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Operator
Good morning, and welcome to the Paychex third quarter fiscal 2002 earnings release conference call.
All participants will be able to listen-only until the question-and-answer session of today's call. This conference is being recorded at the request of Paychex.
If you have any objections you may disconnect at this time. I would now like to introduce one of your speakers for today, John Morphy, Chief Financial Officer of Paychex. Sir, you may begin.
- Chief Financial Officer
Thank you for joining us for our third 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.
This morning, we released our financial results for the quarter ended February 28, 2002. If you need a copy of the release, it can be obtained by calling 585-383-3406, or by accessing our Web site at www.paychex.com at our investor relations home page.
We have also filed our third quarter Form 10-Q with the SEC, and it is available on our Web site. In addition, this teleconference is being broadcast over the Internet, and will be archived and available for access on our Web site until March, 26, 2002. Please be refer to our Web site for access to all news releases, current financial information, related SEC filings, and investor relations presentation.
The earnings release is summarized as follows. For the third quarter and first nine months of fiscal 2002, total revenue growth was six percent and eleven percent, respectively. Net income growth was one percent for the third quarter, and 10 percent for the nine month period.
Quarterly earnings per share were 18 cents in the third quarter of fiscal 2002, and fiscal 2001 up one percent on an unrounded basis. Year-to-date earnings per share were 54 cents, versus 50 cents a year ago, up 10 percent on an unrounded basis.
Economic conditions: Our results have been impacted by the recessionary economic conditions in the United States. We first experienced the affects of the economic recession in the first quarter of fiscal 2002, and these affects have continued during the second and third quarters.
In response to the declining economic conditions, the Federal Reserve has lowered the Federal Funds rate 11 times since January, 2001 to 1.75 percent, which represents a cumulative 475 basis point reduction. The impact of the rate cuts on year-over-year comparisons for interest on funds held for clients, and corporate investment income, was more significant in the third quarter, and this trend is expected to continue for the remainder of the fiscal year.
Year-over-year comparisons for interest on funds held for clients, and corporate investment income combined, were up 14 percent and two percent for the first and second quarters of fiscal 2002, respectively. But were down 30 percent for the third quarter, and are expected to be down approximately 30 to 35 percent for the fourth quarter of fiscal 2002.
Difficult year-over-year comparisons for interest on funds held for clients and corporate investment income is expected to continue into, and possibly throughout, fiscal 2003. The volatile interest market has resulted in significant changes in the market value of our available for-sale portfolios.
As rates decline, the market value of held investments normally increased, and vice versa. The combined funds held for clients and corporate available for-sale investment portfolios reflected unrealized gains of 32.1 million at February 28th, 2002; 20.5 million at May 31, 2001; and unrealized losses of 13.4 million at May 31, 2000.
To provide more updated information, our unrealized gains position as of March 14, 2002 was 17 million. As you can see, the rates are moving up and down and so are the unrealized gains.
This is very similar to what happened at the end of the second quarter.
In addition to the effects of
interest rates, the impact of a recessionary economy has resulted in a lower number of checks per client, as our existing clients reduced their workforces.
During the third quarter of fiscal 2002, we have experienced a 4.8 percent decline in checks per client, compared to a 4.3 percent decline in the second quarter and a 2.6 percent decline in the first quarter. For the first nine months of fiscal 2002, checks per client decreased 3.9 percent on a year-over-year basis.
During the recession of the early 90s, the company experienced a total reduction in checks per client of approximately three percent.
Despite these factors, income before taxes remain strong at 42 percent of revenues during the first nine months of fiscal 2002, which is consistent with the same period last year.
We estimate that if the interest rates and checks per client conditions experienced in fiscal 2002 had continued throughout fiscal 2001 and the first nine months of fiscal 2002, net income growth for fiscal 2001 would have been approximately 25 percent, compared with an actual growth of 34 percent.
A net income growth for the first nine months of 2002 would have been approximately 20 percent compared with the actual growth of 10 percent. The average interest rate, exclusive of net realized gains and losses earned in fiscal 2000 for combined investment portfolios was approximately 4.4 percent, compared with 4.6 percent in fiscal 2001 and 3.3 percent for the first nine months of 2002.
Moving on to the income statement.
Total service revenues increased 12 percent and 14 percent in the third quarter in a nine-month period to 228.0 million and 661.6 million respectively. Service revenues consist of service fees earned from our payroll and human resource and benefits product lines.
Payroll service revenues for the third quarter and nine months increased 10 percent and 13 percent to 195.8 million and 573.7 million respectively. The increases are related primarily to growth in the client base, increased utilization of ancillary services and price increases.
As of February 28th, 2002, 84 percent of our clients utilize tax pay, and 56 percent utilize the company's employee pay services. Major market services revenue increased 40 percent and 51 percent the third quarter and nine month periods to 19.3 million and 51.5 million respectively.
Approximately one-third of our new major market services clients are conversions in the company's core payroll service.
Human resource and benefit service revenue increased 26 percent and 24 percent in the third quarter and nine month periods to 32.2 million and 88.0 million respectively.
The increases are primarily related to growth and retirement services client, and a client employees served by the company's past and PEO bundled services. Retirement services revenue increased 33 percent and 30 percent in the third quarter and nine month period to 15.3 million and 41.3 million respective.
At February 28th, 2002, we had over 22,000 retirement services plans.
Paychex administrative services paths and the company's professional employer organization, PEO are comprehensive services that include payroll, employer compliance, employee benefit administration and risk management outsourcing services. And are designed to make it easier to for businesses to manage their payroll and benefit costs.
Sales of paths and PEO products have been strong with administrative fee revenue from these products increasing 38 percent and 43 percent in the third quarter and nine month period of fiscal 2000 compared with the respective prior year period. As of February 28th, 2002, our paths and PEO products serviced over 72,000 client employees.
Interest on funds held for clients decreased 43 percent and 19 percent for the third quarter and nine month period compared with the respective prior year periods. The decreases are the results of lower interest rates in fiscal 2002, offset somewhat by higher average portfolio balances.
Net realized gains on the sale of available for sale securities included in interest on funds held for clients decreased to 2.3 million for the third quarter, from 3.4 million in the prior quarter.
Net realized gains increased to 7.6 million for the nine month period compared with 3.1 million in the respective prior year period.
The funds held for client's portfolio earned an average rate of return of 2.5 percent and 3.1 percent in the third quarter and the first nine months of fiscal 2002. Compared with 4.9 percent in both respective prior year periods.
Average daily portfolio balances total 1.90 billion and 1.75 billion for the third quarter and nine months ended February 28th, 2002. Compared with 1.80 billion
and 1.55 billion in the respective prior year periods. The increase reflects higher utilization of tax pay and employee services by new and existing clients.
Combined operating and SG&A expenses increased nine percent and twelve percent in the third quarter and nine month period, compared with the respective prior year periods. This reflects increases in personnel, information technology, and facility costs, necessary to support the growth of the company. There were approximately 7,300 employees at February 28, 2002 compared with 7,100 at February 28, 2001.
Operating income of 87.2 million in the third quarter was consistent with the third quarter last year. In the nine month period, operating income increased nine percent to 272.1 million.
Investment income increased 16 percent and 29 percent for the third quarter and nine month periods respectively. The increases are due to net realized gains on the sale of available for-sale securities, and the increase in the daily average investment balances, offset by lower interest rates in fiscal 2002.
Net realized gains were 2.4 million, and 5.2 million, in the third quarter and nine months of fiscal 2002, compared to .6 million and .4 million in the respective prior year periods.
Average daily balances invested were 700 million and 650 million for the third quarter and nine months ended February 28, 2002, compared with 600 million and 550 million for the respective prior year periods.
The increases in the average portfolio balances were driven by additional net cash inflows from operations. The corporate investment portfolio earned an average rate of 3.6 percent for the third quarter, and 3.9 percent for the nine month period, compared with 4.7 percent and 4.6 percent in the respective periods.
Our effective income tax rate was 30.0 percent and 30.5 percent in the third quarter and nine month periods of fiscal 2002, compared with 29.5 percent and 30.1 percent in the respective prior year periods. As mentioned earlier, net income increased one percent and ten percent for the third quarter and nine month periods of fiscal 2002, when compared with the same periods a year ago.
The U.S. economic conditions and interest rate trends, which I discussed earlier, represent uncertainties which we expect will continue to effect total revenue growth. For fiscal 2002, we project payroll service revenue to grow in the range of 11 percent to 12 percent, and human resource and benefit service revenue growth in the range of 22 percent to 24 percent.
Total service revenue growth is anticipated to be in the range of 12 to 14 percent. Taking the aforementioned factors into consideration, and assuming no further deterioration to interest rates or current economic conditions, total revenue growth for fiscal 2002 is anticipated to be in the range of nine percent to ten percent, with net income growth slightly less than total revenue growth.
Moving to page four of our press release, our balance sheet is very consistent with May 31, 2001, plus our growth during the first nine months of fiscal 2002. Total cash and corporate investments have grown to 760 million.
As mentioned earlier, our total available for sale investments, including corporate investments and funds held for clients, reflected unrealized gains of 32.1 million at February 28, 2002, compared with unrealized gains of 20.5 million at May 31, 2001, and unrealized losses of 13.4 million at May 31, 2000. The decrease in interest rate environment drove the improvement and the market value of the available for sale portfolio.
Again, the unrealized gain position will fluctuate, and at March 14, 2002 totaled approximately 17 million.
Our net property and equipment balance activity during the nine-month period reflected capital expenditures of 33 million and depreciation expense of 20 million.
For full year fiscal 2002, capital expenditures are expected to be in the range of 50 million to 55 million, including additional expenditures anticipated for our new 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 to 884 million at February 28, 2002, with 116 million in dividends paid during the nine months of fiscal 2002; a pay-out of 56 percent of net income. Our return in equity for the past 12 months was 34 percent.
The accumulated other comprehensive income balance at May 31, 2001 of 13.1 million has increased to 20.5 million at February 28, 2002, which reflects the previously discussed increase in the market value of our available for sale portfolio.
Investment rates of return: With the volatile interest rate environment, we often receive many questions about the potential impact of changing interest rates.
Please refer to our form 10Q, which was filed with the SEC this morning, under the section entitled, "Market risk factors for further discussion of interest rates and the related risks." To summarize, changes in interest rates, quickly impact earnings on short-term investments, and over time impact earnings on available for sales securities, as current holdings are sold or mature and are reinvested at current rates.
The exact impact of the changing interest rates on the company is difficult to determine due to many factors. But we estimate that a 25-basis point change in taxable interest rates, which represents a 17-basis point on a tax exempt basis, will have an effect of approximately three million on earnings on the next 12-month period.
Safe Harbor: 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 Reform 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 on page two of the press release for our discussion of forward-looking statements and the related risk factors.
I will now turn the meeting over to Tom Golisano, who will provide his comments on the third quarter before we open for questions.
- Chairman, President, CEO
Good morning everybody. A few quick comments.
First of all as anticipated the third quarter being a very important selling season for us, we went through it. We got through it very fine.
We're quite satisfied. As you know, I've said in the past, the recessionary period, at least the one we suffered through '89 and '90 did not seem to impair our ability to sell our products and services. I think that's holding true again in this case, as well as our client retention.
You may know that we went through about a three or four-year period where every year in a row we had record client retention. We're not too far off that record level this year.
So we feel pretty good about that.
Also our MMS group, as you could probably tell by John's comment, continues to do extremely well.
It looks like in just a four or five year period we've built the annualized revenue business of about $75 million. And also something that's unusually strong in our organization today is our PEO and paths product offering.
I think the competitive environment for the PEO in Florida has lessened to some degree for whatever reasons. And the acceptance levels of our paths products seems to be very high.
As John mentioned, we have over 72,000 client employees enrolled in both of these services combined.
So I would say right now, nothings new. Our ability to sell and our ability to retain clients, even though we don't have as many new business stars as we've had in the past.
But our sales people have gravitated over to selling more ancillary services which is fine until the economy strengthens. So then we're also watching our cost controls usual.
So with that, I think we'll turn it over for questions now.
Operator
Thank you. At this time we're ready to begin the formal question and answer session. If you'd like to ask a question, please press star one.
You will be announced prior to asking your question. To withdraw your question, please press start two.
Once again to ask a question, please press star one.
Our first question comes from Mr. (Carter Nata) from Midwest Research. You may ask your question.
Good morning. Just two quick questions. Tom, do you believe that, most of you price increases I believe come in May.
Do you believe based on the economic environment we're in that you'll still be able to achieve your price increases?
- Chairman, President, CEO
We think so. You know, the recession had all ready started to hit last May for many people.
And it didn't seem to have very much of an impact. I think next year -- or this year's price increases we're going to be as conservative as we can be.
We don't think because of the low level of them, and because of the total incremental hit to our customers, you know, profitability that it's going to have much of an impact. So we're going to be a little bit more conservative this year and we don't expect much impact.
And second question, average number of checks?
- Chairman, President, CEO
Well, as John mentioned, our average number of checks year-over-year in this quarter, the third quarter, compared to the third quarter last year, are down 4.8 percent.
At the end of the second quarter, they were down 4.3 percent year-over-year comparison. As I've mentioned earlier, compared to 1989 and '90, this is more severe in a shorter period of time. At this moment, we have seen no leveling, or no turnaround, on this particular issue.
Thank you very much.
Operator
from Bear Stearns. You may ask your question.
Thanks. Tom, can you update us on the number of sales people you have, and any change in the compensation structure? It sounds like you've changed the payroll specialists. Any change on the sales side?
- Chairman, President, CEO
No, we have 880 salespeople, and we anticipate that that's going to go up somewhat next year. We haven't quantified it totally yet. We think we're going to be a little more aggressive in the growth of our HRS services, at least in the number of salespeople.
And right now, we do not predict any changes in our compensation programs for either group.
OK, and Tom, can I ask any thoughts on diversification beyond HR services? I mean, you have no debt, lots of cash, and still a relatively high multiple stock.
- Chairman, President, CEO
Well, I think right now there is nothing on the horizon. We may make and entry into the international world, and it's going to be a very modest entry.
If and when it happens.
But right now, our feeling is with the opportunities we have in 401(k), Workers Comp, PASS, and major markets, we've got more than enough on our plate. And we're really focusing on execution of the sales and operations processes in these areas.
And I'll tell you, if layered in a whole new opportunity on us, assuming the same operations and sales organizations would deal with that product, I would be concerned. Are there potential acquisitions out there, outside of what we do on a daily basis? Maybe, but I don't see anything happening in the near future.
OK, great. Thanks, Tom.
- Chairman, President, CEO
Yes.
Operator
from AG Edwards. You may ask your question.
Yes, gentlemen, you were kind enough to give us some attempt to show us what would happen to your numbers.
Your top line had interest rates in number of checks per client held steady. And you said through the first nine months that it would have been approximately 20 percent. Three months ago through the first six months, that number had been 25 percent.
That suggests to me a rather sharp somewhat deceleration here into the last three months. Am I correct in that? And if I am, what might be causing that?
- Chairman, President, CEO
I think our conservatism is generally based on the fact that we've -- through the third quarter, we continue to see a drop in our checks per client.
And even though it's at the highest -- a higher level than any of us would have ever predicted, we still don't know where it's going to go. So I think we're just trying to be conservative on that.
Well, no, but in the numbers you're reporting here, I assume that held checks per client steady. When you said that had interest rates held steady -- am I reading that correct when you talk about the 20 percent net income growth for the first nine months of fiscal 2002 would have been approximately 20 percent, holding both interest rates and checks per client steady?
- Chairman, President, CEO
OK, well you got a few factors in there. One is, client growth obviously is slower than it would be in a good economy.
It's not like it's off completely, but it's not as strong as you would expect because sales get diminished a little bit and losses get a little bit higher because of bankruptcies.
You also got the fact that as we went into the year, we -- maybe were a little too overconfident on how well we could do in this economy.
The drop-off was rather abrupt and we're moving on our expenses now and reducing some of those. But at the same token, we've not laid any people off; we're still generating 42 percent margins at the pre-tax line.
So we've got a very successful business; we're watching our expenses closely. But you did see some diminishment there in growth, and it's related to the general conditions of which we only factored two out when we did the comparison.
Operator
Our next question comes from Mr.
from Prudential Securities. You may ask your question.
Yeah, hi.
I guess I just -- I had a question about that as well.
But maybe just on a -- on a kind of a side note. You mentioned that, Tom, I think that new business starts are obviously a little bit slower.
Is there a percentage that we can -- or any kind of metric we could look at for new business starts, how much that's down over past years?
- Chairman, President, CEO
I can't give it to you nationally, but I think I can give it to you within Paychex.
When we take a look at the methods in which we sell clients, you've probably heard me say in the past that two-thirds of our clients come to us from customer referral, and that half of those come from CPA referral. We've seen a diminishment in the number of referrals.
And, as you know, 45 percent of our new clients are brand new businesses.
So assuming our sales organization is doing nothing different -- in fact, quite frankly, it's been intensified on the positive -- we would have to assume that our new businesses being referred to Paychex is diminished because of the lack of them actually being created.
Our call levels on CPAs and existing clients have been intensified. But just -- we're getting slightly lower number of referrals.
Now I'll give you an interesting counter to that, for whatever it's worth. We were pleasantly surprised to find out through the first eight months of this year we've sold almost 2,400 clients off the Internet, which is a very positive thing.
But we have the feeling that our new businesses are down because our referral level is slightly down in an intense -- an increased intensity by the sales force.
And then, John, you mentioned a little bit about bankruptcies.
Have you seen much of that?
Because I think you mentioned a little bit about client retention not too far off. But maybe starting to feel a little bit of that?
- Chief Financial Officer
Nothing significant. What happens is it's, you know, you're in a poor economy so you sell a little bit less and you lose a little bit more.
And it's simply people watching their money. We haven't seen anything noticeable on bankruptcies, but, you know, client retention gets a little harder.
- Chairman, President, CEO
Let me give you a -- let me quantify that client retention for you. During the last 10 years we probably had a range of loss clients somewhere between 20-and-a-half percent to 25 percent of our beginning client base.
And I said we were one percent off that number OK. Low being 20-and-a-half.
Well one percent off that number represents about 3000 clients, OK. And if you extrapoliate that out on a revenue basis it's a fairly significant amount of money for us.
So even though, percentage wise it looks real good, you do have to measure the financial impact. And I think that's one of the reasons our new -- not new but different conservative approach than we had maybe the quarter before.
OK. And any -- I know we have one quarter left in '02 but any particular guidance or things to think about for years '03 on revenues in net income?
- Chief Financial Officer
We haven't provided any because we're going to go through our detailed budget session here in the next six to eight weeks.
This is similar to what we've done in prior years. The only guidance we really provide is to say that these comparisons on interest are going to be -- continue to be a little bit complicated.
And we gave you some more rate information on interest rates and rates of return than we've given before. So we given you some information looking at interest rates.
But right now it's too early to tell. And I think in this world we've got right now I -- you know some people say a recovery is right in front of us.
We haven't seen any signs of that. But we at the same time haven't seen the worsening continue.
So it's almost hard -- it's hard to say.
OK. All right. Thanks a lot.
Operator
Mr.
from Merrill Lynch, you may ask your question.
Thanks.
recently cited an increase in competitive take aways. And I'm wondering what your experience has been in this regard this quarter.
Have you been the beneficiary of that?
- Chairman, President, CEO
Yes, I think. We do keep track very carefully of our sales and losses, the automatic data.
And during the month timeframe of September and October ADP was very aggressive in coming after our client base. And basically accumulated databases from telemarketing and from the sales people making the sales calls.
And in the past, we haven't much reacted to this type of activity because we're not really -- we don't think we can convert a lot of clients based on price. But in any event, this year we decided to respond to it.
And our sales organization, we think did a great job. And I think maybe what ADP was referring to is the one or two month blitz that our sales force put on and it was very directed.
So other than that, that's all I can think of that could be referred to, as far we're concerned.
What was the magnitude of I guess the price bids discounting you used to offer, in order to lure some of those clients away?
- Chairman, President, CEO
From our side, or from their side?
From what you had to offer to get them over to Paychex?
- Chairman, President, CEO
We have a discounting policy, and we do give our salespeople some latitude. And basically, we stayed within the parameters of that, for the most part. It was nothing new, it was just a focused effort. And nothing really new as far as the pricing levels were concerned.
OK, great.
- Chairman, President, CEO
Also, the one thing you should know about Paychex is our discounting program is much more conservative than anybody else's, because we have a tendency to bring the clients back to full pricing within a very short period of time, a year or two.
OK, great, thanks.
Operator
from Goldman Sachs. You may ask your question.
Hi, it's
. Just on new signings, Tom, maybe can you talk about the salespersons' quotas, and how they're doing towards quota?
- Chairman, President, CEO
Our salespersons quota, you know, today is very much revenue driven. And right now, they're not at 100 percent of quota, but they're not far off of it. Anyway, considering the sales environment, we're pretty happy.
The revenue creation is measure not only in payroll sales, but what contribution our sales people make to the other divisions.
For example, if a payroll sales rep gets a lead for a 401(k) client, the revenue that's created if that client is sold is diminished to the 401(k) salesperson, and increased to the payroll rep.
So we have this great method of transferring revenue and commissions back and forth between our salespeople.
Our revenue goal this year was far higher than we had ever tried to accomplish in prior years.
You know, a lot of it's got to do with the multitude of extra ancillary services. And so, I think that number is going to continue to grow. But we're off it a bit, we're not concerned about it. We're working hard on it. And like I said, it's the highest revenue per sales rep goal we've ever had in the company.
And on ancillary services, in this kind of environment, is the opportunity for add-on sales just as strong? Or, have you seen some pullback there, as companies look to reduce costs?
Thanks.
- Chairman, President, CEO
No, as a matter of fact, it's the opposite. Our sales force, because they've seen a small diminishment in the number of referrals they get, they are selling more ancillary services.
And another thing that's kind of interesting, and we don't' think it's big enough to make a big deal out of it, but during this economy, we've seen our salespeople actually sell to slightly larger client than they have in the past.
And I think it's because they're going after more established companies, instead of relying totally on new business formations. So it's not a big difference, but it's certainly interesting to note.
But, no, this environment has created a larger opportunity for ancillary sales as opposed to not doing it that way.
OK, thank you.
- Chairman, President, CEO
Yeah.
Operator
Mr.
from CIBC.
You may ask your question.
Good morning, guys.
- Chairman, President, CEO
Yeah?
John, can you give us a little bit more color on your outlook for the fourth quarter regarding interest income?
You said it could be down 30 to 35 percent. I guess, at the low end of that, you're expecting rates to increase by how many basis points?
- Chief Financial Officer
No, we -- on everything we give you interest rates we make no assumptions on rate changes from the
. Now if there was a rate change yesterday, we probably wouldn't have it in here.
But as of today, it's -- how we look at these estimates, we haven't projected any increase in rates.
Obviously, if rates go up, it's not to hard to
in the short term, because whatever the rates go up by -- you know, put a
rate on it, which is about two-thirds, and on our average portfolio -- which is
the short term -- about half the total portfolio, that will happen immediately.
The long-term portfolio doesn't tend to change.
So a lot of our comparison issues, though, are coming from the fact we now have the lower rates with no gains to offset them.
In the past, we've said that using gains and/or losses, we can mitigate interest rate movement for about 12 months. But if they don't tend to even out in that period, then eventually we have -- we have differences and there's not much we can do about it.
So you seem pretty confident about that 30 to 35 percent number?
- Chief Financial Officer
Yeah, I think it's like to happen.
And, again, you've watched us on gains. The most we're going to take is somewhere between four and five million -- a little over four.
And next quarter we may take a little less, with the fact that the portfolio dropped off here again in the first 15 days.
Now that same phenomenon happened at the end of the third quarter, and we gave that same disclosure.
I think the gains were down to around 17 million then, and two weeks later bounced right back up to 35 million. So we're in uncharted water here.
It shakes around, you don't know what's going to happen. But we pretty much expect what we forecasted here to be pretty close to what it will be.
OK.
And then one follow-up question.
Tom, on the HR business, can you talk a little bit about the benefit you guys have seen from the tax law changes -- the tax credit given to 401 (k) for small businesses in addition to -- I know -- you know, Workers' Comp insurance premiums have been pretty much skyrocketing. What benefit you guys have seen from that.
- Chairman, President, CEO
Well, in the 401 (k) area, the legislation that gave a tax credit at the federal level to employers that initiated 401 (k)s, we think has had a positive impact on our ability to sell 401 (k)s.
We think it's also somewhat offset by the fact that the nature of the economy and people's confidence level in the stock market may have offset it. So it's hard to pinpoint and say this thing has been a real extra boom for us.
But we certainly feel it has helped.
In the area of Workers' Comp, that's also very hard for us to quantify, because this is such a new business for us and we're selling, you know, in some months, over 1,000 clients a month.
And we've been in the business for about two years or two-and-a-half years.
We do know that this product is being accepted well in the marketplace. We see other payroll processors even down at a local and regional level starting to adopt the program.
So I think the good news is is maybe in some number of years this will be an industry standard for payroll processors to sell workers comp. And then that will help us not only sell worker's comp, but it will certainly help us sell payroll client.
So we're very encouraged by that. But to say rates today have an impact because by state usually the rates are all pretty much the same depending on either the experience level or the nature of the way the state sets the rates.
So but the customer acceptance is the key thing as far as it being a service offering and a convenience to them. That's the key issue.
OK. Thank you very much.
Operator
Mr.
from Lehman Brothers, you may ask your question.
Yes, good morning, Tom and John.
- Chairman, President, CEO
How are you doing?
Tom, I want to step back to something you said earlier in your prepared remarks that you've been talking about the last couple of quarters, and that is this potential small acquisition in Europe that I presume you would grow organically once you have acquired it and have the nucleus of the management in place.
As you look at the sustainability of your five-year EPS growth rate on a without Europe strategy versus a with Europe strategy, could you compare and contrast for us what sort of full cycle EPS growth rates we might expect?
- Chairman, President, CEO
Well first of all, anything that I might speculate on going forward has nothing to do with Europe as far as additions to revenue or profitability growth.
It's a non event. Quite candidly, if we were to get into that business tomorrow it would probably be a none event for at least
.
OK.
- Chairman, President, CEO
So any speculation I give is strictly
base. And as I said earlier and I think John concurs with me, our philosophy is that in a normal economy we expect to grow the revenues of this company somewhere between 14 and 17 percent.
If we were able to do that on the top line, because incremental revenue is so profitable to us there is not reason why our profitability shouldn't grow in excess of 20 percent.
OK.
- Chairman, President, CEO
It's an official position.
And we feel it's at least a -- at least as things stand today a good three to five year if not year longer position.
And that's full cycle assuming perhaps a recession over a period of Tom?
- Chairman, President, CEO
Yeah, it sort of takes recessions out of it.
OK.
- Chairman, President, CEO
OK.
OK. Another question is, just updating us on your philosophy with respect to taking into income over the next quarter or two the $17 million in unrealized gains that remained as of March 14th as you stated in your press release?
- Chief Financial Officer
I think the most you'll see us take is somewhere between three and four-and-a-half million.
Per quarter?
- Chief Financial Officer
Per quarter. But again, with this drop that just happened, we could be revisiting that.
So it's -- you know, I think we'd stay pretty much within the guidance we had to keep where we are, but you will not see us take an extra two or $3 million to support a shortfall.
OK. So maybe the lower end of that range is conservative for modeling purposes, based on what you said today.
- Chief Financial Officer
I'd probably figure four million. We haven't really gotten into the planning process next year, but I wouldn't even put the whole 17 million in next year.
Oh, understood. And then finally, Tom gave us the payroll sales force head count at the end of the quarter. Could you just give us the HRS sales force headcount at the end of the quarter?
- Chairman, President, CEO
We have 45 people selling our PASS product. We have about 185 people selling our 401(k) product and our FSA product. And we have approximately 36 licensed reps selling our Workers Comp product.
Thanks very much.
Operator
from Robert W. Baird. You may ask your question.
Good morning, Tom and John. Impressive control on the operating costs. I was wondering what the source of that was in the quarter?
- Chief Financial Officer
Well, basically,
, we watch -- and you got to be careful -- you look at the operating costs by themselves, they're up four. The SG&A up a little bit more. And we really look at them together, so I think one just -- it's just how it came out.
We've talked before about the classifications inside branches.
One thing that affected the SG&A costs, we are selling more and more of our Readichecks product. It's a very profitable product with what we call the employee pay option. But as a result of this economy, and that product growing so substantially, we do get a little more losses in the -- basically where we have the money and the star's in the wrong place.
It's under reasonable control. We're watching it very closely, but it's an expense that just grows, because the revenue is higher in those areas.
So that counted for a little bit of the increase in SG&A, where operating costs didn't have that.
So we still look at them in total. We try to classify it as best we can. We think right now we've got excellent control over expenses. One of the advantages we had this year that we did not have a year ago was we hired a lot of people last year. And towards the end of the year this year, we didn't do that. So it's going to allow us to have better controls as we go into next year.
OK. So the nine percent -- I'm looking at them on a combined basis. The nine percent number, is that a sustainable number, going forward?
- Chief Financial Officer
I think so, because we're not going to let those costs go up much. Now, we're going to continue to invest in the data centers, and we've got some other facilities things, but against that we measure in facilities is how much unoccupied space do we have out there?
We can measure that; we're driving that down, so that's going to offset some of the new facility costs. And I can't say until I go through a full budget session, but I think the guy sitting next to me isn't going to let those go up nine percent, if he has anything to do with it.
- Chairman, President, CEO
, one other thing that we did this year I think helped is we usually go through a very intense budget process during the months of April and early May. And those budgets usually stand for the year.
This year, I think it was during the end of October, we went -- I took the organization through the entire process again. And I think that's been a help in us keeping our cost under control.
OK.
OK, good.
And it seems like the sales force for core payroll, the 880 number, has not changed in a while.
And I'm just wondering if the model for adding sales people has changed a little bit, if you're targeting more of a five percent growth number in that versus, you know...
- Chairman, President, CEO
Well,
, we took it up last year from about 800.
So...
- Chairman, President, CEO
And this year, we're anticipating it's going to grow -- we haven't finalized the number yet, so I'm getting a little cautious here.
But I would be surprised if we didn't grow it at least six or seven percent. And maybe if we see some sort of turnaround or at least leveling, we might even take it up higher.
OK.
So at least six or seven percent likely for all of '02?
- Chairman, President, CEO
Yeah.
OK.
And then, as conditions get better and we see rates move up, will you manage the contribution from those higher rates? In other words, you've grown out a 20 percent plus EPS number.
Will you actively take losses as you've actively taken gains in the -- in the declining rate environment?
- Chairman, President, CEO
It really depends on the circumstances and what we want to do in the portfolio.
Because as we've mentioned many times, about half of what happens depends on what we're doing in the portfolio. Right now, we've shorted the duration up to take advantage if rates do turn.
But that really depends on conditions,
. I just don't know yet.
OK.
And then just a final question, a housekeeping question here.
What is the calculation you use for checks per client? How exactly is that being calculated?
- Chairman, President, CEO
We take the number of checks that our clients -- that we prepare for our clients in a given month, and that varies because of four-week months and five-week months. We take into consideration the frequency, because you have some clients that pay weekly, biweekly, some are
and monthly.
And there's an arithmetic formula that you apply to that. And then you divide it into the number of checks prepared, and it gives you the number of checks per employee -- per client.
OK.
Because it seems like with MMS becoming, you know, still small relative to the whole, but becoming a factor and maybe selling up market a little bit, even within the core, that, you know, the natural -- the natural number of progress should be a little bit higher.
Is that fair to say? You know, the economic conditions?
- Chairman, President, CEO
You mean without the economy being negative that our average checks per client should go up a little because of MMS?
Like going up a little bit more, not just because of MMS but you made a comment that even with the core they're selling after market a little bit.
- Chairman, President, CEO
Yeah. But it's a too big of a base to have that little activity move it, Randy.
OK. So it's just a matter of these trends having to persist for a while before something like that would happen.
- Chairman, President, CEO
Correct. With, you know, probably if what I said was correct, and I believe it to be correct about the fact that we're selling a slightly higher client, if the economy neutralizes or becomes positive that will probably go down a little bit, OK?
Right.
- Chairman, President, CEO
Then you set -- move against that the fact that well in a better economy our clients will be hiring more people. So it's sort of very difficult to on a small short term basis say this is happening or that's happening.
OK. Very good. Thank you very much. I appreciate it.
- Chairman, President, CEO
Sure.
Operator
Mr.
from UBS Warburg, you may ask your question.
Hi. Just wanted to follow up on some things with the sales force. Can you address if there's been any increased voluntary turn over in your sales force?
- Chairman, President, CEO
Increased voluntary turn over the last couple of years, it's running about the same. So is our overall turnover.
So there hasn't been any spike in the last couple of quarters?
- Chairman, President, CEO
No, not that we're aware of.
OK.
- Chairman, President, CEO
We monitor that very closely, believe me.
OK. I'm sure. And John, just on the duration change, you say you're shorting it a little bit. Where is now? Where is it going?
Where should we expect it in the next two or three quarters?
- Chief Financial Officer
Oh, we only shortened it up a little bit. And again, we're just watching rates.
It's hard for us to change it dramatically.
Right. Where is it now though? And where do you expect it to be?
- Chief Financial Officer
We usually are somewhere between 2.5 and three and we're probably on the lower end of the two points -- towards the 2.5.
OK.
- Chief Financial Officer
That's only on the long-term piece, though.
Right. I understand.
- Chief Financial Officer
The other
is about 30 days.
OK. And any update on
on checkbooks? Are they seeing them gain some market share?
Are they becoming of more of a concern to you now? Or is kind of just business as usual there?
- Chairman, President, CEO
It's business as usual. We've seen very little out of them actually.
OK. Great. Thank you.
Operator
Mr.
from Wachovia Securities you may ask your question.
Hi, good morning. Earlier you mentioned a little bit about the pricing environment and, you know, competitive takeaways with ADP.
Has that stabilized? Or is that continuing?
- Chairman, President, CEO
Yeah, we think it was just a short period duration. And we think it's business as usual.
But having said that, remember ADP and Paychex has had a very competitive environment for the last 20 years. So I don't think much has changed in that environment overall accept maybe that little spike in activity during October, November and December.
But other than I think it's pretty much the same environment as it's been in the past.
OK. So it's gone back to normal?
- Chairman, President, CEO
I think so.
OK.
And then with regards to the, you know, to your new clients, apart from selling to some established businesses that might have more employs per client, have you noticed any change in terms of the number of employees per client, in terms of brand new business formations?
- Chairman, President, CEO
No, I'm afraid we don't have an effective of measuring that. I think the fact that our referrals are down a little bit, but our average sized client is up a bit, that the fact is they're selling more established businesses than new businesses.
And there are statistics to bear that out. But other than that, we don't think anything else is happening there.
OK. And then, in terms of your SG&A, just sequentially -- and I know it's hard to make a distinction between the operating costs and the SG&A. But sequentially, you know, you did have that bigger increase Q3 relative to Q2, than you did last year.
Is that only due to the Readichex phenomena, or is there anything else going on?
- Chief Financial Officer
Oh, there's some other expenses in there, but it's nothing -- we had our plans. Some people underrun. Sometimes it depends on the timing of where the commissions are factors in there, but we don't -- I can't say we spend a lot of time managing whether that number's going up a little more than before.
Yes, are the commissions higher for -- I imagine the commissions would be higher if you've got bigger clients, or if you're selling some of the HR services that have higher overall margins. Is that not the case?
- Chairman, President, CEO
Well, I think our salespeople and some of the ancillary services, we wanted them to be pretty aggressive. And I think, for example on direct deposit and Readichex, if you were to measure the commission against the revenue generated, they're probably getting more in proportion.
And I think our logic for that basically is that our margins are much higher on it. So we don't mind doing it. But that could give you a spike.
OK. And the final question, I mean, it seems like some economists are predicting that the economy's starting to turn around. The unemployment rate's actually trended down two months in a row. And we've actually seen an increase in terms of non-farm payrolls.
Have you done any estimates, or can you give us any quantification in terms of what the impact of a one percent increase in employees per client would be? I know you're not seeing it yet, but when you do start seeing it?
- Chairman, President, CEO
What one percent increase in the number of employees would be?
Yes, per client? Or payroll checks processed per client?
- Chairman, President, CEO
OK, one percent of five million ...
- Chief Financial Officer
It'd be less than one percent of it?
- Chairman, President, CEO
That's be 50,000 -- 50,000 checks. On an annualized basis, that would be a million and-a-half dollars times 30?
- Chief Financial Officer
It's going to be a little bit less than one percent of revenue, because the last check is not the highest revenue check. So you've got that factor.
Plus you have the ancillaries, some of them have fees on them with more checks, and some don't. So if I had to make a guess, it's like .7 or something of one percent.
- Chairman, President, CEO
Yeah, John's right on. The revenue would be about a little less than one percent and the profitability would be a little bit more than one percent.
Yeah, because, I mean, it would be -- that would be the most profitable check you process.
- Chief Financial Officer
Yeah.
- Chairman, President, CEO
Right.
Plus your average float balance would go up, wouldn't it?
- Chairman, President, CEO
A little bit, yeah.
- Chief Financial Officer
Yeah, it would.
OK. Great, thanks.
Operator
Mr.
from SG Cowen, you may ask your question.
Yes, first, good morning.
One, could you clarify -- you made a couple of statements, Tom, about retention. And you said it was down one point and then you gave us that range.
And I'm -- I'm not sure what -- was it -- is it a point below that 20.5 or was it a point below what it was a year ago?
- Chairman, President, CEO
No, it's actually better than it was a year ago.
It's one percent off the 20.5 percent, which I believe was our record number. In other words, it's just slightly higher than our best retention year ever.
By higher, I mean the turnover rate's higher.
Right.
But retention is actually better than it was one year ago?
- Chairman, President, CEO
Percentage-wise, absolutely.
OK, thank you.
Secondly, could you give us some feel -- you have this garnishment product that you started up about a year ago.
Is this visible from a revenue standpoint at this point either in absolute terms or run rate or...
- Chairman, President, CEO
Not yet.
We have several thousand clients signed up. I think it's somewhere between four and five thousand clients.
Typically, I think they would average about one garnishment per client. And at this point, it's not noticeable.
OK.
And you talked a little bit about Workers' Comp and that growth slowed earlier in the year.
What's happening to it now and what's your expectations?
- Chairman, President, CEO
Well I don't think our Workers' Comp growth slowed that much, if at all.
Our expectations for this product are quite high. We think we've got the sales process down to where we're fairly predictable now on how many clients we're going to sell.
I think our average quota is about 1,00 clients a month, and I think over time it's going to go up.
We still have a few states that we could probably use some assistance with
new carriers.
But other than that, we're very high on it and we're developing a higher level of predictability at this point.
You were going to add significantly to that sales force in...
- Chairman, President, CEO
We haven't answered -- we haven't had final discussions on that one. We've had general conversations.
I think one of the answers or the key issues of whether or not we do that is some of these key states. And I'll tell you that one of the key states is California.
We have a lot of clients in California, and if we could get to a level of happiness with Workers' Comp in California, we'd probably dramatically increase that sales organization.
OK.
Thank you very much.
- Chairman, President, CEO
Sure.
Operator
Mr.
from Raymond James, you may ask your question.
Yes, I was wondering if you've changed any of your recruitment practices with respect to the sales force.
- Chairman, President, CEO
I think Michael, and this is not a big deal in my opinion, but we are encouraging our sales managers to stay away from recruiters.
And do more field based type of recruiting.
We think that part of our turnover is created by the fact that recruiters are very familiar with our organization and our sales people.
And I think as a matter of policy that we're going to try to encourage the non use of recruiters.
Thanks a lot, Tom.
- Chairman, President, CEO
OK.
Operator
Mr.
from RBC Capital Markets, you may ask your question.
Hi, Tom the SBA recently put out something about new business inquiries and how they're up fairly significantly. I think as people get laid off they look to become entrepreneurs.
Is that anything you've every used to help try to correlate the future?
- Chairman, President, CEO
Well no. And if you've heard our presentation or seen it on the Web, we have a slide in there that shows the business breakdown by number of employess.
And over the last 15 years we've seen a dramatic shift in the number of employers in this country that have between one and four employees. It used to be about 49 or 48 percent of the businesses in the United States, and today it's up over 70.
We think that's a dramatic shift and mainly because of the reason that you stated. There's been a lot of corporate downsizing in the U.S. in the last 15 years, and a lot of those people have started their own businesses.
Now on a micro managing, on a three-month, or a six month or even a year period, do we see an impact of that? Do we measure it? The answer is no.
OK. And secondly, for John, the quarterly tax rate fluctuation, what drives that every quarter?
- Chief Financial Officer
Basically in this case we have put in some new tax things that are going to drive the rates down.
You also have other things we look at and tie up in the air. But we did is
the rates, the rate we believe very strongly in the fourth quarter will be the same as the year-to-date rate through nine months.
OK. Thank you.
Operator
Mr.
from William Blair, you may ask your question.
Hi, Tom. Just one question for you.
You know, if the economy is turning, I mean, basically in your experience in the '90s recession, what do you see first? Do you see the check volumes
?
Is it salary levels? Is it some other metric?
I mean what kind of things are you looking at? Or is it a combination of all of those.
- Chairman, President, CEO
I think there's two things we'll look at David, the first one is number of new hires, new employees that our clients are putting on.
And the second thing is more of a leveling of the number of checks per clients as compared to a drop.
When we came out of this thing in '89, '90, we didn't wake up one day and say oh, our checks per client is back to where it was. That didn't happen. What happened was it stopped dropping, and then, over a significant period of time, it came back. <sync time="01:43:48"/> Now, when you consider year-over-year comparisons, I mean, that's fine with us. That does not create us any havoc. So you don't wake up one day and say hey, this thing's over and it's back to where it was. It will not happen that way.
Do you see the salary levels at all first, though? I mean, in terms of the ...?
- Chairman, President, CEO
Don't measure salary levels,
. It has really no impact on our revenue or profitability, or anything like that.
So you wouldn't see it on your float volume then.
- Chief Financial Officer
The only place we see it is we watch average flow. That tends to go up equal to about inflation, or maybe a little more. Not much.
OK, thank you.
Operator
from Salomon Smith Barney. You may ask your question.
Thanks for taking the question. Tom, are you going to run for governor?
- Chairman, President, CEO
I'm sorry, am I going to run for governor?
Yes.
- Chairman, President, CEO
There's a rumor out there that I'm considering it.
And that rumor is true. No final decision has been made yet. But I would assume if a decision like that is going to be made, it'll be made in the next 60 days.
OK. One question about the company product strategy. As I look at the product profile, you know, taxpayers make sure you've got several initiatives that are working very well.
Major markets, retirement. What comes next? I mean, what change of add-on products can you add? You know, considering these products often take three, four, five years to finally have an impact?
- Chairman, President, CEO
Well, other than Europe, right now there is nothing that I want to talk about that's on the drawing board. And like I said earlier, we've got such a big plate now, with such a big opportunity, I think even if we had a great idea, it would be interesting to see how much resource we would put behind it. Right now, our feeling is we got a very full plate of products. They're all interrelated, which makes them extremely profitable, and this is what we're going to focus on. <sync time="01:45:52"/> Now, if something came along like
, which is not going to have a big impact, a nice impact, but not a big impact, we'll do it. But right now, I don't see anything new on the horizon, outside of possibly Europe.
OK, thank you.
Operator
Mr. David Grossman from Thomas Weisel Partners. You may ask your question.
Thank you. Just two quick questions. One, Tom, could you maybe explain the dynamic or the mechanics of why checks per client coming out of he last recession flattened, and then just took a long time to come back? And then secondly, John, if you could just maybe lay out some rough orders of magnitude for cap ex and depreciation for fiscal '03?
- Chairman, President, CEO
I'm afraid I don't think I can explain to you that dynamic. All I can do is reiterate what happened.
In '89-'90, we had lost about three percent, I think it was, of our check volume in a nine-month or 10-month period. And then we never did say on any given day that we got it all back.
It probably was a number of years.
Now one of the -- one of the components of that, of course, is we do sell a smaller client than we have.
In other words, new sales tend to be smaller companies than our average. And back in '89-'90, you know, it would probably be safe to say that our incremental growth with the number of payroll clients was probably higher than it is today because of all the ancillary services.
So whether or not we see something different this time than last time is total speculation. And I don't feel I know enough or have enough insight to answer your question.
- Chief Financial Officer
Our cap ex -- it's very preliminary, but my guess would be somewhere between 35 and 45 million. It shouldn't be as big as this past year unless we have a lot of carryover from this year that doesn't get in.
Depreciation, I've not looked at. I don't expect it to jump very, very significantly because a lot of the assets we're putting out are longer life assets with the data center, but time will tell.
Great, thank you.
Operator
Mr.
from Robertson Stephens, you may ask your question.
Good morning, gentlemen.
Can you give us a little color on the linearity of the quarter with respect to your same customer paycheck declines?
Is it pretty steady throughout the period or did you see any change in trends
?
- Chief Financial Officer
No, it's pretty steady.
You know, you look at the second quarter was
4.6 -- or 4.3, I can't remember the exact number. And it's up to 4.8.
So things at least in the quarter didn't get significantly worse. It moved a little bit as we went through it, and that's kind of where they stuck there.
- Chairman, President, CEO
January is typically a
month, in check volume, anyway. And so I think what happened at the end of January we realized -- and into February -- that the drop-off was higher than it was in prior years proportionately.
- Chief Financial Officer
Yeah ...
- Chairman, President, CEO
And that's why we've gone from 4.3 to 4.8.
- Chief Financial Officer
Yeah.
So barring a seasonal trend, is it safe to say that the third quarter was relatively consistent compared to the second?
- Chairman, President, CEO
No. Considering the seasonal trend, quarter three was lower
negative compared to quarter two.
OK.
And a quick follow up.
A small competitor filed for an IPO yesterday. I assume you saw that.
Any -- are you seeing them in the market at all? Or is there any consideration relative to pricing in specific geographies as a result of them becoming a little more aggressive?
- Chairman, President, CEO
Not that we've seen so far.
You're talking about Advantage I assume, Advantage Payroll Service.
Yeah, that's right.
- Chairman, President, CEO
I think Advantage has somewhere around 40,000 clients, 43,000 clients, I believe.
I don't know what number of them belong to licensees of Advantage and what number actually belong to the parent company itself.
But, you know, obviously advantage has been out in the marketplace for quite a long time. I don't think we've seen anything escalate, any mire than it had, you know, over the last five years as relative to them.
- Chief Financial Officer
You actually might see this change a little bit, go the other way, because now that they're public they're going to have to I assume work towards, I'm not sure -- I didn't see any statement yet, so I don't know whether they are profitable at the moment or not.
One thing we have seen is sometimes compete with them to buy small practices or buy small client lists, we have seen the prices they'll pay drop in recent months.
So whether -- I mean they're going to -- it's -- when they were private, you know, they really could compete without showing anything. Now that they're public they're going to have to compete with their financial statements. And I think there's going to be some, you know, burden to do well.
- Chairman, President, CEO
Is there a date planned for them to become a public company?
Oh, I don't know. I was just reading the prospectus.
- Chairman, President, CEO
OK.
It was filed yesterday. Thanks a lot.
Operator
Mr.
from Goldman Sachs, you may ask your question.
Sorry, just two quick follow ups.
On the 401 (k) business what growth are you expecting from new clients? And are you seeing in changes in demand on the margin?
- Chairman, President, CEO
No. We got off to a slower start than we wanted to at the beginning of the year in 401 (k). And I said the only two dynamics effecting it seem to this tax credit the federal government gave us as well as the somewhat reduced confidence in the stock market.
But other than we think it's pretty much business as usual.
OK. And Tom, in the MMS business with most of -- a third of the new signings coming from existing clients, does this help in revenue penetration of all of the other services?
- Chairman, President, CEO
Having clients switch from the core service to the MMS product?
Right.
- Chairman, President, CEO
Actually, from a service perspective, we are -- have a higher skill level delivering ancillary services like 401 (k) and flexible spending accounts to our core payroll clients rather than our MMS clients.
But as far as tax pay and direct deposit and all of those, it's just as strong. The 401 (k) arena and the flexible spending accounts are areas we're working on to improve.
So you might say that core has a better advantage overall relative to ancillary to MMS but we're quickly changing that.
OK. Thank you.
Operator
Excuse me. Mr.
from Prudential Securities, you may ask your question.
Yeah, hi just one follow up. On -- I just want to clarify the retention. The retention is actually down from last quarter, but a year ago it's a higher number but down from this 2Q? Is that correct?
- Chairman, President, CEO
Are you talking about our client retention?
Yes.
- Chairman, President, CEO
All right, well, maybe we better be careful on what -- on the use of the terms up and down. Our client retention this year, by all measures, is much better than it was last year.
OK, and how is it done since this past quarter? Is it actually continues to get the retention gets better? Just because in one of your statements prior, you were mentioning a little bit of bankruptcies having an affect, but yet retention is up. So I'm trying to understand that.
- Chairman, President, CEO
I think John was referring more on an annual basis than a quarter basis on the business failures. On a quarter-to-quarter basis, it seems very consistent. On an annual basis, we've improved it significantly over last year.
OK, thanks.
Operator
At this time, there are no further questions. I would now like to turn the back over to Mr. John Morphy.
- Chief Financial Officer
Again, we want to thank you very much for your interest in Paychex. And we hope you all have a great spring season. And here in the Northeast, we haven't seen much winter, so we're hoping it doesn't show up in April. So take care and have a great day.