Barrett Business Services Inc (BBSI) 2007 Q3 法說會逐字稿

Good morning. My name is Lori and I will be your conference operator today. At this time, I would like to welcome everyone to the third quarter BBSI earnings call. All lines have 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. Sherertz, you may begin your conference call.

Good morning. This is Mike Mulholland with Bill Sherertz. We will provide you with our comments regarding the company's operating results for the third quarter ended September 30 and our the outlook for the fourth quarter of 2007. 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 forward-looking the 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 third quarter results, as reported, the company earned $0.54 per diluted share in the third quarter, as compared to $0.48 for the same quarter in 2006. These earnings represent a 12.9% increase in net income. Page 1 of our operating results summarizes the company's revenues and cost of revenues on a net revenue basis as required by generally accepted accounting principles. Our comments today, however, will be based on gross revenues and various relationships to gross revenues because management believes such information is more informative as to the level of our business activity, and more useful in managing our operation. Comments related to the gross revenues have no effect on gross margin dollars, SG&A expenses or net income. Total gross revenues for the third quarter of $296.8 million increased 8.4% over 3Q '06. On a comparable branch office basis, that is without regard to Strategic Staffing, our July 2 acquisition, total gross revenues were $284.3 million, an increase of 3.8% over 3Q '06. Staffing revenues for 3Q '07 rose 31.1% over 3Q '06. On a comparable branch office basis, again without regard to strategic staffing, total staffing revenues for 3Q '07 declined $2 million or about 6%.

We are very pleased with the Strategic Staffing acquisition. Their revenues and contribution to earnings were right in line with our previously reported expectations. Gross PEO revenues for the third quarter of $252.8 million increased 5.2% over 3Q '06. All markets throughout the country were up, except for Pro HR, and Bill will comment on this issue during his remarks. Our gross margin percent for 3Q '07 increased slightly, 24 basis points, over a year ago primarily due to modest declines in payroll taxes and workers comp expenses expressed as a percentage of gross revenues. SG&A expenses for 3Q '07, up $9.5 million or 3.2% of gross revenues increased over 3Q '06 and 2Q '07 due to incremental SG&A expenses attributable to Strategic Staffing and higher profit sharing. Our effective rate for income taxes for the quarter declined 30 to 35.2% and we expect to have the same rate for 4Q '07. This equates to an expected rate of 35.7 for the full year. The decline in rate for the first half -- from the first half of the year is primarily attributable to higher than anticipated tax exempt interest income and work opportunity tax credits.

Turning now to the balance sheet of September 30, cash and marketable securities was $60.6 million, declined from $73.4 million at December 31, primarily due to the $12 million in cash we paid for Strategic Staffing on July 2. Receivables of $45.3 million increased over December 31, due to an increase in days sales outstanding in receivables to 14.7 days, owing to increased staffing business for the quarter and higher overall revenues in September of '07 as compared to December of 2006. The increase in goodwill at quarter end principally reflects the acquisition of Strategic Staffing, as well as the final payment of the contingent consideration on Pro HR, our January 1 of '06 acquisition. Accrued payroll is up from the prior year-end balance because of increased payroll and payroll taxes in September '07, as compared to December '06.

Turning now to our outlook for the fourth quarter of 2007. We are expecting gross revenues to range from $285 million to $290 million for the quarter. Bill will comment more fully during his remarks regarding our visibility for revenue trends. In addition, we anticipate diluted earnings per share for 4Q of '07 to range from $0.45 to $0.48, which compared to $0.45 for the fourth quarter of 2006. At this time, Bill Sherertz will comment further on the recently completed third quarter, as well as our outlook for the fourth quarter. Bill?

Thanks, Mike. Well, it's too bad third quarter was a record, but we'll ignore that and do the future looking stuff. During the quarter we signed 68 new PEO customers. We lost 45. Of the 45, 17 were sold or closed. 10 we canceled for credit risk and 18 left on their own. And I guess that my -- that's a little higher than I would anticipate, although given the general economic conditions on the West Coast, that doesn't necessarily surprise me. We are fighting a couple issues. A new issue that just arose is the -- obviously the fires in San Diego. We have four of our largest branches are in that area. The highways, some of the highways are closed. A lot of the businesses are not opened and so it's -- we don't know it will affect us, but we have to anticipate that it will probably have some effect on us.

In general, we find that our customers are flat or down across the board. Obviously, there are some pockets. To give you a little flavor of it, San Jose is down 10%, Sacramento down 11% in the quarter, San Diego down 7%, up here in the Northwest, industrial was down 47%. Idaho remains a challenge, although it's stabilized with the acquisition of Meridian and Grand Junction. Meridian in the quarter was down 64%. Grand Junction was down 73%. So despite those kind of numbers, we still had a relatively very good quarter. I've just completed a round robin of our branches. I'm very pleased with the talent of our people and the approach that we're taking towards business and building HR delivery systems that I think is going to almost create a bit of a cult with our customers. Because in the end, if we can make our customers more profitable -- and I think we are doing that -- it's the reason that we get 50% of our business from referrals and that will probably increase.

We have almost no visibility going forward into the next year, in terms of what the economy is going to do. The economy is sliding, despite what the government is telling you. I think if you go out and talk to some business owners, they will tell you things are not perfect. An analyst called me yesterday and I said California is not doing so well. And he said, yes, I know. Well, it's obvious to the people who live on the street that it's not perfect, and we certainly see that in our customer base. Despite all that, I'm very optimistic. I think we're going to -- we had a good October signing period of new customers and some of them were rather large. So we're going to churn for a while, would be my guess. We are guiding very conservatively, because, again, we just don't know what is going to happen in the fourth quarter, nor do we know what's going to come to us in '08 in terms of the overall economy. I hear a lot about it, particularly on CNBC and I agree with it -- high gas prices, credit crunch, poor housing environment, all of those things are going to contribute to a lackluster economy at best. And I would not call it a recession and the reason I would not call it a recession is because we don't have high interest rates. The one thing I do fear would be if the Fed decides to defend the dollar and take the interest rates up and we won't call it a recession. We will call it a depression next time. But in general, business is trying to absorb what's happened with the housing market and the credit crunch and the high gas prices, but we don't see our customers as being very robust. But we're working on the delivery system to widen our base and if we do widen our base -- and I think we will substantially, we'll do just fine when the economy gets more on stable footing.

But having said all that, the numbers that we're putting up and the guidance are not exactly terrible numbers. So it looks like to me that if you take the cash out, we're selling at eight times earnings and if you guys want to sell it down to five times earnings maybe I will just buy the whole (expletive) thing. With that, go ahead, ask the questions.

Thank you. (OPERATOR INSTRUCTIONS) The first question comes from Tobey Sommer.

Thank you. I have a question about the pace of new sales and maybe any changes that you are perceiving in terms of the composition of those kind of customers, if any change, really relative to the last couple of quarters, any particular vertical or geography that's doing well for you? Because like you said, the attrition may be a little bit more than we had modeled but the new sales seem to be continuing to progress nicely.

No, no particular verticals. I could just read you -- when I look at it, residential services, some of these I wouldn't even know what they are, building supply, towing company, home care, Lincoln Mercury dealership, special dispatch, circuit door, auto body and paint, maintenance, boathouse, I don't know exactly what that is. [tighter] delivery services, wall-to-wall painting. So, I mean, it's just kind of all over the place. And just -- just the general trend, Tobey. You didn't hear a lot of construction in there.

New customers continue to come from a very diverse group of industries.

Right. And geographically is that fairly representative as well?

Yes, places we are working on it right now, picking it up, where we're getting hurt is Idaho. We have a good manager over there. We are -- particularly in Boise and he's signed a number of new customers and we've churned quite a bit over there. It's one of the reasons when people ask me about buying PEOs that I kind of wince. I know that once you get involved and nailing down credit terms and risk issues and HR issues, you are going to churn a lot of those little guys out because they didn't come for the good reasons in the first place. But in general, we are doing -- we -- it's across the board. Towson is doing well back east. Portland is doing okay. And in California -- the issue you've got with the sales is that when it's a branch like San Jose is down 10%, you are talking about $100 million plus branch. And there's nothing that I'm going to do to San Jose. It's just part of the economy down there. They still continue to sign new customers and we've got very bright people and they are aggressive. I mean, I'm not going to change the way we operate the company based on that.

Right. Let me ask you a question about the workers comp trends expected next year. You seeing any kind of change versus the trends in recent years in terms of at least expectations for what the state may do? And can you refresh my memory if those trends will be reversed, how is that generally contributing to your ability over time to get new sales in that market? Thank you.

Well, we have been in a two and a half year downtrend in workman's comp premiums, state of California in particular. The state WCIB has proposed a 5.2% increase, which is the first increase in, I guess, pretty close to three years. And I don't know that it's going to be a big deal for us, other than it's not going down. The good news is it's not going down anymore. And what happens, as the rates continue to go down, we get more selective about the kind of customers that we'll do business with. If they pay us less money, then we expect less risk. So it does have some limiting factor on who we'll do business with to that extent. I have seen more customers with higher mods, which means they are not as good a risk probably in the last three months than I've seen in the last time. We turn them down unless they are special cases. It does provide an opportunity if the rates continue to go up, and I suspect they will, because there's some changes in the law that will drive those numbers. So that will be a little bit of wind at our back next year particularly.

Right. And so that's good stuff there. And then two kind of separate questions and I will get back in the queue. One, I was wondering if you could comment on your own internal employee retention and if there are any changes there. And secondly, I'm wondering if you can comment on wage or compensation trends, both in your customer base and internally. Thank you.

Well, we did lose one of our top managers. He, unfortunately died. He was on blood thinners and stepped on a glass and unfortunately bled to death and he was out of Temecula. We had a couple of managers leave. I must say, they were not star performers so it's a chance for us to upgrade and we will. Wage pressures internally to the company because the profit sharing is so high are virtually nonexistent, to be real frank about it. When we do pay more, typically is when we were upgrading our people to a higher level and we have done a lot of that over the last year. In terms of our customer base, I think the big issue that's going to be coming at them is going to be immigration. If the United States is going to reform immigration, it's a good time to do it because people are readily available, people that can fill those jobs in replacing illegals. Albeit, I suspect that if somebody can get their act together, they are going to have to pay a little more money to get legals to do what they may be able to get illegals to do now. But in general, there's less overtime, less bonuses and very little wage pressure that I have seen.

Thank you very much. I will get back in the queue.

Okay.

Your next question comes from Kevane Wong.

Hi, how are you doing?

Good.

I guess first, as far as Pro HR, what's going there that caused the big turnover? It sounds like it would be something specific to that operation.

I -- well, we made a major change in how we bill the customers. We do it on a bundled rate, Pro HR, did it in an unbundled rate, and it's just more culture than anything else. Now, Rexburg, which was a big piece of that acquisition, has done just fine. So it really kind of comes down to what management talent we had in place and, unfortunately at the time the person there wasn't that good, but Aaron is a talent and he started to add new customers. We will be fine. It's one of those deals that if you are looking at acquisitions and you wanted to fix it, Boise ends up being fix it. Rexburg doesn't. Grand Junction is fix it. So I have done a lot of those over the years and we will be just fine. It's just a little pain in between here and there.

And when was the billing change done? You owned Pro HR for a year now. Is that a recent change for the billing?

No, it took all of '06 to get our computers to really get that done and get the historical. It was a struggle to get that thing to our way of business, and as Strategic Staffing, the most recent one, it took us a month and a half and the PEO took us almost 12 months.

Okay. So that's why it's sort of selling up at this point. Is there anything with Pro HR that would need to be adjusted? Once that runs through, is that it as far as integration, et cetera?

No, it's now building it. You know, we're on the road to -- it's all stabilized and -- I don't anticipate further erosion in it. It's going to be down the rest of the year. We have the same numbers in the fourth quarter. But I think we'll add some new customers and we'll do okay with it.

And then looking for the guidance is obviously lower than -- looking at top line versus third quarter. How much of that would be -- I don't know if there's a good way to quantify it, Pro HR, versus economy, versus your sort of estimate from the fires. Is there a a good way to give us a sense of how much each of those contributed?

I have no clue how much the fire in Southern California is going to affect us because it won't show up until probably next week in our billings. It should be very temporary, but it could be $1 million or $2 million. I wouldn't be surprised. The Pro HR will continue on the same run rate. In the fourth quarter, you have a couple of major holidays in there and all your cultural business goes away in the second half of November. So those are all the negatives and it will depend on how strong our signings are. In years past, we were able to make up most of all that through new signings and the signings look fairly strong. So we'll see.

I got you. And then I guess the economy. I don't know if there's a way to quantify how much more caution you sort of put in the numbers in December?

Well, we are trying. If we are going to miss a quarter which we just did, we try not to miss two in a row. So those numbers -- we took the first two weeks of October and just ran them out. That's what you are looking at.

Okay.

They are better than the low end of the guidance number, but why -- why put that as kind of the base number and end up $0.02 lower or whatever. If I -- in years past, you would be sitting here signing a lot of customers and their business is up and the economy is upbeat, that's one thing. But I don't -- I don't see it right now. And I look across the board. Maybe I watch too much CNBC but I see a lot of big companies talking about the same thing I'm talking about.

Yes. Certainly seeing it this week with earnings. Last one for you. Again, sort of credit issues coming up. In the quarter, did that accelerate from what you were seeing before, or was it steady? And what are you seeing so far in October? Are credit issues with customers staying about where they were or are they getting worse?

It's been kind of an ongoing issue all year. And they have not exacerbated themselves. Part of that would be, well, Bill, why don't you do a better job on the front end. But things change at our customers and we are really tight on the credit issue. We will not do business with people who can't pay us. It's not getting worse. I don't know that we've had anybody in October so far that I'm aware of -- and usually I'm aware of it -- that we would cancel on a credit basis. We held risk management meetings here last week and I personally canceled three customers. I didn't like their risk profile. I mean, some of that goes on but I think that's just normal business. That's not out of ordinary.

Okay. And I guess in the third quarter was there a particular -- when you are looking at sort of numbers or credit guys, did that spike in the last couple of weeks in the quarter or is it spread out?

It's spread out and a couple of them are pretty good size.

Okay. And would those tend to be one end of the quarter or the other?

I don't know that I looked at it. There was a couple in September, one was rather big for us. I mean, they were probably about an $8 million deal, I guess.

Got you.

In terms of revenues, not outstanding balance.

Yes.

Got you.

I don't want to get caught on -- you figure out how much a week that is or every two weeks and I don't want to get on the down side of them not paying me.

No, I hear you. I'll get back in queue. Thanks, guys.

Your next question comes from Lance Adams.

Hi. This is actually Randy [Sellers]. I work with Lance. How are you? You made a comment that I thought was pretty interesting. You said that we're at eight times earnings now and if it gets to six, you would buy the whole thing. I applaud you for that, but let me ask you a question -- does it make sense to use your cash to buy stocks, since it's such a great investment, it seems incredibly cheap.

I think we'll probably be looking hard at that, yes. Yes.

I mean it looks like a fabulous investment down here, give than you have, what, $5 or $6 of cash?

Yes. In fact, I keep a weekly chart on the cash, and we have made up all of the acquisition -- the acquisition cost us $12 million cash and the receivables were about another $4 million to $5 million, so we were really out of pocket about $15 million to $16 million to $17 million, and we made that all back. So despite the premature announcement of our debt, we seem to be generating a lot of cash.

Yes. So I would encourage you to think hard about buying back stock because it's incredibly cheap here. Yes. Lance, you have a question here.

Just a quick follow-up. I think you are pretty bearish on the economy, and given that you tend to buy staffing companies, are you going to maybe hold back in doing acquisitions and obviously that forces you to look internally as far as building up cash or buying your own stock. And are you seeing compression on the multiples out there for staffing companies that are in the market to be sold?

Anybody who's public, I'm seeing a compression in multiples, you bet. No, if we see the right company with the right geographic deal, the economy be (expletive), we'll move. We are sitting in a fabulous position on a great balance sheet. So we don't have to worry about what the bank thinks or submit monthly statements to them or anything else. And to be frank about it, when you get a down economy, that's the time when you want to expand your market share and your market base because on the other side you are just that much bigger. Kelly used to play these recessions -- I used to watch Kelly play it like a fine violin. Every time you would go into a down market, they would go out and pick up market share and wait for the market to turn up and there they go, they would be that much bigger. We do the same thing. If you look over the history of the company and you were to track the recessions and see how we come out on the other side, we always come out much, much bigger and stronger.

Okay. Well, it sounds good to us. I mean, it's just your stock is very, very cheap right now. And it would be great to see some buybacks because that would indicate that you agree that your stock is dirt cheap. Thank you.

I will be out talking to some new investors, potential new investors and if they don't like buying eight times earnings, oh well.

Your next question comes from Bruce Ackerman.

Thank you. Gentlemen, I take a look at what I call a markup, where I take your revenue and divided by your direct payroll, and I notice the staffing markup is down quite a bit in the third quarter. Could you comment on that, and what you see going forward?

I disagree with your analysis. It's not down.

Well, then I'm going to have to redo that analysis.

I suggest you do that. I mean, our markups, if anything, have gone up, but typically the way we price things, we don't -- we don't fool around with markups very often. Very seldom.

Okay. Last question, the National Association of Insurance Commissioners passed some guidelines in June for PEOs that were incorporating new exposures for uninsured subcontractors and uninsured 1099 employees and casual hires at the work site. Is this going to affect you in any way? Can you comment on that?

Well, in Oregon, in particular, if we have a general contractor that we have under the umbrella of PEO relationship, we have exposure for everybody who's on the site, and it's up to us and our customer to make sure that those people who are on site are not doing 1099s and have their own workman's comp coverage. And we're really tight on that. Every place that we do business, we recognize that it's most likely we are the deep pockets and we will have an exposure. Once in a great while, some small contractor gets by us, but it's pretty rare. We're pretty tight on making sure that our generals make sure that their subs are covered by their own insurance.

Okay. Thank you.

Yes.

Your next question comes from Josh Vogel.

Hey, good morning, fellows.

Good morning.

You have already touched on a lot of my questions, but I was curious, what's your revenue exposure to Oregon and Idaho? And how much were they down year-over-year?

Well, Idaho, I don't know if I have the year-over-year, but I can tell you in just some numbers, Meridian was down 64%, Grand Junction was down 73%. And those numbers are -- third quarter of '06, they did $21 million and third quarter '07, we did $7 million. So about $14 million they were off, just those two.

Okay. And Oregon?

Actually, Oregon was up. Oregon was -- you know, Bridgeport and Hillsboro. I'm just talking third quarter. Bridgeport and Hillsboro were up $1.2 million and industrial was down $800,000. So net of those two, it's up $400,000 on a gross basis, Josh.

Okay. And in the staffing business, are there any pockets of weakness across any verticals you would like to point out that basically just caught you by surprise or your outlook is more tempered now?

Not so far. Things like Boston Scientific announcing major layoffs -- that doesn't make me feel particularly warm and fuzzy. The agricultural business is strong. We exited a piece in Maryland, which turned out to be very good for us to have done that. And that contributed probably $600,000 or so in the quarter, I would think. And there's some other businesses that we have exited by our choice, just as a matter of nonprofitability, if you will, and also hurting our unemployment rate. But in general, we're kind of shielded from the staffing world economics other than in certain branches. And obviously one of our really big customers is CMGI and should -- kind of the good news is that that's an exposure to high tech, if you will, because it's Microsoft and Hewlett-Packard. It's a distribution center for a lot of big high tech guys. I guess if they all went in the toilet that that would have an effect on us. That may be our biggest exposure to macroeconomics on this.

Lastly -- Bill, I know I asked you last night, but Mike, I wonder if you could tell us what the actual contribution was in the quarter from strategic.

Well, as I said in my remarks, it's right on line with our expectations and we had twice previously indicated that for the second half of the year, we would expect Strategic Staffing to contribute $0.07 to $0.09, midpoint being $0.08, which is $0.04 per quarter. That was right on the mark. Slightly better, but rounded $0.04 for the quarter. So we're -- we're very pleased. Great operation and excellent management team.

Great. I'm sorry, I should rephrase. I meant just on the top line. What was the contribution?

That would be --

About $12 million or so.

Yeah, a little over $12 million and, again, our prior comments as it relates to our expectations for revs for a 12-month period for Strategic Staffing was $46 million to $48 million, and $12 million -- a little over $12 million is right on the top edge of that parameter.

Josh, I'll just give you some numbers. I think I already did. San Jose was down $2.2 million, Sacramento down $2 million, San Diego down $1.2 million, Camarillo down $800,000. Those are not losing customers. Those are just kind of the natural business. They are adding -- the net on all of those guys is they have added more business than they have lost. So that's kind of what the issue is that we see out there. Our customers are smaller and less usage than they were in terms of how many people they employ and the wages that they pay.

Got you. Thank you, guys.

Your next question comes from Ruthanne Roussel.

Good morning. It's Ruthanne Roussel speaking.

Yes.

A couple of my questions have been addressed in whole or in part, but I would -- I would really appreciate any more color you can give us on how the strategic acquisition has performed. We have just heard about the revenues. We understand that it was integrated in just a month and a half and is now running smoothly. And it sounds like if strategic contributed $0.04, and then the quarter was about $0.04 below expectations, it sounds like the strategic part of things is seeing better business at the moment than the existing legacy business has been. Is that a fair analysis?

I guess, yes.

Okay. We were hoping for two things from strategic, or at least I was. One of them was better geographic diversity. Can you tell us what kind of performance we have seen from the offices you acquired in Utah or is it too early to tell?

No, we are very pleased with all of them. Colorado Springs is doing very well and Orem is doing good. And the Salt Lake City has been combined with Clearfield and West Valley and West Jordan. Steve, who runs that operation is a good operator and we are very pleased with the way he's running the operation. I think over time, there will be some culture issues that we will address, and they are being addressed. But in general, it's run very well. Very smooth operation and we have not seen a lot of -- any fallout with his people and/or customers. So, I mean, it's one of those -- it's one of those acquisitions that if you can do it -- one a year or once every two years, it's a huge plus for you.

Okay. There have been some sort of musings about the idea that eventually the strategic offices might start to leverage in the PEO services. Is that something that we can see any time in the near future or is that kind of a general concept?

Well, it's not a general concept. First things first. You get them running smoothly and the culture is there. And then you teach them about the PEO world. I mean, PEO can be somewhat dilutive if you are not careful with keeping it as a separate entity. So we will be introducing that at some point this quarter, particularly with Steve and some of his top people, but we want to be careful in how we do that.

All right. Thanks. I have no further outstanding questions.

Great. Thank you.

Your next question comes from Ryan Winter.

Hi, Bill. How are you?

All right.

I have two questions. One is with your history in the industry -- one to understand in past recessions, kind of trends in terms of incremental new customers versus customers lost, how that ratio has evolved in different recessions and whether you think if a recession does occur, is occurring, how that would be similar, different compared to historical. And then my second question is a statistic and I apologize if I'm misquoting or misparaphrase you from last quarter. A number you thought was interesting was something like 900 of your customers were adding staffing, 900 were kind of declining and it was a 50/50 thing. Any update or anecdotal trends on that ratio?

No, I don't recall saying last quarter that our customers were adding people. I think you were listening to a different call. We have been -- we have been on kind of this downturn since March. I mean we have gotten cautious since March. March first quarter was an extremely strong signing period. So was the second quarter. And so to be real frank about it, in the churn, the reason we are up is because of our ability to sign customers, not because our customers are adding people. I would say -- I don't -- very few of our customers have added people over the last nine months. As far as the recessions go, all the recessions I have been through, which has been four, have been with high interest rates, and -- but I have never seen this credit crunch and the housing crunch that we are facing, so I don't know how that plays out in terms of business, business to business. My hope is that it will be relatively shallow because they are not fighting some macro issues of not being able to borrow money and the banks simply close their doors because their interest rates are 12% and nobody can afford them. During periods of recessions, you have to -- a lot of our costs are variable and so you stay in line with your costs and you continue to broaden your base of customers and pick up market share from the weaker players. If you will look around the industry, you are going to see -- I will be surprised if anybody in the industry comes out and says we are just kicking butt and taking names. I will be shocked if they do that, and they may. I would say overall, it's a great time if you are really razor sharp because people will make some poor decisions. At least in my history, I have watched companies make very poor decisions on the kind of people they keep and who they let go and what branches they close and what branches they keep open. And ultimately, those are all going to be opportunities for us.

Thank you.

Yes.

Your next question comes from Tobey Sommer.

Thanks. I was wondering if you could comment -- I think in your prepares remarked you did allude or make a reference to the fires in Southern California as being impactful on the business. I was wondering if you -- if that is impactful on two fronts, perhaps your own employees' productivity but also I guess maybe your customers not running as big a payroll during those intervening weeks. Is that the right way to think about that?

Yes. I think we will be down -- I'm just guessing. I don't know the answer of how much, but just like when California was -- when it was flooding down there, I mean when you can't drive to work, it's pretty hard to sell your products and a lot of them are closed. A lot of businesses just simply closed. People are trying to protect their homes or their home burnt down. I mean, you've got one of the worst fires, I think, in history. There's only within one worse down there. We don't know -- we haven't heard from anybody that said they have been driven out of their home. One of our managers said it's like snowing. The ash is an inch or two inches deep on the streets. That happened to come from Santa Ana. So there will be some economic activity after all of this is done. All of this has to be rebuilt. Unfortunately it appears that a lot of it was arson set. We hope it was not terrorist related. At least they shot one of the bastards if it was. But, you hate to think of trying to make money on the backs of something like that. But I suspect that California is very resilient and they'll build it back and these are all very -- these are all very high homes -- high-end homes that you are talking about down there. A lot of them -- most of them are in the $1 million plus category. I'm sure they were insured, but it's very tragic. And it's got to have a short-term effect on our business. I can't believe that it wouldn't.

In terms of your guidance, can you tell us -- characterize your assumptions regarding the impact on the business? Did you assume that the impact continues for half the quarter, the whole quarter or some other assumption?

I think that we just -- we put the lower number just -- $2 million or $3 million, if you look at this quarter, we were off our guidance by about $4 million. Well, what is that in terms of earnings? That's $0.02 or $0.03. So if San Diego is down a couple million or $3 million over the next couple of weeks, it's a short-term phenomenon, but it's hard to make up.

Right. And then I was going to ask a separate kind of housekeeping and administrative question -- if you have ever given thought to actually holding your conference call during nonmarket hours since you do release in the afternoon. Maybe actually holding the call at that time to enable perhaps more efficient trading in early hours, given a fact that a lot of the commentary and the color you give in the call in your prepared remarks is not included in the press release. That is the only thing that people really have to deal with in the early day -- the early morning trading.

If there's enough consensus, that's fine. I don't need a night's worth to sleep on it to figure out what I'm going to say. That would be fine with me. If enough people who like to have it just after the close when we announce. We certainly have the time to do it. The only issue we would get into is it would be later in New York. You guys have got a three-hour time differential. So if we announce earnings at 1:30 here, 4:30 your time, the question would be how many people have already went home?

In my experience that it's a fairly common occurrence, but we'll see what other feedback you get. Thank you very much.

All right.

Your next question comes from Kevane Wong.

Hey, guys, looking at the numbers as far as the revenue breakout between staffing and PEO. I mean, PEO was up 5 and staffing was down organically 5 ish. The sense we've gotten before was PEO stuff was more where you were concerned given sort of the macro environment, but staffing was stronger. When I'm looking at the down 5% in the quarter, is that really more of a reflection of your decision not to renew the East Coast cannery client or is it just the environment out there? And if it's environment, sort of what's happening?

It's not the environment. If you took out the customers that we let go, it would probably have been flat.

Okay.

We are into the -- I think we are somewhat insulated other than, like this, specific example of a Boston Scientific or if CMGI would lose a big contract -- some of that would be more internal to us. But in general, I think we are pretty insulated.

And in general, when you are looking at that business, as far as growth opportunity, is that staffing business really something organic that you would expect to have any particular pickup in -- in sort of the organic growth, or is it simply the nature of it, that it's just a very stable business and it's really more grow by acquisition at this point?

I would say it's more stable than growth by acquisition. We will pick our spots where we will get an opportunity to do fairly large business but I'm not of the ilk to start spending a ton of money trying to promote the day laborer or the one-off, hire a secretary stuff. It's the wrong time to be doing that.

Right. And then also sort of -- a curiosity. At the Workers Comp Board was presenting their sort of 5.2% recommended increase, there were a number of people that spoke that were essentially pointing to companies that haven't had necessarily any worsening in their workers comp experience, but since everyone else's stuff has gone down so much, their mods were going up because they're worse relative to other people. Are you seeing a lot more people that are interested in your services because their mods have gone up, even though they are sort of not in relative to absolute workers comp experience has been unchanged? And is that an opportunity, or is it really a matter of -- if they are not going down like everybody else, you still don't want them?

I see more high mods than I have seen in a long time and it's -- you have to be really careful with them. Typically if I see a high mod, I want to see a couple years of really pretty squeaky clean stuff. The mod stays with you three out of four years and the last year doesn't count. So effectively, you've got -- you could have been terrible four years ago and have a really high mod. We are looking for the guys that were not so good three or four years ago and have really kind of spent the time and effort to improve themselves. You are right, though, a small loss now can affect your mod because it -- a mod is determined by the amount of losses to premiums. As the premiums come down, the percentage goes up. So I think that -- I think it's probably going to help us a lot more than it's -- than it's going to do anything else. What we have to be careful of, though, if you run for revenue, you get in bed with the wrong people, it can -- it's like you grab the wrong end of the snake. It will bite you. We are still going to be very selective about who we do business with.

And it sounds like it's only come up since you had such a stark drop in California now you are getting the trend upward. But is it -- it sounds like it's only come up because we've had such a sharp drop in California, now you're going to get sort of a change upward, but is it in essence creating more opportunity for you guys? Or more people come to the door but you are screening out of them so it's not really a particular change in demand?

Yes, I think it's more people come to the door and we screen out more.

Got you.

They have to make a really, really good case about I have a 1.3 mod and you should -- you should consider me as a customer and my response will be, how many losses have you had in the last 12 months. And they will say, well, we had a couple and my answer will be come see me when you haven't had any in 12 months. I mean, that's kind of the way it works.

Got you. Okay. Perfect. Thank you.

Good.

Your next question comes from Bill [Deguire].

Congratulations on a well-managed company, and I guess -- I really need your opinion because there's really not many surprises. As I look right now at trading in your stock, not only is the volume up more than the average volume, but it's also down $4.76. And that's not commensurate with what we are talking about right now. We are talking about PE and all of the color that you provided. Is there any rationale that you can perceive when you are talking about a 21.45% decrease in price today?

Well, Bill, I -- the stock market does a lot of funny things and when there's more sellers than buyers, your stock prices go down. And when there's more buyers than sellers, the stock price will go up. And that's just kind of the way it is. I mean, people want to drive the stock down to $4, they will. And there doesn't have to be a rhyme or reason to it. It's just what it is.

I guess if the fires weren't there, I might not have even posed the question. I certainly understand your answer, but the downside -- because I heard earlier discussions, I believe the person used a PE of 8. I didn't think that was particularly accurate PE, but he talked about well, if it drops to by 6 by the company and I heard your reaction to that and I thought it was well stated. And -- and it just -- this is so unusual that I had to ask and if I -- I understand stock market basically and individual stock, but when I see a company as dynamic as yours, right now at $4.87, I merely didn't know if it was fire related.

Well, I'm the one that made the comment of a PE of 8. If you back $6 in cash out of the price of stock and you look at earnings per share and do the math, I mean it's pretty simple where we're at. So, that's easy math for me to do.

Okay. I thank you both and take care.

Thank you.

Your last question comes from Ryan McGaver.

Hi, guys. I was wondering if you could gave me the canceled customer breakout again.

We had 45 cancellations. 17 were sold or closed their business, 10 we canceled for credit or risk and 18 left on their own. I think that adds up to the right number, doesn't it?

Yes, it does. And also in previous calls you have given the breakout of how the business was referred for new customers. Do you have that for the third quarter?

I haven't really run it but my sense is it hasn't changed much. It's still about 50% referrals and --

And 25/25?

Yes. If anything is going to happen, I think the referral will go higher. We hired another salesperson. Those people are hard to find. Our expectations of a new salesperson are that they can contribute $100 million to $200 million in new business.

And then the Strategic Staffing, back when you purchased that, there was talk about possibly shifting it over and maybe growing a PEO business out of there.

Yes.

Has there been any more consideration or effort put into that?

Again, the first things first. You want to make sure that it's on good stable basis, that the transition issues were taken care of, the culture issues are in place and then it's time to introduce PEO and we'll be doing that this quarter. And given their track record, I think that will be a very good positive for us in '08. But you have to be careful that it doesn't dilute a nice staffing business that they are running as well.

Okay. Thank you.

Yes.

At this time, there are no further questions.

Okay. Well, thanks for the participation and we'll see you again next quarter.

This concludes today's conference. You may now disconnect.