沛齊 (PAYX) 2002 Q1 法說會逐字稿

-00(No Audio)

Good morning. My name is [Di Helen] and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Paychex's first quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press the number 1 on your telephone key pad and questions will be taken in the order they are received. If you would like to withdraw your question, press the pound key. Thank you. Mr. Morphy, you may begin your conference.

Thank you for joining us for our first quarter press release. Also with us today, is Tom Golisano, our Chairman, President, and CEO. Upon the completion of the review of our financial results, we will conduct a question and answer session. Presently, we have well over 200 people on the call. We thank you for taking the time to participate in our teleconference meeting during these difficult times. We at Paychex were extremely fortunate in that all our employees remained safe during this tragedy. We hope that you and your families are also safe at this time. This morning we released our financial results for the quarter ended August 31, 2001. If you need a copy of the release, they can be obtained by calling 716-383-3406 or accessing our website at www.paychex.com in our investor relations page. We have also filed our first quarter form 10-Q with the SEC and it is available on our website. In addition, this teleconference is being broadcast over the Internet and will be archived and available for access on our website until September 27, 2001. Please refer to our website for access to our recent news releases, current financial information, related SEC filings, and investor relations presentation. The earnings release is summarized as follows.

For the first quarter of fiscal 2002, total revenue growth was 15%, which in turn generated a 20% increase in net income. Quarterly earnings per share were $0.19 versus $0.16 a year ago, up 20% on an un-rounded basis. First quarter fiscal 2002 results were closely aligned with the expectations we described in our fiscal 2001 year-end disclosure process. As previously discussed, we have changed our finance report to include only one reportable segment. In fiscal 2001, we completed consolidation efforts to streamline certain operations and improve customer service. These efforts resulted in many service operations, supporting multiple products, in both the Payroll and human resource and benefits product lines. Due to these changes, the company no longer prepares any internal reporting, reflecting separate operating results for the Payroll and human resource and benefit segments. Accordingly, in fiscal 2002, the company has changed its segment reporting from two segments to one segment. We have continued to provide the same level of revenue disclosure by type of product line. This disclosure can be found in the MD&A of our form 10-Q. We will now refer to the third page of the release - the consolidated income statement. Total service revenues increased 16% in the first quarter to $216.2 million from a $186.5 million in the prior year quarter. Service revenues include service fees earned from our Payroll and human resource of benefits product line. Payroll services revenues for the first quarter increased 15% to $189.4 million. The increase is related primarily to growth in the client base, increased utilization of ancillary services and price increases. As of August 31, 2001, 83% of our clients utilized Taxpay and 54% utilized the company's Employee Pay Services.

Decline in economic conditions impacted our Payroll service revenue growth in the first quarter. This was evidenced by decreases in average check volume per client. We expect this trend to continue and currently anticipate full year fiscal 2002's growth in Payroll service revenue to be in the range of 13-15%. Human resource and benefit service revenue increased 22% in the first quarter to $26.7 million. This increase is primarily related to increasing recurring revenue streams from such products as 401(k) record keeping, workers' compensation insurance, section 125, PAS, and PEO. 401(k) record keeping revenue increased 26% for the first quarter to $12.3 million. The quarter-over-quarter growth rate for HRS revenues was lower than last year's first quarter for several reasons that we expect to improve over the rest of the year. First, last year's first quarter HRS revenue growth was exceptionally strong at 42%, presenting a difficult quarter-over-quarter comparison. Last spring, we divided our HRS sales representative into those who sell only 401(k) and those who only sell PAS with more of the stronger sales people focussed on PAS. The change in the sales process somewhat affected the sale of new 401(k) plans in the first quarter, but we expect to see long-term benefits of this program and are seeing improvement as each month passes. Sales of PAS and PEO products have been gaining momentum with administrative fee revenue from these products increasing 48% in the first quarter of fiscal 2002. Looking forward, we expect full year of fiscal 2002's human resource and benefit service revenue to grow at a rate in excess of 25%. Interest on funds to help to clients increased 7% for the first quarter compared with the prior year quarter. This increase is the result of net realized gains and the sale of available-for-sale securities and higher average daily portfolio balances, offset by the impact of lower interest rates in the first quarter of fiscal 2002.

In the first quarter of fiscal 2002, net realized gains and the sale of available-for-sale securities were 3.2 million compared with net realized losses of 0.1 million in the prior year quarter. Average daily portfolio balances totalled 1.7 billion and 1.4 billion in the first quarter of fiscal 2002 and 2001 respectively. The increase reflects higher utilization of Taxpay and Employee Pay Services by new and existing clients. Market rates of interest have declined significantly with the federal funds rate decreasing 300 basis points from January 2001 through August 2001. In addition, on September 17, 2001 the federal funds rate decreased another 50 basis points. With the decrease in interest rates and subject to potential further interest rate reductions, the company anticipates that interest on funds help for clients for the full year, fiscal 2002 will be lower than in fiscal 2001. The impact of decreases in interest rates on comparisons of interest on funds help for clients is expected to be higher in the second half of the fiscal year. As of August 31, 2001, unrealized gains and available-for-sale portfolio were $31.9 million compared to $20.5 million of gains at May 31, 2001, in unrealized losses of $13.4 million in May 31, 2000. As mentioned earlier, total revenues increased 50% for the first quarter and are expected to be in the range of 13%-15% for the full year of fiscal 2002.

Operating expenses increased 17% and SG&A expenses increased 10% for the fiscal 2002 compared with the prior year period. Combined operating and SG&A expenses increased 13% in the first quarter, compared with the prior year quarter. This reflects increases in personnel, information technology, and facility costs necessary to support the growth of the company. The 17% growth in operating expenses reflects the focus on further improving customer service by implementing an initiative to decrease the number of client serviced for payroll specialists. So, the payroll specialists were also adjusted to improve retention. In addition, we increased personnel for the PAS product due to the expansion efforts in fiscal 2001. These initiatives were implemented throughout fiscal 2001 and the impact of the higher expenses on year-over-year growth rate is expected to be less in the second half of fiscal 2002. For the full year of fiscal 2002, combined operating and SG&A expenses are expected to grow at a rate comparable with or slightly lower than in fiscal 2001. First quarter operating income increased 19%, operating margin for the first quarter of fiscal 2002 was 40% compared with 39% in the first quarter of fiscal 2001. Investment income increased 36% for the quarter, the increase is due to net realized gains on the sale of available-for-sale securities, and higher average daily invested balances, offset by the impact of lower interest rates in the first quarter. Net realized gains were 1 million in the first quarter of fiscal 2002 compared with net realized losses of 0.1 million in the prior year period. Average daily balances invested were 0.6 billion and 0.5 billion for the first quarter of fiscal 2002 and 2001 respectively. The increase in the average daily portfolio balance was attributable to additional net cash inflows from operations.

As a result of the decrease in interest rates and subject to potential further interest rate reductions, investment income for the full year of fiscal 2002 is expected to grow at a rate significantly lower than in fiscal 2001. The impact of decrease in interest rates in comparison to investment income is expected to be higher in the second half of fiscal 2002. Our effective income tax rate was 30.7% in first quarter of fiscal 2002, compared with 30.5% last year. Looking forward, we expect the full year of fiscal 2002's effective income tax rate to be in the range of 30.5% to 31.0%. As mentioned earlier, net income increased 20% in the first quarter when compared with the same period last year. Moving on to page 4 of the balance sheet, the balance sheet is very consistent with May 31, 2001 plus our normal growth during the first quarter. Total cash in corporate investments have grown to 653 million. Total available-for-sale investments include corporate investments and funds help for clients and money received from clients that will normally be dispersed to employees or taxing authorities included unrealized gains of $31.9 million in August 31, 2001. The decrease in interest rate environment is driving improvement in the market value of the available-for-sale portfolio. Our net property and equipment balance increased by 1 million during the three-month period, reflecting capital expenditures of $7 million and depreciation expense of $6 million. For full year of fiscal 2002, capital expenditures are expected to be in the range of $50-55 million, including additional expenditures anticipated for a new centralized data center in Rochester, New York. Depreciation expense is projected to be in the range of $28 million to $ 30 million. Total stockholders equity increased $860 million at August 31, 2001 with $34 million in dividends paid during the three months of fiscal 2002, a pay out of 48% of net income. A return on equity for the past 12 months was 37%. The cumulative other comprehensive income balance on May 31, 2001 of $13.1 million has increased to $20.4 million at August 31, which reflects the previously discussed increase in the market value of our available-for-sale portfolio. Investments rates have returned. The trend of decreases to the federal funds rate continues as evidenced by the most recent interest rate reduction of 50 basis points on September 17. Extensive disclosure and how changing rates affect our revenue recognition and interest on funds help for clients is contained in our Form 10-Q and previous SEC filings. The purpose of the following comments is to provide concise as well as informative information related to the changing rates. In simple terms, increases and decreases in interest rates quickly affect earnings from short-term funds and over-time affect earnings from the available-for-sale portfolio.

The earnings from the available-for-sale portfolio do not reflect changes in rates until the investments are sold or mature and the proceeds are reinvested at current rates. The immediate impact of change in interest rates and short-term funds may be temporarily offset by realized gains or losses from transactions in the company's available-for-sale portfolio. During the first quarter of fiscal 2002, our total investment portfolio including both corporate investments and funds help for clients averaged approximately $2.3 billion as expected to average $2.6 billion for the full year in fiscal 2002. Our normal and anticipated allocation is approximately 50% short-term and 50% intermediate-term. The average duration of short-term investments is generally less than 30 days where as the average duration of the intermediate-term investment is three years. If interest rates change, the market value of our available-for-sale securities portfolio moves in the opposite direction. Unrealized gains are generated when rates decrease and vice versa. As of August 31, 2001, the company had $1.4 billion invested in available-for-sales securities at fair value with weighted average yields to maturity of 4.1%. Assuming a hypothetical decrease in both short-term and intermediate-term interest rates of 25 basis points given the August 31, 2001, portfolio, the resulting potential increase in fair value would be in the range of $8-$9 million. Conversely, a corresponding increase in interest rates would result in a comparable decrease in fair value. These are balance sheet variations only as the income statement is not affected until there is an actual transaction in the available-for-sale portfolio.

Presently, we estimate the earnings effect of a 25-basis point change, 17-basis points for tax-exempt investments. At this time, it would be approximately $3 million for the next twelve-month period. As previously mentioned, unrealized gains and available-for-sale portfolio were $31.9 million at the end of August. The exact effect of change in interest rates is difficult to determine, due to many factors involved. These factors include, but are not limited to daily interest rate changes, seasonal variations in investment balances, actual duration of short and long-term investments, a proportional mix of taxable and tax-exempt investments and changes in tax exempt municipal rates, which are not synchronized or simultaneous. Changes in rates are minimized again in the short-term, but the fact that rate changes normally produce unrealized gains or losses in the reverse direction of the rate changes within our available-for-sale securities portfolio. On September 11, 2001 United States was subjected to terrorist attacks at the World Trade Center buildings in New York City and the Pentagon in Washington. Paychex's operations experienced minimal disruption as a result of this tragic event, and all Paychex's locations have returned to normal operation. However, at this time the potential near and long-term impact this event may have in regards to our third party service providers and client markets for the company's investment portfolios, markets for the company's services, and on the US economy are uncertain. As a result, there can be no assurance that there will not be any adverse effects on the company due to this significant event. You should be aware that certain written and oral statements made by the company's management constitute forward-looking statements as defined in the Private Securities Litigation Reforms Act of 1995. These statements should be evaluated in light of certain risk factors, which could cause actual results to differ materially from anticipated results. Please review our Safe Harbor statement at the end of page 2 of the press release for our discussion of forward-looking statements and the related risk factors. At this time, I will turn the meeting over to Tom Golisano who will provide his comments prior to answering questions.

Good morning, everybody. It should be aware or obvious to everyone that we have started to see some impact on the economy relative to Paychex's. So far, it appears, it certainly has not impaired our ability to sell clients or to generate new revenue. Our client losses are in a very normal range for us, and we feel fairly confident in that arena. But we have seen a decline in the number of checks per client; it is about 2% of our check volume. [BREAK IN TAPE]. Just hold on one second. [BREAK IN AUDIO]

[Diana]?

Yes sir.

Tell me, we believe we are having some problems with people getting on. Do you know if that is true?

Okay, hold one moment. I can check for you.

For those who are on the call, we believe we have some issues with who can be on the call. We are checking it out right now and we appreciate your patience on this.

Excuse me, Mr. Morphy. I do apologize, we are experiencing some technical difficulties and there are some of your participants that are still trying to get on the call and we are working on that right now.

You know how many that is.

I am not sure, sir. Would you like for me to check?

Yes.

Okay, hold one moment please. Excuse me Mr. Morphy; it looks like there is about 25 plus.

John, there is about 25 people that are not able to get on the call.

Okay, do you know if you can get them on pretty quickly or is that a different problem?

Yes sir, we are working on that right now as we speak.

Now, can anybody talk to those individuals?

Excuse me?

Are they connected and you want a different line?

Yes sir. Someone is speaking with those participants right now.

Okay, we will hold.

Okay, Thank you.

Excuse me, Mr. Morphy.

Yes.

I do apologize. We are continuing to work on getting our participants on the line sir.

If you get [Stephen McCloven] down on the line then I want to know the ...

Okay.

Hold on a second.

[Diana]?

Yes sir.

Do you know what started the problem, is it just some people who couldn't get on, or they got knocked off.

At this time we are experiencing, we have high call volumes and that is creating the problem for them to get connected because we have a lot holding.

So, when you told me you had a number holding, a lot jumped on after that?

For other calls, not for your call. Not holding for your call, for the other call that we have scheduled for today.

We have many people holding to try to get into this call now?

No sir, we already have them on line. We are just going to connect them to your call.

Is Steve McCloven the one who called them?

Okay, I can check for you. Hold one moment.

[Diana]?

Yes sir.

What did you find out?

We are still looking for your participant Mr. Steve McCloven.

Do you have many more people trying to get on?

At this time sir, I am sure it is approximately 50.

Thanks.

[Diana]?

Yes sir.

All participants ... we are still holding on here trying to get a few more people on the phone. We still expect to be able do this, but there is pretty heavy call volume.

Okay.

If a person calls in now, are they likely to get on or not?

Yes sir, they are.

Are you able to talk to them through your cellphone connection.

You can hear my conversation still. Are you able to talk to them through your cellphone connection?

Yeah. We go on the call right now. We are connected right now.

Not me.

I believe you are. I can hear you through my speakerphone now.

Hell, I have never on a conference call when the participants can talk to each other when the company has control over the mike.

Yeah, I think you connected us to the wrong line

This is John Morphy we are getting some information back to you, right? Fine. Echo.

[Diana?]

Yes sir.

What is the status?

Okay, hold one moment. Let me check with my messenger.

Yes, you are fired.

Excuse me, Mr. Morphy?

Yes?

We were unable to find Mr. [McCloven]. Would you like for me to dial out to him?

Yes, can you put him on if we give you the number?

Yes sir.

Hold a second. The number you to dial is 415-676-3535.

That is 415-676-3535. Hold one moment sir. Excuse me Mr. Morphy?

Yes?

Mr. [McCloven]. [THE CALL RESUMES]

[Mr. McCloven] is here. I think, [Steve], you are the only one we are aware that was trying to get on but could not get on. So we are going to resume the call at this point.

Thank you.

What I want to reassess is we have had some discussion on the release. All the discussion that has been had to this point is almost word for word verbatim in our 10-Q which is available on our website, that is one of the reasons we pride ourselves on filing the 10-Q the same day of this call. So, we believe we are in a good position where everything that has been disseminated is equally disseminated. At this time, I will turn the mike over to Tom, who will provide us comments and then we will go into questions and answers.

Good morning every one. As I started to say earlier, certainly the economic environment in United States has started to impact Paychex in a slight way. Initially, we have seen no impairment to our ability to sell new clients and add new revenues. Our client losses are well within our regular pattern, so we feel very good about that, and we have seen a slight decline in the number of checks per client that is equivalent to about 2%. We started to hit this wall in June and it has continued through July and August. Obviously, the issue around interest rates continues to be at one year abnormally, and that I am sure everyone is well aware of. On the good note, some of the sales patterns and MMS and workers' compensation insurance in PAS are all remaining very strong. John mentioned 401(k) earlier because of the restructuring in the sales organization and we have gotten off to a slow start in the 401(k), but it is gaining momentum very, very quickly and we think we will be on a target within another 30-60 days. So all in all, considering the environment and the general economic situation, I think Paychex is boarding very well, we can't obviously predict the future, but currently we think we are in pretty good shape relative to rest of the world. So, I think at this point, if anybody would like to ask us questions, we certainly would entertain them.

At this time, if you would like to ask a question, please press the number 1 on your telephone keypad. Your first question comes from [Randy Neale] of [Raymond James].

Yeah it is [Randy Neale] for Robert W Baird. Is your ... I hope to get a discount on this call. Is your confidence surrounding the acceleration in HRS-PEO for the remainder of the year due to the pick up that you are currently seeing in the 401(k) business or are you looking for something in addition to that?

Actually for the first few months, it has been everything but the 401(k). As I had just said we got off to a slow start with it, but it has gotten its momentum back, but PAS workers' comp have been very, very strong and so has our [POP] plant, our cafeteria plant has been also fairly strong. So the only downer in the HR area entirely has been 401(k) and we think we got that back under control. Even PBS is extremely strong much to our pleasant surprise.

Is that on the profitability side as well, in terms of PEO or is it...

More of the number of the employees we are adding as well as the profitability.

Okay. What is the Payroll period comparison that you had in Q1 relative to last year?

I am not sure I understand your question.

In terms of number of the Payroll periods or ...

No, there was no date change.

Okay, so flat comparison on that front. And then the capital expenditure projection changed quite that strictly due to the data center?

Yes we have signed a pretty big purchase order with EMC. We got a great deal on the purchase order with EMC obviously. At the time, we were forecasting forward last June we weren't sure what we are going to do with that, so we decided we would wait and see. The equipment will ... some of it won't be put into use until next year, but we are going to a single data center, with a backup capability, which we think will provide a lot better service to our clients.

Okay and you did not talk specifically about MMS, any matrix to speak up there, a momentum or maybe relative to the traditional of course smaller business, how is that progressing right now?

Our MMS, considering the economic conditions and considering our internal plan is doing extremely well.

Okay and number, could you tell us the revenue number for that?

I don't have it right in front of me, but the growth would have been in line with 30% plus.

Thank you very much.

Sure.

Your next question comes from [Steve Weber] of S.G. Cowen.

Yes Good Morning. In the past John and Tom, I think you indicated that you did not think you would book more that $10 million in net capital gains. I think you said that in the question in the last conference call. Do you have any different feeling on how that will progress this year given where the rates are going now?

Basically, when we made that statement that was probably pretty much on a budget would have had somewhere between 2-3 million a quarter in it, and in the first quarter we put in a little but because rates dropped. It is almost impossible to say what will happen over the next 6-9 months. The number has jumped way up. We do not want to take significant gains. We get some off trading. The events of this past week have really changed that a little bit, so I think we will watch as this year goes on. I do not think you will see us take a staggering number in them.

Okay and how do you progress on that? How much of that is involuntary because the discount advancement tour recalled or whatever?

It is about half.

Okay. Thank you.

Your next question comes from [Kartik Mehta] of Midwest Research.

Good Morning. I wanted to find out, you said the attrition rate was normal. Would you be able to talk about your attrition rate in the past product how that is doing?

Attrition rate in the past. The attrition rate in the past product is nothing other than we anticipate. It is a new product for new, relatively speaking to everything else and outside of minor operational issues; we think it is going very well.

From an economic standpoint are you seeing any greater weakness in some regions than others, may be more than you had anticipated and maybe strength in the regions that you had not.

The answer to that question is no and it is probably for two reasons. One we have not seen any regional differences, but number two we do not really look for them. At least, they are not obvious to us at this point.

All right thank you very much.

Your next question comes from [Christen Linberg] of Lehman Brothers.

My first question is, given your share repurchases and the fact that they would be accreted to 2002 and 2003 earnings. I am just wondering what your board's current thoughts are on your share repurchase announcement?

First of all, we do not have share repurchase plan in place so we are not able to repurchase shares. We do have a fair amount of money in the balance sheet. Recent events have gotten stock closer to where the breakeven point is and accredited EPS, which is somewhere around $28-$30 which will probably cause us the lead. We have talked about this in the past. Our policy has really not been to buy stock back. One reason it was not really beneficial but the other thing is we do not always believe that is the right and the best thing to do.

Okay my second question goes to your earlier announcement from the calls that you are no longer announcing any operational metrics other than revenue broken up by segment. I am wondering if your willingness on the call to give EBIT by segment.

The reason we discontinued this that it is actually impossible for us to even calculate. If we talk way this internally if I had the number I would be forced to disclose it. I don't have it.

Okay. I wonder if you can give us your total your head counts at the end of the quarter.

It was around 7500.

Okay. Your previous color as to the revenue from the Asian markets, are you unwilling to give that or are you don't have the number at this time?

I will find the number and before the end of the call we will give it.

Okay. Do you have the ENS flow balance for the quarter.

That was in the disclosure.

It was I am sorry I didn't get that in and could you also find the breakup for us out of the operating expenses, the corporate expense and depreciation and amortization for the quarter.

No in the segment reporting we used to give the corporate expenses. We never felt that it was the right way to look at it, but that is where we are in the segments. So that is the only other change we have made, to give you the operating expenses, the SG&A, and offer a lot of forward looking statements and where expenses are going which we feel pretty comfortable with.

Okay. One more question and then I am done. I apologize for taking so much of your time. In your new 13%-15% revenue growth guidance for the full year 2002, can you break out even generally how much of your reduced guidance is due to a change in interest rate environment how is due to your unexpected reduction.

Actually most of that change does not reflect changes in interest rates, because I believe in the end, the little bit of change in rates that we have seen so far since we last gave guidance, the gains will make up for most of that. Pretty close, most of it is in Payroll operating exchanges.

Okay. Thank you.

Your next question comes from [Greg Gold] of Goldman Sachs.

Thanks. Just a clarification, John, as I think I heard in the beginning, the operating expense growth you said it should it be up or below fiscal 2001s 14%.

When you get down in the end and add that up, again we have everybody focussed on operating expenses. Then you look at the other angle, we run the company really on a consolidated basis. It turned out to some other place that we put increases in expenses were more on the operating side than the SG&A side. We worked hard in the branches and Payrolls specialists and did some of those things. So you got something there that you will see I think 17 and 10 I will look at them together and see 13 so that the growth is less than revenue.

Actually, that is what I meant, the operating expense and SG&A together for fiscal 2002. The growth in those expenses should be up or below what it was in fiscal 2001.

Yes and I think you will find that the way we control the expenses this time, we had some ramp ups early on last year. We are not adding much as we got through the year so some growth we used to see during the year wont take place.

Okay. The second questions Tom, on the comment about the check volume per client, that it is 2% below a year ago level. Is that the right way to think about it.

No not really a year ago, 2% sort of, below the trend line, for the last six months.

Okay. Have you seen, has that deterioration started out lower and got higher over the last six months, or has it been relatively consistent?

It was just about the same, probably, if we looked at the numbers for the last six months and compared them to the three months on either side of a year ago, they are very consistent. So it just started to happen to us in the last few months.

Thank you.

Your next question comes from [Brian Sakhakini] of Deutsche Bank.

I think they were just answered, one quick question. Employee per clientele, did you give that metric out? Hello do you hear me.

And our average number of employees per client has declined about 2% over the last three months.

Okay, so in line with checks per client.

Yeah. Employees per client and checks per client to us is the same thing.

Yeah, okay, great. Thank you.

Your next question comes [Mark Markham] of First Union Securities.

Good Morning. What is your assumption with regards to where the checks per client would go, that is implicit in your assumption of 13-15% growth for the balance of the year.

I think if we are trying to air, we are going to try to air on the conservative side.

So it is probably going to be a little bit less than 2%... in other words it would have been more that 2% in terms of the decline.

We are going to try to air on the conservative side, I mean I am not in a position to make that kind of a prediction I don't think anybody is.

All right great. Thank you.

Your next question comes from [Greg Giber] of A. G. Edwards.

First question on your interest rate assumptions, are you assuming any further interest rate declines in the current fiscal year.

No.

Okay. I am wondering when you talked about the decrease in average check volume per client I you could give a little color what was happening your corporate Payroll service, as well as happening in the major market service. What is the average number of employes in the MMS service?

The way we compute them now is we combine the two. So the number that we give you, and I will give you that number, is about 14.1 employees has been reduced by about 2%, so that is on the combined group.

So that is on the combined group. Your major market services growing faster then the core business that is pretty enough for measuring one at a time.

It is growing faster certainly percentage wise, but keep in mind as relatively small compared to the core group.

Okay. Thank you.

Okay then coming back to the major markets questions, major markets revenue in the quarter was $15.6 million, last year it was $9.6 million, that is 60% increase which you have to recognize. Some of that business does come from our core business, clients that transfer from our core services to our MMS service.

Your next question comes from [David Farina] of William Blair.

Good Morning. I was curious when you guys mentioned that you have some more money in your service area in terms of adequacies in your queue, to decrease the number of clients there per Payroll specials. Can you talk about why you did that and I know, you talked about the impact that has already been installed in terms of the cost, but were you getting complaints from the customers are what was it something you thought you need to do? [AUDIO DISTURBANCE]

You actually kind of breaking half of bit, but I will keep a try.

The ancillary services that our Payroll specialist has to deal with now today over time has driven us in a manner that we will have less clients per Payroll specialist than we used to have. Secondly in some of the larger metropolitan markets, larger metropolitan areas up until at least a few months ago, we have had obviously some wage pressure market adjustments in the wages that we pay in our Payroll special, and in a few branches we are talking them to improve our service level. So it is sort of a combination of those three things.

Have you guys seen any notable reduction, it is probably too early, though, in improving retention rates and the things like that.

We have a couple of ways to monitoring client satisfaction one is retention rates, one is we do customer surveys every month and quite candidly over the last two or three months, we have made significant improvement in our customer service attitude release relative to the clients that answer our survey. So we have seen some pay back already on it.

Though I appreciate that information I was actually, in terms of our own people, retention, I know it had some problems with the service personnel, have you seen any improvement there?

In our audit personnel, and John mentioned we are up to about 7500 employees, we have seen a dramatic change in our ability to attract and retain employees and I think just like everybody else for the most part. Particularly in the major metropolitan areas we have seen the improvement.

Okay, thank you.

Your next question comes from [Pat Burton] of Salomon Smith Barney.

As to within the customer base, any idea what the exposure might be to the travel and leisure segment. Thanks.

It is Tom. Our exposure to those types of industries, if you would take Paychex as client-based because it is so large now with 375,000 clients, and assess where small businesses fit by SIC code. We are pretty much aligned with the rest of the country. And our client bases probably reflect very closely what the breakdown in small businesses by product line or service line that exists in the country. Obviously, that includes some food service, which is one of our higher categories, but at this point I don't think we are going to see much of a dramatic impact because it is somewhat spread out around the country, and it does not include large hotel chains or large food chains. It is mainly smaller type businesses; I don't think we will see much of an impact based on reduced travel.

Thank you.

Your next question comes from [Kevin Weith] with [_____].

I know this is very early, but is there anything changed in the secular way because of this terrible tragedy and in terms of may be some clients behavior as far as your in house conversion to the system going from in house do you need to do anything as the company strategically now with the reflections that we have had from over the last week or so.

To answer your first question ... you are right it is very early to tell, but quite frankly my speculation would be that we would not see much change in that. As far as this type of tragedy it is certainly in any organization like ours heightens our level of concern and awareness for backup processes and contingency plans and all that, and I think we will do a very good job in this area, but I will tell you it does heighten our awareness level.

And the last question is when did the new building completed and then I would assume that capital expenditure is decreased from that.

You may remember we were going to construct a new addition to our corporate headquarters and as we found another building then the community very attractive to us economically. We purchased a five-year-old 135,000 square foot building for $5 million of reconstruction and the investment we are going to make is the construction of a data center in that facility and that is the deal John is taking about.

John then the capital expenditure starts to go down from there?

Yes. It should. I don't know whether we have got all data center there, but we are pretty well on the way.

Okay. Thank you very much.

Your next question comes from [Ashvin Schuvikaar] of Salomon Smith Barney.

Hi, a quick question on the impact of asset valuations on the 401(k) side of the business ... I just want to make sure it is ...

Basically, we do get some basis points from that money, but even these significant reductions are not going to cause significant reductions in revenue. They will be some reduction but they are minor.

Okay. What kind of steps are you taking ... you said 30-60 days for back to normal, is it pretty much completely the new sales force of training or what is it?

Are you referring to our 401(k) sales?

Yes.

Basically what we did in our 401(k) sales arena at the beginning of the fiscal year was to breakout a certain number of those representatives and I think the number is 45, to be past of Paychex administrative services representatives so we had to back fill the 45 positions plus we had another 30 positions we wanted to grow in sales force. And what we did is we sort of over estimated our out of the box start with all of these new representatives in 401(k). So, the first month we were down quite bit, the second month we were down less, and the third month we were down less, and we can see the momentum gaining. The only mistake we made is we just underestimated how long it would take us to get these representatives up to place.

Okay. So, everything is in place and the momentum is there ...

Yes absolutely.

Okay, thank you.

Your next question comes from [Chuck Webster] of [Mid Ryan].

Good Morning, just a question on the balance sheet. John the non-cash operating working capital went up a decent amount relative to sales this quarter where it was last year's first quarter and that had pretty big impact on operating cash flows. I wonder if you could speak to what might be behind that.

Our PEO in the income statements recorded net and it was the timing of the end of the quarter the PEO put more asset and liabilities on the balance sheet and in the operating cash flows it is just a way the PEO flows through.

Okay. You have had a pretty good trend downward that non-cash working capital has dropped from 3-2.8 and so ... on do you think that trend continues relative to percentage of the sales or is there something going that might halt that decline.

I think it will continue, bit I do not know that I will accelerate. I think we should continue to do better because we keep watching. We are very good at cash collections etc, we have got a great business that throws cash flow up, but I ... whether it will be as strong as it has been last years I am not sure about that, but we think it should continue.

Great thank you.

At this time if you would like to ask a question, please press the number 1 on your telephone keypad. You have a follow-up question from [Christen Lindberg] of Lehman Brothers.

Just one follow-up. I am wondering speaking to the expansion in the sales force that you just discussed within the PAS and 401(k). Do you have any further insight into further head count increases in your sales representative numbers through the rest of the year?

[Chris] what we do traditionally is during the spring of the year February, March and April and early May we do all the hiring and the training and generally speaking except for replacement personnel we don't increase the size of our sales organization until the following year at the same period of time. So I could speculate, but it would be totally speculation, and I don't think it would serve main purpose. I would assume that is going to be safe to say we will continue to grow our 401(k) sales force next year. But we have a predetermined percentage of growth at this point.

Okay. Thank you very much.

Your next question comes from [Randy Neale] of Raymond James.

Are you comfortable with the sales force turnover as it is now, I guess, where has that trended over this quarter?

Our sales force turnover has been certainly consistent where it has been for the last year or two ... improved over, you know, two or three years ago when we had the really bad year. It is never good enough, but it's consistent with where we expect it to be.

Okay. You have mentioned in the past that at some point it might make sense to, you know, consolidate offices or be more efficient in terms of offices that you have out there ... I think you have over a 100 right now. Is there anything that we should expect in the way of margin impact from that sort of activity?

While we are talking about consolidation of offices [Randy] historically is the computer room and not necessarily printers or networking equipment, but CPUs and I think overtime you can see a consolidation of those CPUs, but I would not anticipate any great economic benefit from that. It is more an operational benefit and a business continuity benefit is the reasons we are doing this. No Great economic benefit at all.

Okay and one last question after [_____] Payroll, have you found that to be a catalyst or what has been the feedback, I guess, from the CPA community on that business?

The [_____] Payroll thing is still working in two ways. It's generating a [_____] Payroll client, but it is also generating traditional core Payroll clients too. So, the sales force and it's [____] it is never a 100%, but generally speaking the sales force is positive about it.

Great. Thank you.

Okay.

Your next question comes from [Jim Tiffany] of Bear Stearns.

Thanks and good morning. You gave us the major market segment revenues. Can you give us a sense on the sales activity in the recent past of around 80 ps that they are seeing some slowdown in sales activity?

We have not seen a slowdown in sales activity in MMS Jim.

Okay. Great. And historically, Tom, how much of your new business has actually come from new business startups, and what have you been seeing there recently?

Around 40% of our new clients are brand new businesses and we have been seeing no change in that even in the last 60-90 days.

Excellent. Thanks.

At this time, if you would like to ask a question, please press the number 1 on your telephone keypad. You do have a follow-up question from [Mark McCohen] of First Union Security.

I wonder if you could comment on what you are seeing in the pricing environment and are you still going to raise prices, you know, 33% for the balance of the year?

We already went through our annual price increase process that took place in May. So, there will be price modifications between now and next May, and that is generally the way we have operated from year-to-year and we think we will be consistent with that.

Are you seeing anything from any competitors that are ... any changes?

No. Paychex has a tendency to be on a higher end of the price scale and most of the regional or localized companies will follow us may be a small percentage lower than ourselves and automatic data are pretty consistent.

Okay great. Thank you.

If you would like to ask a question, please press the number 1 on your telephone keypad.

Yeah, at this time, I think, we appreciate your patience. We apologize for some of the difficulties on the call. It sounds like everybody hung in there with this. Again thank you very much. Your interest in Paychex again is always great, we appreciate it, and wish all of you the best, and over the next few weeks and the months to come, and hopefully all of this will get a lot better. So, take care and have a great day.

Excuse me Mr. Morphy we do have a question from [Robert Romania]. Hold one moment. He withdrew his question, sir I do apologize.

Okay. Thank you very much and again all have a great day.

Thank you for participating in today's conference. You may all disconnect.