nice cars and live in nice homes and they work their ass off to achieve that.

If you were to look at our managers and just the kind of people they are, they don't particularly want to have a lot of bosses. They don't need vice presidents. They don't need gimmicks. They don't need Hawaiian vacations and the only perk that we have that a lot of people take advantage of is the home in Palm Springs that the Company allows our good customers and top salespeople as well as managers to use.

But that's more of a reward than a motivator. We don't do sales contests. I think as I look out, we are going to do management meetings to, quarterly management meetings. And we will have all managers together and I think there's a spirit of competition that just kind of natural to themselves and we have found absolutely no need to set -- I won't set revenue goals for anybody because you more than likely will get them. You just may not like what you get.

So the mantra that we use is find good customers that treat their people fairly and then deliver our service that helps our customers and we will just kind of take our chances with the number of people that are interested in that kind of program.

As you look at your existing markets, can you talk about -- I mean what you see as a relative penetration level of your service or competitive services in that space? Is there a lot of growth left in the existing markets or do you need to continue to roll out new geographies to keep your growth rate going?

I guess the way I would answer that question is, our biggest branch is San Bernardino and he hasn't slowed down. He's big. He's probably at a run rate of at least 150 million headed for 200 million.

That's kind of my litmus test. Because San Bernardino isn't necessarily a largest city in America. And so when you start looking around at Santa Ana and [Temecula] and San Diego and Camarillo and San Jose and Concord and Napa and Fairfield, all the -- Sacramento. Can they be at that size?

Absolutely. So you answer your own question with it. You just say, "Well we haven't got anywhere near a market penetration in which we are just happy," and that is kind of the end of that story. We are able to not have to open a branch.

I guess maybe if you might want to look at it another way Starbuck's has to have a coffee stand on every quarter because it is a matter of convenience. We have the luxury of being able to be within 50 miles and service that entire area. Well, 50 miles is a pretty big area when you look at it as a radius and bring all those -- and the number of businesses that are in that 50-mile radius, it's pretty phenomenal how many are down there when you're talking about those areas particularly in California have millions of people in those 50-mile radiuses.

It's about like having Portland every place you are in California. So it's a big market.

Okay. Thank you very much.

We have no further questions at this time.

Thanks for your participation and we will be on the call this time after the third quarter. Thank you very much.

This concludes today's conference call.