沛齊 (PAYX) 2007 Q1 法說會逐字稿

Welcome and thank you for standing by.

At this time, all participants are in a listen-only mode.

After the presentation, we will conduct a question and answer session. [OPERATOR INSTRUCTIONS] Today's conference call is being recorded, so if you have any objections you may disconnect at this time.

I will now turn the meeting over to your host, the Chief Financial Officer of Paychex, Mr. John Morphy.

Sir, you may begin.

Thank you for joining us today for our first quarter Earnings Release.

Also with us is John Judge, our President and CEO, the teleconference call will be comprised of three sections.

A review of the first quarter fiscal 2007 financial results including comments and updated guidance for full year fiscal 2007, an overview and comments from John, and lastly, a Q&A session.

Yesterday afternoon, after the market closed, we released our financial results for the first fiscal quarter ended August 31, 2006.

This press release can be obtained by accessing our website at the Investor Relations page, www.Paychex.Com.

We have filed our Forms 10-Q and 8-K, I'm sorry, just a 10-Q this quarter, the 8-K was last, at the end of the year.

We have filed our Forms 10-Q with the SEC, which provide additional discussion and analysis of the results for the quarter.

These files are also 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 October 27, 2006.

Please refer to our website for access to all recent news releases, current financial information, SEC filings, and Investor Relations presentations, that will be updated in the next week or so.

Fiscal 2007 is off to a great start.

We entered the year knowing our first quarter comparisons would be challenging, due to the exceptional first quarter we experienced a year ago.

Our employees were up to the challenge, and we are pleased to report that we have exceeded our first quarter expectations.

We achieved record net income of 135 million, or $0.35 diluted earnings per share.

Net income and diluted earnings per share increased 17%, Payroll Service revenue grew 9.4%, Human Resources Services revenue increased 21.4%, and total revenue was up 14%.

Cash flow from operations increased 24% to 200 million.

We adopted the new Accounting Standard for stock-based compensation and recognized 6.5 million of expense in the first quarter of fiscal 2007.

We continue to leverage our business and invest for long term growth.

Our operating margins in the first quarter, excluding interest on funds held for clients and stock-based compensation, increased from 37% to 38%.

The first quarter is typically our high water mark for operating margins with a goal of continuous year-over-year improvement.

Operating income excluding interest on funds held for clients and stock-based compensation costs increased 14% to 163 million.

Slightly less than our long term corporate goal, but first quarter results were better than our financial plan, and our 15% growth goal is an annual one versus a quarter by quarter goal.

We are reaffirming our full 2007 guidance that we provided last quarter except for the inclusion of the effect of the federal funds rate increase on June 29, 2006.

The federal funds rate increases directly affect interest on funds held for clients, and corporate investment income.

I'll now refer to the consolidated income statement.

Payroll Service revenue increased 9% for the first quarter to 337.5 million.

This growth was driven primarily by client growth, price increases, and higher check volumes.

Ancillary services also reflected good year-over-year growth.

New hire reporting was up slightly during the quarter, and the economy continues to chug along, and we have not noted any significant weakness.

As of August 31, 2006, 92% of all clients utilized our Payroll Tax Administration services, and 69% utilized the Employee Payment services.

Human Resource Services revenue increased 21% for the first quarter to 92 million, and was right in-line with our expectations.

The growth was generated from the following, Retirement Service client base increased 13% to 39,000 clients, Client employees for our comprehensive Human Resource outsourcing services which includes Premier and our PEO increased 31% to 312,000 client employees, and Workers Compensation services client base increased 19% to 54,000 clients.

Additionally the asset value of Retirement Services client employee funds increased 21% to 6.6 billion.

We are no longer able to disclose actual revenue figures for Retirement Services Premier, PEO, and other service offerings included in the HRS revenue line.

The continued significant growth of our Paychex Premier service, which contains bundled pricing for the above service offerings, has made it virtually impossible to accurately compute specific service revenue product by-product.

To assist you in evaluating our HRS growth, we will include more client data on our investor website in the next day or so.

As in prior years, Human Resource Service revenue growth can vary significantly from quarter to quarter, and the results of one quarter may not be indicative of year-over-year growth.

Interest on funds held for clients increased 55% for the first quarter to 30 million.

The increase in interest on funds held for clients was primarily due to higher average interest rates earned, and higher average investment balances.

The average investment balance for funds held for clients increased 8% over year ago, and was driven by client-based growth, increased check volume within our current client base, and increased utilization of our Payroll Tax Administration services and Employee Payment services.

The increase compares to 11.4% a year ago, and the decrease is more due to nuances in our business compared to last year, than any indication of a weakening economy.

Our investment portfolios and the earnings from these portfolios have been impacted by the increasing interest rate environment.

The federal funds rate which was at 1% at June 1, 2004, has steadily increased to 5% through May 31, 2006, and is currently at 5.25%.

The increasing interest rate environment has positively affected net income growth.

The average interest rate earned on funds held for clients increased to 4%, from 2.7% a year ago.

Consolidated operating Selling General and Administrative expenses increased 13%.

The increase was due to our continued investment in personnel and other costs, related to retaining clients, promoting new services, and creating more efficient systems for selling and servicing through new and enhanced technology.

Our compensation expenses were also impacted by adopting SFAS 123-R related to stock-based compensation costs.

Under the new Accounting Standards, we recognized 6.5 million of stock-based compensation costs in the three months ended August 31, 2006.

Operating costs were affected by 1.9 million, and SG&A costs were affected by 4.6 million.

Total expense growth would have been 11% excluding stock-based compensation costs.

As of August 31, 2006, we had approximately 11,200 employees, compared with approximately 10,300 as of August 31, 2005.

Investment income net increased 94% to 9 million for the first quarter.

This was due to increases in average interest rates earned, and increases in average portfolio balances, resulting from investment of cash generated from our ongoing operations.

Our effective income tax rate was 31.0% for the first quarter ended August 31, compared with 31.4% in the prior year period.

The decrease in our effective tax rate is attributable to higher levels of tax-exempt income derived from municipal debt securities held in our funds held for clients and corporate investment portfolios, and a lower effective State income tax rate, partially offset by the non-deductible compensation related to incentive stock options.

Looking at the balance sheet, cash and corporate investments were 653 million at August 31, 2006.

We also had 431 million in long term corporate investments at August 31, 2006.

Our cash flows from operations were again strong at 200 million for the first quarter of fiscal 2007, an increase of 24%, or over 39 million from the same period a year ago.

Our total available for sale investments, including corporate investments and funds held for clients, reflected net unrealized losses of 11.6 million at August 31, 2006, compared with net unrealized losses of 22 million at May 31, 2006, and net unrealized losses of 11.9 million at August 31, 2005.

The change in the unrealized loss position is due to decreasing yields, that increased the fair value of the Company's investment portfolio.

The three year AAA municipal securities yield decreased to 3.54% at August 31, 2006, from 3.65% at May 31, 2006.

Our net Property and Equipment balance activity during the first three months of fiscal 2007, reflected capital expenditures of approximately 16 million, and depreciation expense of approximately 14 million.

Total stockholders equity increased to 1.7 billion at August 31, 2006 with 61 million in dividends paid in the first quarter of fiscal 2007.

Our return on equity for the past 12 months was 30%.

Looking at guidance.

The guidance is virtually the same as we disclosed last quarter, except for the inclusion of the increase in the federal funds rate.

Payroll service revenue growth is projected to be in the range of 9 to 11%.

Human Resources Services revenue growth is expected to be in the range of 20 to 23%.

Total service revenue growth is projected to be in the range of 11 to 13%.

Interest on funds held for clients is expected to increase approximately 30 to 35%.

Total revenue growth is estimated to be in the range of 12 to 14%.

Corporate investment income is anticipated to increase approximately 55 to 60%.

Stock-based compensation costs will be primarily included in Selling, General and Administrative expenses, and are expected to impact pretax net income in the range of 4 to 5%.

The effective income tax rate is expected to approximate 31.0%.

Net income growth is expected to be in the range of 13 to 15%.

Remaining unchanged, purchases of Property and Equipment for fiscal 2007 are expected to be in the range of 85 to 90 million.

Fiscal 2007 depreciation expense is projected to be approximately 55 million, and the amortization of intangible assets to be approximately 14 million.

Our projections are based on current economic and interest rate conditions continuing with no significant changes.

You should be aware that certain written and oral statements made by management constitute forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995.

These statements should be of value, in light of the certain risk factors, which could cause actual results to differ materially from anticipated results.

Please refer to our Safe Harbor statement on Page 3 of the press release for a discussion of forward-looking statements and related risk factors.

I will now turn the meeting over to Jon, who will provide his comments on the first quarter before we open for questions.

Thanks, John.

Nice job.

I will just add a few more comments on the quarter, and then we'll open it up for dialogue.

To reiterate what John said about management, we were very pleased with our first quarter results, and very proud of the people that delivered them.

We had impressive gains versus the first quarter last year, which was particularly rewarding, since we had a very tough compare and still produced strong results.

In almost all categories were we were on or ahead of plan, and that gives us great confidence in reconfirming our full year guidance.

The main economic indicators for us were all positive, we are ahead of plan, on last year on check volume, client based growth and new hire reporting both remained strong.

Client retention numbers and client sat surveys are excellent, and I'll share some of those results with you in a second.

Our price increases were put into effect and accepted without incident, due to the strong perceived value in our offerings.

Our key execution objectives were also very successful.

Our sales territories were covered, and quotas were out early.

Our kickoff meetings and the new fiscal year education programs were rolled out well.

The normal new year organizational changes were made early and settled in quickly, and as you can tell by our results, first quarter delivered at or ahead of plan setting up the year very nicely.

I'd like to make a comment on that point if I may, and it's based on some discussions John and I have had with many of you.

I'd like to reiterate a few points about our guidance philosophy.

We give guidance on a full year basis not on a quarter to quarter to quarter basis, we do not have four quarters that look exactly alike.

That is, we don't expect that we will have four quarters with the same margins, the same revenue growth, or the same op income growth.

Our performance is skewed throughout the year, and therefore so is our plan.

When we feel that we can't achieve our guidance we will change it and we'll have, and we've got over 10 years now of calling our performance on the mark, and in the few occasions where we felt like we needed to adjust it, we did, as we did last year.

Luckily most of the time that we have adjusted our guidance, we have adjusted it up.

An example of this would be our op income growth for the first quarter was 14% which obviously is below our full year guidance.

14% in the first quarter is absolutely excellent, and obviously it is ahead of our plan.

The same analogy would hold true for the rest of our metrics, be it revenue or margin or expenses, and so on.

We believe very firmly in the whole notion of doing guidance, full year guidance, and of being as transparent a Company as we can, and you can count on us to continue that.

Back to the first quarter results.

If you look at some of the operation stats I told you I'd mention on the client satisfaction, for the first quarter it was absolutely outstanding.

Our core client satisfaction, which are numbers typically our client satisfaction numbers are the highest in the industry, and the first quarter our client satisfaction for core client sat was up 2.5 points.

Our core satisfaction for our new clients, that's as we bring new clients on board, was up 1.5 points, and MMS, our overall client sat was also up 2 points, and our new client sat was up 2 points as well for MMS.

On the client losses, it total we're running way ahead of plan.

Over 1,000 clients under our plan in terms of client losses, and MMS also ahead of plan, so we are having a very strong, had a very strong quarter on client losses.

On staffing, we continue to make really good progress on employee retention.

If you'll remember that fiscal year '06 was an excellent year for us on that, and the first quarter continues strong.

Our payroll specialists and our sales teams are better than last year in almost all categories, and on-target to improve again this year.

Equally important, our tenure in the field is improved, particularly with senior payroll specialists and senior sales people.

That bodes very well for our productivity.

In terms of investments for our future, all are healthy and all are on-track.

On the international side, our Germany operation, we're ahead of plan for the first quarter and doing quite well.

Time and Labor Management has been up dramatically since we acquired Stromberg, and sales continue to do well in that division.

Health insurance which you have heard us talk about in the last couple of calls, which is a major opportunity for us going forward, we are fully staffed and we are charging ahead, and things look very, very good on the health insurance side.

MMS, Core, and HRL salesforce expansion, you know that we continue to invest in sales people in all three of those divisions.

We have for years, we did again this year, and we'll continue to keep putting more and more people into the field, as long as we see the opportunity to increase our productivity, and we still see that.

From a product development, the only thing I can tell you there, is we're literally swamped with requirements which is always a good sign, and our IT staff is performing extremely well.

So all-in-all, we're really pleased with the performance of our team, and very happy with our first quarter results.

The first quarter you heard me talk about this before, but the first quarter to me is such a very important quarter for a lot of reasons.

It sets the tone for the year.

Are you starting in a hole and chasing plan all year trying to catch up, or are you on-plan, or above and chasing records.

Are you working each day with a lot of confidence, or are you nervous about your ability to succeed or make your plan, and therefore you're cutting your investments, and cutting your headcount, and cutting your budgets, and so on.

You can see that in the attitudes of your management team and of your employees, so yes, it's about the numbers for sure, but it's also about a lot more.

People at Paychex have a bounce in their step these days and a smile on their face, because they've won in the past and they know they are about to win again, and because of that confidence they're setting new records every day, and I've got to tell you it's really fun to be a part of it.

With that, John and I would be happy to take any questions or comments you might have.

Very good.

We'll now begin the question and answer session. [OPERATOR INSTRUCTIONS]

Our first question comes from Greg Cappelli of Credit Suisse.

Hi, guys, it's Greg and Jeremy.

Good talking to you.

First question, just the SG&A spending came in a little bit below what we were looking for in the quarter.

Are there any areas you guys held back on maybe a little bit this quarter, or could we expect to see a pick up as we move through the year perhaps, and John, what you mentioned in the healthcare benefits offering area, something like that?

We have basically, didn't do anything unusual.

I think some people are a little bit higher on their revenue estimates, and a little high in expenses than what we had.

But expenses were right in-line.

Typically the first quarter is the best operating margin quarter, because that's when the price increase is still pretty fresh, and people tend to under spend a little bit in the first quarter, but nothing highly unusual here.

The one thing we had that's a little bit different this year, and it's causing a little bit of skewing from what we had in the past, is the investment healthcare thing, basically started strong in the first quarter, with a little more in the second, and that will be kind of balanced off as we start to get some revenue and some other things in the last half, but pretty much the same on SG&A, Greg, and we don't get any too major trend differences, but those are the few comments I have on that.

That's helpful.

Just one quick follow-up.

The Retirement Services employee funds growth was 21%, and that outpaced growth in the Retirement Services client base, I think it was 13.

What's driving that?

Well, the funds thing is where the market goes, and it can go up or down.

Okay.

We put that number in there because it helps you people when you're trying to understand where we're getting off basis points, but that number bounces all over the place.

And then just finally, are you still I think you mentioned 6 to 7% before for salesforce growth in the core payroll.

Is that still the goal?

Approximately that.

I think that's all disclosed and you can compare it to the prior year on our investment website.

Okay, great.

Thanks a lot, guys.

Next question from Adam Frisch with UBS.

Hi, guys, it's Steve Stout for Adam.

John, you guys had a pretty strong quarter, and you raised your float and investment income guidance, but you kept your net income targets unchanged for the new year, and I know that you said that there is some variance in your quarters.

Our guidance was 12 to 14%, and we changed it to 13 to 15.

I apologize about that.

What I'm trying to get at is are you really just sort of playing in the ranges here, when you were thinking about your income for the whole year, your float income for the whole year, you know?

I think last quarter you said once you get to 15%, you're sort of reinvesting, and you start to reinvest in the business.

Where are we there?

That's 15% without float income.

Float income is float income.

We don't invest or change anything really, based on what that's doing.

Right but it seems like you're almost bumping up against that top end of your net income guidance range, and then last quarter you said once you get up to about 15% on the bottom line, you'll start thinking about reinvesting in the business.

I kind of wanted to get to some color on, are you there yet, or are you starting to think about increasing your investments in the business?

This is Jon.

Let me go back to the philosophy statement I made earlier, and that is that we give you full year guidance.

We just had a quarter of first quarter that was a great quarter, and we're really happy with it.

If we saw anything in the first quarter also taking into effect what we think is going to happen in the next three that would cause us to change the range, we would change it, so what you ought to assume, we changed it 1 point based on what was happening in the float market on the total.

You should assume because we left it where it is, that our belief, our best estimate with where we are today, is that we're still inside that range.

That would be reasonable for you to assume that we moved up in the range, because we moved the range, but if we see something in the next quarter that causes us to believe the full year is going to move, we will move it with you.

We've been a very transparent Company, and we are going to continue to do that, and you should just assume that we're off to a great start, and by reconfirming our guidance we're telling you that we still think we're inside that, and there's three quarters to play yet, and the minute that we see that's going to change, we'll make that change, and do it with confidence.

Okay so no additional sort of thinking about making additional investments now?

Actually we have pretty aggressive investments in this years plan and coming out of the first quarter, while we see a lot of things, the real time that we get a real good look at the year, is when we get to the January selling season.

So, it would be too early to do what you're talking about.

And John, your sales Commission costs or your sales bonuses, were those, did those trend pretty much in-line?

I think you said you thought that they were going to be pretty good.

We wound up, you know, a year ago our salesforce just had one of those once in five years or once in ten year years, although we've given it challenging goals this year but compensation, a lot more people went over quota last year than we anticipated, and we made some minor changes to the compensation plans.

We don't expect the situation we had last year to reoccur.

Okay.

And about how much of those bonuses are going to SG&A?

How much of that sort of bonuses are going to SG&A?

How much of that sort of -- I'm sorry?

They're all in SG&A.

About what percentage?

I wouldn't even know.

Okay.

It's not that material.

Okay.

Next question comes from Pat Burton of Citigroup.

Hi.

Congratulations on the quarter and start to the year, guys.

My question is, could you provide us an update in terms of the healthcare benefits area, in terms of like, direct sales reps, people in the telecenter, and how you're growing that business, and maybe the productivity you're seeing there?

It's in the beginning stages.

Obviously we spent a lot of time in the last couple of calls talking to you about the market, and why we thought the market was an exciting one, why we felt like we were a perfect fit for that market, and the fact that we raised it in terms of importance, to probably the top slot right now in the investments that we're making.

In the first quarter which was this was the year that we decided to put a full court press on it, and we released a lot of hires, Tony Tortorella who is running that part of the operation for us.

Tony is almost completely staffed at this point.

I mean, we're 100% staffed with the inside team, and we're about 98% staffed on the outside, so we're almost at full strength already through the first quarter, and that initiative or that effort is going well.

And you finding any initial pushback or any new complications in there, Jon, or is it pretty much as planned?

It's pretty much as planned and we're not seeing issues with it, and quite frankly, I believe that once we get this up to strength and moving forward, that we are going to have, at least it's my belief that we are going to have very significant forward momentum.

Okay.

Thank you very much.

Next question comes from Rod Bourgeois of Bernstein.

Hey, guys.

You're talking about being ahead for the quarter and I'm wondering, can you isolate the ahead of plannedness into the core payroll and tax business, or in the sort of the ancillary services, or is it just really across-the-board?

It's a little bit across-the-board.

I mean, we're ahead of where we are, and we planned pretty closely so anything we get over is usually good, but I would say that the economy has been reasonable.

We haven't seen any signs of weakness.

I wouldn't say it's got any momentum attached to it, but everything was pretty much close to where we wanted it to be, and we just got over each one of our goals a little bit, which is typically what we do, because we have a lot of people executing in an awful lot of areas.

Alright, and can you elaborate a little bit more on the economy?

Can you specify what new client, or new hiring activity was in your client base, and if you're seeing any shifting around with small business formation, or client churn, or anything related to the economy of note, or is it just really sideways?

We look at a lot of different pieces of it.

Obviously we look at the hiring part of it.

You've seen the statistics that were released by the Bureau of Labor Statistics, and there were modest gains.

I think they look for something in the neighborhood of 150,000 new job creation, non-farm job creation to be a healthy economy, and they were running probably 10,000 or 20,000 below that.

We look specifically at the small and independent intermediate business.

We got a pretty large sample set with 550,000 clients or so, and our clients the two things we look at, that give us indications, are what's the churn inside the client?

Are our clients, are the employees in our clients are they going down, or are they holding flat, or are they rising?

And then what's happening with the new hires inside of our clients, and in both cases, both the stability of the employees inside the clients, and the new hires have been positive for us.

Now it's not outrageous.

You're talking about, you know, you are talking about plus 1%, or plus 1.5% sort of a thing, but that in itself is a positive thing for us, and we look at what's happening with our check volume, and that as I mentioned earlier was positive, so the things that we look at that are important to us have all been fine.

We don't have a crystal ball that's any different than yours, relative to what's lurking out there in the future, but the good news for us, is as we look at the things that are important to us, in the first quarter they were all positive.

Okay, great and last year you did increase your investment in payroll specialists per client, and I'm assuming you got a return on that in the form of lower client churn.

Is there, or are there plans or any plans this year to sort of change your strategy relative to the investment in the payroll specialists?

Is it status quo, are you going up, or are you going down, given the return you got on that last year?

You were right in the first thing, right on the money.

Our returns come in two areas.

They come in the improvement in client losses, or client retention and we did see that, and it comes in the improvement in client satisfaction, and the client satisfaction is very important to all companies.

It's extraordinarily important to us, because I'll remind you that our sales operation is largely a referral sales operation, and some fairly significant amount of our new clients get referred to us from existing happy clients, so those are two really important metrics for us.

The investments that we're making this year, we will stay on par.

As you can guess with the type of Company we are and how disciplined we are in our operation, we use very strong metrics on clients that are covered by payroll specialists, the number of senior payroll specialists we have in the field, because obviously they are far more productive and do a better job for us than the new hires by and large, and so our focus this year is to continue to watch the productivity of our field force, to make sure that we have the proper staffing in our branches, so that we can provide superb service to our clients, and therefore get the referrals that are so important to our future business.

And the main thing I think you could say we're looking at this year, is we are continuing to push to insure that we have more senior people in the field, because that tenure is very, very important to our productivity.

Great.

Looks like a good start.

Thanks, guys.

Next question comes from Elizabeth Grausam with Goldman Sachs.

Just on some of the other investments you were making last year, and it sounds like you are continuing first quarter, can you update us on the German market?

I think you were at four cities by the end of the fiscal year last year, and where you are in that initiative?

Germany initiative continues to go well.

Again, I'll remind you that that's from a relevance, or a significance to our business.

It's still in the early stages, but it continues to go well through the first quarter.

They are significantly ahead of plan, on both units and on revenue, so I mean, we're very pleased with where we are in Germany, and the expansion in German has gone well, and we're going to stay focused on that.

I will remind you though it's an investment, and the way that we look at an investment like Germany, we can afford to spend so much money to drive that investment, and so that sort of gates how fast we go, and given the investments that we put in Germany I would have to tell you that we are very happy with where we are.

Great and then your accelerated hiring in the fourth quarter on the sales side, what are your expectations now starting off the year?

It sounds like from a very strong point for new client growth for the full fiscal year, what maybe had it been in the first quarter?

We are hoping that we're going to keep moving towards a goal of getting to 5.

Last year we were at 4, and it's well too early to decide what that will be.

But you feel good that 5% --

5 would be a goal.

Do I think we'll get to 5?

I would love to get to 5, but do I realistically believe?

I think it's just going to take a while to keep getting there.

Lastly on your time and attendance, you had great momentum in that business last year, more than doubling.

Is it still on that same trajectory of growth?

It is.

The expectation we won't obviously have expectations to double it every year, but that's a business that I think when we first acquired that Company, it was doing a million dollars a year, the first year with us it did almost 7, and second year it did 14, so you know, we're going to be on that kind of a trajectory, and we are going to continue to make the investments required to get it there, so that's a business that we think realistically, could be a 50 to $100 million business for us.

Wonderful.

Thank you very much.

Next question comes from T C Robillard of Banc of America.

Great, thank you.

You guys obviously saw really good year-over-year margin improvement on the operating line, and you talked about some aggressive investments on the healthcare side in the first quarter, and that tapers off a little bit in the second quarter.

Is it reasonable to assume some good year-on-year gains continuing on the operating margin side, or are there other investment opportunities that you guys are going to take advantage of, as the healthcare kind of tapers down and get into more sales mode with that business?

You don't hear quite what I said.

The healthcare investment will actually be heavier in the second quarter, than it was in the first.

Let me get at your question though.

The way we think about it may help you.

When we think about operating the Company and the investments we make we have a couple of different philosophies.

One, we believe that all well managed companies will devote the majority of their resources to their current period operation, but will always carve off some part of their resources, to work on investments that will help them in the near term 1 to 3 years, in the intermediate term 3 to 5, and in the long term past 5, and we do that with discipline, but it starts out like most other areas of our budget.

We start out the process with an assumption of how much money we have available to us to invest, and still produce great results in the quarter and the year, and then we go and rank our investments against that available amount of money, so it's a much more I think disciplined approach than maybe we've led you to believe, and so we always, you'll never find us making investments that are going to tank the current year, just because the investment is great, and if we ever saw one that was so phenomenal that we felt like that was something that we needed to do, we would do it obviously and we would tell you what we're doing and why we're doing it, but we used a pretty disciplined approach.

So what you should expect is when we give you guidance on the year, that's priority #1.

And if we can drive past that, then we will start to look at whether or not we think we can afford to put some more investment dollars into some of the investment scenarios that are in front of us, but for the most part we start the year out with a pretty disciplined view about what our P&L ought to look like, and what available dollars we have for investments.

Next question comes from Kartik Mehta of FTN.

Good morning.

John, question on the new legislation for the 401(k).

Do you think there's any, a positive or negative impact, that could happen for Paychex because of the new legislation?

Positive, yet I don't think it's dramatic, but one of the things we've always tried to do is get more employees in the plans.

These new rules which allow you to put a person in without them opting in, and you can assume they are in, versus opting out, will help us, I don't think it's dramatic, but we like to get help everywhere we can get it, and that is some good help, but I don't think it changes the universe too big.

And John, in the past, the billion dollars in cash you have, your druthers has been that you will increase dividends, rather than doing a stock buyback, or doing any type of special dividend, is that still the thought process?

Well, you have to remember you can get my opinion, but on those items, that really is the Board's decision and per view, and obviously we look at the dividend almost every October, and we'll be looking at it next week when we have our Annual Meeting.

My preference is still the dividends, I don't like special dividends, but at the same time, I do recognize that the cash starts to mount, and I can sit here and say well, we didn't get there yet but if we were successful as I think we'll get to, the cash is going to keep mounting, and I don't think just adopting a pure posture of the dividend quite where it is will be the answer, but it's still a little bit early, and we like to have the cash, to create some great opportunities, and when you look at buying stock back, the pluses and minuses are just not overwhelmingly in favor of doing it, but we continue to look at it.

And last question, John.

Any thoughts about changing the duration of the portfolio, or changing the portfolio in any way, as we might be nearing the end of interest rate increases from the Fed?

Probably now starting to extend it a little bit, and we have an Investment Committee meeting in November, but again our goal here on interest income is to stabilize where we can.

You're not going to see us get back into the gain and loss game, because of accounting rules, and float income is going to be kind of where it is.

I don't see us putting hedges on.

If you hedge wrong you get hit and when you hedge right you generally don't get much for it, but we probably are taking out the duration out a little bit as we speak, in line with what you are talking about, Kartik.

Next question comes from Tim Willi of A.G. Edwards.

Thank you, good morning.

I had a question about M&A and then a follow-up, the first question about M&A, looking at your HR services businesses, you know, beyond payroll kind of stuff, but just curious for your thoughts on, if there are businesses that you're not yet in, or you're debating internal development versus acquiring businesses where you don't have the a geographic presence, or maybe the scale or competency yet, and again pondering do we invest internally, or look for an acquisition, and what those may be?

The M&A piece and we have talked about this before, the M&A piece is absolutely an option that's in front of us.

We clearly have the cash on our balance sheet to execute if we find something that we like, we have got tremendous currency in our stock obviously, if we wanted to go that path, so we have with the wherewithal to do it, and we are clearly inclined towards the M&A route where it makes sense.

We have a function inside of our product management team that spends 100% of their time looking at different businesses and different offerings, that might be helpful to our client set and therefore to us, so it's an important part of how we think every day, and as you can imagine with the type of firm that we are, where we have an established distribution network to 550,000 small businesses, literally anybody who has something they want to sell the small business, and it doesn't have the distribution wherewithal to get it to market would normally come to us, so our deal flow, if you will, in terms of knowing what companies are out there, and what offerings are available is actually quite excellent.

With all of that said though, we're pretty disciplined in our strategy about sticking to our knitting, and staying in the areas where we have competence, but we look at things every day.

We were in a meeting yesterday where we went through two, somewhat interesting opportunities for us, and when those things get to the point where we believe that we're going to do them, then obviously we'll make that public.

Until then, it's really not to our benefit to talk about it.

Okay.

And I appreciate that, and my follow-up question was I was just curious if you could give any kind of update on the actual performance, or just a thought process around the PEO and the Premier business and the State of California now that that's obviously become a much more attractive market, to maybe move some of those businesses into more aggressively?

Our philosophy hasn't changed.

Our philosophy is one that says the Premier business is obviously a very strong primary element of our strategy both present and going forward.

We believe that the bundle approach is very attractive to our clients.

We believe that the offerings inside that bundle are attractive to our clients.

We've made lots of modifications to the portfolio of offerings inside the bundle, and in some cases unbundled, some of the offerings for clients that wanted a piece of the bundle but couldn't really justify the whole bundle, and that whole strategy continues to be one of, a strong element of our overall strategy and strong going forward.

The PEO is a very disciplined world for us.

It's one where we have gotten very good results out of it, and we're very happy with the business that we have in the PEO, but the PEO business if it's not managed with great discipline, it's our belief anyway, that it could provide substantial risk, and so in the PEO world, where we find opportunities that are good growth opportunities, and are inside the umbrella of the risks that we're willing to take in that business, we absolutely will jump all over it, but it's not a business that we have got or that we've got great growth targets on, and are willing to take risks with some of the players that might be looking for PEO solutions, so the philosophy is not any different than it was, or that it's been for the last year or so.

I guess I'll leave it at that.

Okay thank you very much.

Next question comes from Dave Grossman of Thomas Weisel Partners.

John, you talked about in your prepared remarks about the float balances, that growth rate deccelerating, and that being a result of some nuances in your business.

Can you maybe describe that it in a little more detail?

Where the 15th of the month falls, we had, we have years, believe it or not, the calendar gives you favorable timing, and the calendar can give you unfavorable.

A year ago in the first quarter we had all of the favorable timing, and in one year it switched to unfavorable.

The reason I put that comment in, and even though you'll look at that balance, and you look at anything you can find on the economy, and the float balance going down, to me, wasn't related to the economy.

It's also the growth in our ancillaries like Tax Pay and Employee Pay.

Each year they get a little bit less.

Employee Pay doesn't get too much less, but Tax Pay is at maturity, so I don't think that was any indicator of the economy doing anything.

So is your target still 10% for the year?

Yes, but you know if something happens I can't control it.

Right.

And then I guess, Jon Judge, in talking a little bit more about health insurance, as you're kind of ramping up, it sounds like you're pretty much kind of where you want to be from a sales capacity perspective, so when these folks are going out to market, what is the core value proposition that they're marketing right now?

If you look at the market itself, the market, and we're talking about primarily small and intermediate businesses, the distribution channel that goes to market today, are independent agents.

When the independent agents are making decisions about who they're going to call on today, they start with the largest companies, and move down as you would guess.

So the market itself is sitting there with a large number of small businesses, that are probably at the tail end of the priority list, in terms of getting called on, or getting handled by the independent agent channels, so from our standpoint, it's an underserved market.

We are talking to these clients anyway, you know, in the average year, we'll bring in 120,000 new clients, and so we'll talk to twice that number, or slightly more than twice that number, on our way to the 120,000 or so new clients.

So we've got very broad coverage as it exists today.

We're talking to the clients anyway about payroll.

It's a very simple question for our payroll team to ask if the client is also interested in health benefits and if so, we switch them into our health benefits sales team.

So it's like the rest of the Paychex business model.

It's going to be a referral model, and the differentiation for the client, it's sort of a 1-stop shop, but more importantly, we're chasing down the insurance and taking care of the effort for them, versus them having to chase down the agents, and trying to get them to get coverage for them.

So, like most things in the economy, when you only have 8 or 10 or 12 employees, most of the business-to-business models that are out there, they're trying to figure out how to talk to their clients that have 1,000 people, or 5,000 people, and not very many of the business models, business-to-business models are actively set up to go and talk to very small clients.

Well we are, and so we think just like it gave us a tremendous advantage when we started selling Payroll, we believe the same thing is going to be true when we go to sell insurance benefits.

And what is the incremental investment in the second quarter with the sales set being pretty fully staffed right now?

What is the increment that comes in the second quarter?

It's probably bigger than a million but not much bigger than that.

But enough of these percentages move pretty dramatically sometimes by a small amount of money in the quarter.

Right and actually just I know this question has been asked a couple different ways, in terms of the investments, but if my math was right last year, it looked like you took, you know, the upside and some of that got absorbed in incremental spending, and I don't know if last year was just a really big year, where you spent a lot of these incremental initiatives, but it looks like this year at least in the first quarter, and again maybe it's early to your comments previously, but it looks like you let it flow to the bottom line in the first quarter, the upside from the higher rates, so should we take from that that last year was a really big investment year, or you're just comfortable with where you are going into the second half of the year, based on the accelerated investments you made in fiscal '06?

You should take what I said earlier.

We have a very disciplined approach to the way that we set up our financial plans and how we drive our performance, of top priority will be making the guidance that we put out to the marketplace.

If it turns out that we're having a year that is better than guidance, we will make decisions at that point, as to whether or not we want to reinvest some of that additional profit back into the business, or flow it to the bottom line, but to start the year particularly in the first quarter, you ought to assume that we are on-target to make our guidance as we told you, and that the investment set that we talked about there, are inside of our plan.

Thank you.

Next question comes from Brandt Sakakeeny of Deutsche Bank.

Thanks, I'm actually all set.

Nice quarter guys.

Next question comes from Tien-Tsin Huang of JP Morgan.

Just a follow-up to the last question.

Is there anyway you can help us quantify roughly, the costs or investments related to ramping up the health insurance and retirement initiatives?

We don't normally disclose those things.

You can assume it's not monstrous, but if we talked about it, it's significant but I think we give more guidance than anybody gives on a line by line item, and that's what we would rather you paid attention to, than trying to figure out every single element inside that guidance.

Fair enough.

I was just --

That's okay, I know.

How about on --

Sometimes you like to ask, and sometimes I like to not answer.

Obviously you can ask us anything.

How about on a cumulative basis, just give us order of magnitude how much has gone into the initiative?

Well basically when you get these initiatives, I'll talk about it a little bit differently than the amount.

What typically happens at Paychex is we do something like we did a year ago, and it's some money, but it's not big on healthcare.

Some but not a lot.

This is the year, we got to grow our salesforce, and we have got to get a salesforce launched across the whole country, which means about 60 or 70 people, and we get almost no revenue.

So once you get those guys moving, which takes you a little while to get there in the second quarter, they will all be moving, so the biggest year for us is the first one.

And then the second year, you start getting revenue, but you know, we're greedy so we like to grow the salesforce almost as much again.

Now we may or may not do that, because getting to 2 people in a city, still isn't a lot, so in the beginning you got that going on, so what happens though is once you get to about 2 or 3, probably year 3, the number isn't too bad because you got some revenue coming from it.

But we talk about these growth opportunities, because we know we have to start them today to get something material 3, 4, 5 years out, and our business is so big with this recurring model that something new, it's hard to get it to have a big impact short-term, so the good news about our business is we look out 12 months, and we know pretty much where it's going to be, but the bad news is we can't change it too much even if we wanted to, but fortunately we've got a great Company, great execution on our people, and a very strong recurring revenue stream, that keeps us getting the results that we get.

Understood. is there anything that you can think of in the next couple years that could be as large that would be new, on the back of health insurance that could be, in terms of the future investment?

Several things that we're looking at, and once they get to the point where both their pro forma and their strategic importance to us passes the test, and we decide to actively invest in them, at that point we'll talk to you about them.

Great.

Thanks, nice job.

Next question comes from Bryan Keane of Prudential.

Hi, good morning.

I'm in an airport, so I apologize for the connection.

Jon Judge, I've asked you this before, but I just wanted to go over it on pricing.

I'm surprised you guys can't push pricing a little higher since retention keeps improving.

It feels like you have got some leverage there.

Have you thought about doing that?

Yes, and actually I should assume that you're going to keep asking me until I get it right.

Well, it just seems like if you went up a point or two, I don't know.

You would know more than I do, because you guys do the studies, but I don't think it's going to move retention much.

So why not be a little more aggressive?

There are very active debates in our Company every year around pricing.

It's know the something that we do casually.

There's a fair amount of market research that we do.

The debate is always led by our product, the head of our product management, by the name of Steve Beauchamp, and clearly Walter Turek is on top of it, and representing the salesforce, and Marty Mucci representing the Ops team.

It's an interesting discussion, I'm sure you'd love to be a part of it, just to see the debate that goes back and forth, and we try to land on the optimum scenario that will allow us to improve our revenues, hopefully in-line with the value that we put into our product set, yet still keep our customers at an extraordinarily high level of satisfaction, because as I mentioned earlier, because we're in a referral model, some seven out of ten clients that we bring each year comes to us referred, it is vitally important that we keep our clients extraordinarily happy, and that we keep the important channels that we use extraordinarily happy, particularly the CPA channel.

Just remind me this past year, it was about 3.5 price increase?

A little bit north of that.

Okay.

And then just finally, the health insurance initiative.

Just trying to figure out when you guys think that might have a material impact on results.

Is that a year or two out, or what's the timing on that?

Define material.

20 million or more.

In revenue?

Yes.

Oh.

I hope year three but I don't know.

The effort we're putting in there, we better get to 20 million pretty quick.

I think, what I was going to say was, Jon on prior calls has said that he felt like it would be material probably in four to five years.

The way that I look at the insurance business if we have read the market right, and I think we have, if we've read the weakness in the distribution channel right, and I think we have, and the market doesn't even change, and by the way I think it will change.

I think there's going to be continued pressure put on through the political process, to drive more and more availability of health benefits to all workers in the U.S, but if all of those things happen the way we think that they are going to happen, and our go to market strategy is as strong as we think it is, I believe that we're going to see exponential growth in that business for probably the next ten years.

Okay, great.

Thanks guys.

Next question comes from Gary Bisbee of Lehman.

Yes, hi, guys.

Couple questions.

Jon, you mentioned in your prepared remarks a statement about as being transparent as possible, and I'm trying to tie that together with not breaking out the revenues by segment anymore.

I understand the bundling makes it challenging, but could we get a little more color on why you made the decision, and why now, and then also are you planning to provide a revenue break out at least on the payroll side, by core versus major market?

First I'll go to core versus major markets, doesn't make any difference anymore.

Basically they are just offering a platform solution to a client.

You start off and you think it's size-oriented, it is somewhat but it's really based on sophistication.

A third of the clients who go from MMS come from core, and this has reached large numbers, so it's really just payroll business and some of it is smaller clients but when you start talking about a range of 1 employee to about 500, and we have more than that, and we're very good at it, that market is kind of is the market.

I mean ADP kind of breaks it out that way too.

On the HRS, I would have loved to continue it, but I've got so much bundled pricing, and some clients taking things and some not, sometimes when they don't take them the price gets reduced, sometimes it doesn't, I couldn't come up with, I don't have the numbers myself, so the reason I didn't give you a number, if I had the number I would give it to you, but I don't have the number in a meaningful way where it means anything.

I think actually we've given you better data, because we've given you some more client data, and I think the client data really more properly reflects what's going on.

An example of that is we changed our pricing scheme a little bit on Premier a year ago, which is one of the reasons why the growth in HRS went down in this year-over-year, a tough comparison to the change in the pricing structure, so the revenue growth looks much greater than the work site employee growth, when really the work site employee growth is the better indicator, so we think we've given you good indicators, and would love to give you the revenue number, but I don't even have it myself.

Any thought to given the big pricing differential between PEO and Premier breaking that out anymore, or should we just assume that the vast majority of the growth there is coming from Premier, and not at all from PEO?

There is not a significant price difference between Premier and the PEO.

It's just because we account for them basically the same.

The difference is the PEO is really just our Premier offering in the State of Florida, so we don't give you Texas, we don't give you Louisiana, but the PEO growth isn't as good as the rest of the country, because in Florida, I won't say PEOs are saturated, but the market share of this business that's been take earn in Florida is much greater than the rest.

It could be, you could have 30% of the market gone in Florida, you might have 1% of the market gone in the rest of the country, so most of the growth will be in the Premier side of the other 49 states, but it's still good down there, but it's not going to be as high as the other one, because they are in a whole different place.

For example, we've been very active and aggressive in that market now for over ten years in Florida.

I wouldn't say we've been active and overly aggressive in the rest of the markets in the country for more than two or three years.

Okay and then if I remember correctly I think last year, you had around a $7 million Workers Comp cost adjustment, that boosted the revenue in the PEO and HRS segment, and, you know, was there another one of those this year, and if not, it looked like if you back that out, you really would have been more like mid-30s growth in HR services, which is an acceleration from the last couple quarters.

Is that something we should expect the next couple quarters?

The Workers Comp situation has finally cleared and clarified itself.

We changed our accounting slightly, to be not quite so conservative, and we have a better estimate on what claims are going to be through more activity.

We gave you the guidance on the HRS business for the year.

It's 21 to 23%, and it might bounce around a little bit, but I think it's going to be pretty close to those numbers.

Part of that is because the business is getting bigger.

We're going to be at or a little over, be around the 400 million mark, and that's starting to be a pretty substantive business, where getting growth to 39 or 40% in the quarter just isn't going to happen.

But is it the right way to think about it that it would have been 34% growth, excluding any of those insurance cost adjustments?

No.

I'd look at what we had.

We're 21 to 23, and that's what we think is going to happen.

Even in this quarter?

21 to 23 in this quarter, and the guidance for the year is 21 to 23.

Okay.

Option expense is a bit lower than we thought it would be.

Is this a good number to project forward, or would you expect there to be some higher in the remaining quarter?

It could be slightly different, and that depends on what our option activity is for the rest of the year.

Okay.

But I mean ballpark, is this a decent number?

Again I would go by the guidance.

Okay.

And was then 4 to 5% the number I think you gave last quarter?

Yes.

Okay.

And then lastly, I guess you're not buying back stock, so that the way to think about the share count being down slightly, was just a lower average share price during the quarter?

Yes.

Okay.

Thanks a lot.

Next question comes from Mark Marcon of Robert W. Baird.

Good morning.

Nice quarter.

I was wondering with regards to the health insurance initiative, how many markets are you in right now?

We have it in all of our cities, and I think that we've got almost 300 health carriers already.

And how many health carriers?

About 300.

Excellent.

Providers.

Yes.

Because it's very regional.

I mean, if you're in Boston, you better have three or four in that city, because you have got to have all of the major ones, and unfortunately they aren't all the same.

They vary all over.

Okay and that incremental million dollar cost that's going to come into this coming quarter will be for what?

I said approximately a million.

It's the salesforce will be fully staffed in the second quarter, whereas it was not quite fully staffed in the first quarter, and you're getting into, you know, a pretty small number.

Okay, great.

And then with regards to the Retirement Services within HRS , what's the number that we should, you know, use clients or should we use funds, in terms of thinking about what the growth is looking like?

Well don't look at funds.

Funds is a Stock Market and yes, I wouldn't use funds.

You have got to use the client growth.

Okay so use the client growth so that was in the teens.

Any impact as yet from the change in terms of the model, or is that yet to come?

They're off to a good start.

We are very optimistic, and we think it's going to be good, but there's two things we've got going right now that we're going to know a lot more in about 12 months.

That's the 401(k), and the good success we're going to have in these multiple funds and healthcare.

We're early in both of them, and we look at good results and I'll let John make a few comments on those, but I think we're in the early stages, and things look real good and only time will tell.

Do you understand what he was talking about with the multi fund?

Yes.

That was the nature of my question.

I understand the change in terms of the model, and then what I was wondering about was, when we would expect to see an impact in terms of a change in the growth rate with regards to Retirement Services.

To build through the year, and it will really come in two ways.

The big change obviously is the fact that now we have the ability to essentially handle any equity-based 401(k) plan.

Where in the past when we brought customers into the fold, if they wanted to go with the five providers that we had and a fixed menu of funds, normally I guess 8 or 10 funds per provider, then they would could switch their 401(k) over to one of the ones that we did the bookkeeping on, and they would have the benefit of having the same company do the record keeping on their 401(k), as well as do the payroll and obviously those two are very closely aligned.

Right.

But the new world now, we are able to take on literally any equity-based 401(k) plan, so the two areas that we expect that it will come from one, when we bring new clients into Paychex for their payroll business, if they have a 401(k), they will now be able to switch it over to have us do the record keeping to keep the exact same funds in the same providers, and so that's one source, and then the second source is the conversion of the existing clients, and again it's on the premise that it's easier for the client to have one person do both their 401(k) record keeping and their payroll.

That's the point at which I said, we will know a lot more in 12 months.

We know what we think is going to happen.

We know why we think that the value proposition is a compelling one for our clients.

Most of our thinking comes from market-based research, that is information that we got from our clients and we've obviously believed it, because we made the investments to get ready for it,

And so now we've rolled it out, and it's very early on in the rollout, and as soon as we have material information for you about how it's going, we'll give that to you either in numbers and facts, or just give you an overview if we choose not to share the numbers with you, but right now, it's still early to tell whether that's how fast that's going to tick up.

We obviously believe it's going to tick up pretty well.

So it's early in the rollout but it has been rolled out at this point, and I assume there's probably also a little bit of seasonality with regards to how that may end up coming to fruition?

Correct.

Same as it is with Payroll, right?

Yes.

We still do somewhere in the neighborhood of 23 to 25% of our new sales in the month of January, because on the calendar, it is a convenient time for a lot of people to make the switch over, and the same thing will get you there.

Super.

And then with regards to MMS, I know you're not breaking that out, and I know that it's two separate platforms, but in general, would you say that that, is that platform continuing to grow at a fairly rapid rate?

Platform being the MMS business?

Right.

Yes, the MMS business actually in the first quarter was the strongest that we had in all of our businesses, so the business, it's a good, it's a very good business for us.

You know, we are on the very positive side of momentum in that business, our offerings, the strength of the software sold as a service, the MMS platform, the strength of that has dramatically improved in the last two years, customer satisfaction in the MMS world has dramatically improved, and is the highest in our business, so I mean, everything across the MMS business right now is very, very healthy, and we're obviously thrilled that we decided to get into it, and obviously the customers are thrilled that we decided to get into it.

Super.

And then last question just on the salesforce.

I know you started hiring ahead of schedule last year, last fiscal year.

When would you expect to be at the full targeted salesforce range for this year, and then, you know, how would you say the productivity of the new folks is, given some of the new programs you put in place, in terms of being more selective about who you hire?

We are essentially at full staffing on the sales side, and the things that we did last year, you should think of that as being engrained in our go to market processes now.

We will always to the extent that we can afford to do pre-hires in the fourth quarter, we will do it.

When we set our budgets for this year, John put some money in the budgets to allow us to do pre-hires in the fourth quarter, so you ought to assume that we're always going to do that, and that's a fairly simple philosophy, right?

Our covered territories are going to produce more than non-covered territories.

We'll keep the emphasis that we have on trying to drive ourselves toward more tenured and more seasoned sales professionals, because the reality is that people in our type of business, again, it's a referral business.

The longer you're in territory, the deeper your relationships are with both the clients in territory that refer for you, as well as the CPA's in that territory that we brought to you, the better you're going to do and all of those things are natural things to do, and we'll keep the pressure on that forever.

Great.

And I think we'll probably end up seeing the true results, in terms of whether the productivity has improved, is when we get into that key selling season, right?

Well, I think you have seen that the productivity is already improving.

We had the best selling year that we've had probably in five to seven last year, and most of those results happen in the following year, so a big part of why we had a strong first quarter this year, is because we had such a phenomenal selling year last year.

Yes.

Same thing is true on both the client retention side, and the customer sat side, relative to our payroll specialists, and the work that we're doing on that side.

The better job that we do with keeping ourselves fully staffed, and having as many senior payroll specialists in the field as we can, you know, those types of things will lead us to low customer attrition numbers and high customer sat numbers.

Terrific.

Thank you very much.

Next question comes from Charlie Murphy of Morgan Stanley.

Thanks gentlemen.

Can you give us an idea of what to expect from the new client data in HRS, that you expect to provide over the next day or so?

We gave it to you right in the 10-Q.

It's in the press release.

We gave you the number of 401(k) plans, and we gave you the work site employees, and gave the number of Workers Comp finds.

Okay, thanks.

Next question comes from Sanil Daptardar of Sentinel Asset.

Hi.

Could you talk about the client growth?

Is that in the press release?

Core payroll client growth once a year.

Okay.

And the price increase also of once a year basically of 4 to 5%, is that correct?

[24]% and it goes in every May 1.

And the high check volume that we talked about, can you talk about what was the check volume growth?

We don't disclose check volume growth.

Okay, thank you.

Next question comes from Glenn Greene of ThinkEquity.

Thank you, good morning just one more question.

At a high level could you just walk through the business model for the health care initiative?

Is it a commission on the annual premium?

Is it a renewal, and some sense for the commission rate?

The way that it will work, I mentioned earlier that part of the way the strategy will flow out is again using the referral model, the difference here is that the referrals will come from our existing sales teams, the coverage that we have in the field with clients, and then refer into, and refer into our health benefit sales team.

Obviously we'll be hoping that we will get similar type referrals from the CPA community.

The way the sales model works is the salesforce for the insurance team, will operate in many ways like the rest of the salesforces in our Company.

There will be a hunting salesforce, they will be paid to capture clients, they will be paid on the capture of clients, the retention of our clients, of clients in our business model largely falls to our operations team, not our sales team, and so the payment, the commission payment happens once, and it happens at the capture of the client.

In the insurance world, the insurance carriers, you know , obviously they pay you a premium for the capture of the clients, and then every year thereafter, they pay you a smaller premium for the retention of those clients.

Those dollars will continue to flow into Paychex, and will essentially fall to the bottom line.

So you get something like 4 to 5% on the first year premium, and a couple percent on the second year that kind of thing?

No.

We believe it's going to be the same percentage year-over-year, and we hold our fingers a little bit, but healthcare has got about a 9% price increase, so this would be a very beautiful thing.

Okay, great.

Thank you.

Each time the client adds employees, it adds premium to us.

Got it.

A little bit different than some of our other businesses.

Next question comes from Greg Smith of Merrill Lynch.

Yes, hi.

You guys talked about the economic outlook feeling pretty good from where you're sitting, and then you may take the duration on the portfolio out, but yet we've got this massively inverted yield curve, that sort of seems to be saying something different so I guess the question is, how is the yield curve where it is right now, impacting the way you're managing your investment portfolio?

I have to correct one thing you said, Greg and I'll turn it over to John, because it's clearly in his area.

We didn't talk about the outlook of the economy.

We talked about how the economy was in the first quarter for us.

Okay.

Fair enough.

Yes, the yield curve long term is definitely behaving very unusually, but it's been that way for quite a while.

We look at interest rates as not trying to maximize them, because there's no way to do it, because I don't know anyway to be perfectly right, so when the interest rates get to where we think that we like where the size or the level is, we may take the curve out, but we're not talking about taking the curve from 3 to 7.

Might be from 3 to 3.5 in the long term portfolio, so we're not talking about a major change.

But you are right.

The interest rate thing is very hard to predict right now.

The long term rates and the short-term don't seem to be always going in a consistent direction at all.

We're showing no further questions on the phone line.

We'll turn it back over to you.

Okay, I want to thank you very much.

We felt real good about the quarter, and we really appreciate your interest in Paychex, and a lot of good questions asked today, and hopefully you got some good answers, and we wish you the best, and enjoy the good weather!

We don't have too much left here, and thank you very much again.

Bye.

This concludes today's Conference Call.

We thank you for your participation.

You may disconnect at this time.