沛齊 (PAYX) 2008 Q2 法說會逐字稿

Welcome and thank you for standing by.

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

During the question-and-answer session, (OPERATOR INSTRUCTIONS).

Today's call is being recorded.

If you have any objection, you may disconnect at this time.

I would now like to turn the call over to Mr.

John Morphy, Senior Vice President and Chief Financial Officer for Paychex.

Sir, you may begin.

Thank you for joining us today for our second quarter earnings release.

Also with us is John Judge.

Teleconference call will be consistent comprised of three sections.

A review of our second quarter 2008 financial results, including comments and updated guidance for full year fiscal 2008, an overview from John Judge and lastly, the Q&A session.

Yesterday afternoon after the market closed we released our financial results for the second quarter ended November 30, 2007.

And we have filed our Form 10-Q with the SEC which provides additional discussion and analysis of the results for the quarter.

These are available by accessing our investor relation's page at www.Paychex.com.

In addition, this teleconference is being broadcast over the Internet and will be archived and available on our website until January 21, 2008.

Fiscal 2008 off to an excellent start.

We are on track to achieving our 18th consecutive year of record revenue and earnings.

We achieved record net income of 147.1 million or $0.40 diluted earnings per share in the second quarter and look forward to continuing to set records into the future.

Total revenue increased 12%, generated by payroll service revenue growth of 9%, Human Resource Services revenue growth of 24%, and interest on funds held for clients growth of 4%.

Service revenue growth of 12% continues to be in line with our expectations.

Operating income excluding interest on funds held for clients increased 17% to 178.7 million.

On December 14, 2007, we completed a stock repurchase program we announced in July of 2007, and have repurchased 23.7 million common shares for a total of $1 billion.

We will now look at the consolidated income statement.

Payroll service revenue increased 9% to 361.6 million and 8% to 723.1 million for the three and six months ended November 30, 2007.

This growth was again driven driven primarily by client based growth, higher check volume, price increases and increased utilization of our ancillary payroll services, as of November 30, 2007, nearly all of our clients utilized our payroll tax administration services and 72% of our clients utilize our employee payment services.

Human Resource Services revenue increased 24% to 115.5 million, and 22% to 228.8 million for the three and six months ended November 30, 2007.

The acquisition of BeneTrac contributed approximately 2.5 million to the growth during the three months ended November 30, 2007.

The following factors also contributed to Human Resource Services' revenue growth.

The retirement services client base increased 17% to 46,000 clients.

Our comprehensive human resource outsourcing services client employees increased 22% to 401,000 client employee served.

The workers' compensation insurance client base increased 19% to 67,000 clients.

And the asset value of the retirement services client employees funds increased 24% to 8.9 billion.

For the three and six months ended November 30, 2007, interest on funds held for clients increased 4% and 6% respectively.

The funds held for clients average balances increased 6% during the second quarter, and 5% for the six months of fiscal 2008.

The average interest rates earned on the funds held for clients were 4.0% and 4.1% for the three and six months ended November 30, 2007, as compared to 4.0% for both of the respective periods last year.

Recent federal funds rate reductions will negatively impact on interest on funds held for clients for the remainder of fiscal 2008.

Based upon current and expected attributes of our investment portfolio, we estimate an additional 25 basis point reduction in the Federal Funds rate at this point in time, would reduce interest on funds held for clients by approximately 4.5 million over the next 12-month period.

Our guidance disclosed herein is based upon the current Federal Funds rate of 4.25%.

Please refer to our Form 10-Q for further information on the effect of changing interest rates on funds held for clients.

Consolidated operating and selling general and administrative expenses increased 9% for both the three months and six months ended November 30, 2007 to 298 million and 595 million respectively.

The increase is primarily related to our continued investment in personnel, related to selling new clients, retaining clients and promoting new services.

As of November 30, 2007, our employees increased 6.1% from the same time a year ago, to 12,200 employees.

Operating income increased 15% to 209.5 million and 14 % to 420.1 million for the three and six months ended November 30, 2007.

Operating income excluding interest on funds held for clients increased 17% to 178.7 million and 15% to 357.0 million for the three and six months ended November 30, 2007.

We expect the year-over-year growth in operating income excluding interest on funds held for clients for the year ended May 31, 2008 will be approximately 15% consistent with our long-term growth objectives.

Investment income decreased 25% for the three months ended November 30, 2007, to 7.5 million, and increased 2% for the six months ended November 30, 2007 to 19.7 million.

The changes in investment income reflect the funding of the stock repurchase program completed on December 14th.

Based upon current interest rate levels, we expect fiscal 2008 corporate investment income will decrease by 35 to 40%, compared to fiscal 2007.

This is primarily due to the 1 billion stock repurchase program which reduced investment income, it is expected to yield slightly higher earnings per share result for fiscal 2008 due to fewer common shares outstanding.

Our effective income tax rate was 32.2% for both the three and six months ended November 30, 2007, compared with 31.0% for the same period a year ago.

The increase in our effective income tax rate was primarily the result of lower expected levels of tax exempt income due to funding of the stock repurchase program as well as recent decreases in market rates of interest.

The rate also increased as a result of adopting FIN 48 the new tax accounting pronouncement related to uncertain tax positions.

Moving on to the Balance Sheet.

Cash and total corporate investments were 476.1 million, as of November 30, 2007.

Our cash flows from operations were again strong at 358.2 million for the six months and an increase of 28% over 278.8 million in the same period a year ago.

Our total available for sale investments including corporate investments and funds held for clients reflected a net realized gain of 13.9 million as of November 30, 2007 compared with a net unrealized loss of $14.9 million as of May 31, 2007.

The three year AAA municipal securities yield decreased to 3.2% at November 30, 2007, from 3.7% at May 31, 2007.

Our net property and equipment balance activity during the first six months of fiscal 2008 reflected capital expenditures of approximately 40 million and depreciation expense of approximately 30 million.

Client fund deposits as of November 30, 2007, decreased to 3.5 billion from 4.0 billion as of May 31.

Client fund deposits vary widely on a day-to-day basis and average 3.1 billion during the six months ended November 30, 2007.

Client fund deposit balances continue to grow at a lower rate due to continued wage inflation accompanied by no index changes in the federal deposit rule since 1993, means more and more clients are required to pay their taxes weekly versus monthly.

The fund balances benefited from Readychex was not as great as in prior years as the growth of this product is now much closer to that of direct deposit.

Total stock flow as equity was 1.2 billion as of November 30, 2007, reflecting 226 million in dividends paid in the first six months and 865 million in stock repurchases.

A return on equity for the past 12 months was an excellent 30%.

Our current could outlook for the full fiscal year ended May 31, 2008 has been revised from that provided in our quarterly report on Form 10-Q for the quarter ended August 31, 2007 to reflect slightly lower payroll service revenue growth and the decreases in the Federal Funds rate subsequent to September 26, 2007 the day we had filed that Form 10-Q.

Projected revenue, net income growth and other financial results are summarized as follows.

Payroll service revenue growth is projected to be in the range of 8 to 9%.

Human Resource Services revenue growth is projected 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 be in the range of a decrease of 5% to flat year-over-year.

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

Corporate investment income is projected to decrease by approximately 35 to 40%.

Effective income tax rate is expected to approximate 32% and net income growth is projected to be in the range of 11 to 13%.

Our weighted average outstanding shares for fiscal 2008 are expected to be approximately 370 million.

Again, our quarterly earnings release process accompanied by the simultaneous filing of our Form 10-Q and your early analysts reports gives us a pretty good indication of what you would like us to comment on during this teleconference call.

So to provide additional comments related to the economy, payroll revenue growth, and our investment of funds held for clients, in Corporate investments we provide the following.

Obviously an excellent first question would be why was second quarter payroll revenue growth stronger than the first?

As we have discussed previously, each fiscal quarter has a little of its own identity or seasonality.

It does not necessarily carry over to the next quarter.

Examples include the number of business days in the quarter, which are usually consistent year-over-year and quarter-over-quarter, but not between sequential quarters.

Seasonal employment, such as summer hires and the other one, client payroll year ended December 31, which generates many year-end reports in the January time frame, et cetera.

Payroll revenue growth in the first and second quarter was consistent with our expectations.

The confidence we expressed that our second quarter growth would be better than the first quarter materialized.

We did not categorize the first quarter as a deacceleration, nor at the same time do we see the second quarter as an acceleration.

It only takes approximately 4 million in a quarter to move the payroll revenue growth number about 1% and based upon all of our revenue variables, it is not unusual for our quarterly payroll revenue growth to be somewhat inconsistent during the year.

These variables tend to even out an an annual basis and our guidance is annualized guidance and not quarterly guidance.

Another good question, if payroll revenue growth met expectations in the first half of fiscal 2008, why did we lower our payroll revenue growth guidance to 8 to 9% for fiscal 2008?

At the end of our first quarter, our projections for fiscal 2008 payroll revenue growth were near the low end of our 9 to 10% guidance range.

Many variables affect payroll revenue growth.

Some of which have nothing to do with the economy, such as frequency of payroll and other factors that year-over-year comparisons and things similar to that.

Based upon our second quarter forecast process, we came to the conclusion that our most probable forecast for fiscal 2008 payroll revenue growth is between 8 and 9%.

There is no general cause for the slight reduction in revenue reduction.

To put this in perspective, one half of a percent of annual payroll revenue growth is less than $2 million per quarter.

Regarding the economy, we are seeing little if any change in economic conditions and we believe the small business economy remains in a relatively constant state.

Our lower guidance on net income was totally related to the effect of lower interest rates and being able to more exactly project the effect of our stock repurchase program.

Our investment portfolio is not at the same exposure as many others related to the subprime credit crisis.

We currently have no exposure to the following investment type.

Asset backed commercial paper or asset backed securities, auction rate securities, collateralized debt obligations or CDOs, enhanced cash or cash plus mutual funds, structured investment vehicles, SIDs, subprime mortgage securities and as many of you are probably aware, yesterday the S&P downgraded and/or put a negative watch on many of the municipal bond issuers.

Well approximately 40% of our portfolio is insured our purchase of bonds is not based on insurance but the strength of the issuers.

Our average bond rating is AA with nothing below an A rating.

Accordingly, we do not believe the S&P action will have any significant impact upon us.

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 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 three of the press release for our discussion of forward-looking statements and the related risk factors.

At this time I turn the meeting over to John Judge who will provide comments and then we'll open for questions.

John, Thanks.

Just a quick comment.

John, when he said that the S&P downgraded municipal bond issuers, he meant insurers.

Thanks for joining us this snowy December morning in Rochester.

Happy holidays to everyone.

I'm just going to add a few comments to John's and then open the phone lines up for dialogue.

I'll focus my remarks on three areas, the quarter that just closed and some additional color on that, provide some color on the guidance adjustment that John just talked about and then give you a quick update on some of the things that we're doing to ensure a strong finish for this year and position us well for growth beyond the year.

First, our second quarter results, as you can imagine, we feel very good about the quarter.

As you saw in last night's earnings release and then just reiterated by John in his comments, our second quarter was very strong in most areas.

Payroll service revenue bounced back to 9%, up from 8 in the prior quarter.

HRS revenue growth was very strong at 24%, up from 20% the quarter before.

Expenses were very well managed at 9% growth with much of that growth focused on areas that will help us grow future revenue and profits, like more salespeople and investments in IT systems and service projects for customer consumption and so on.

Our client losses are on track to yet again set a new low watermark.

Remember last year, we sort of broke through the 20% rate for the first time and we're exceeding that rate right now in this current year and I expect that we'll finish this year better than we did last year.

Our customer set is remarkably strong.

It's in the low 90s and at new record levels.

We're very proud of what's happening on the customer set side.

Our operating income excluding interest was up a very strong 17% and total revenue growth at 12% with expense growth at 9 yielded another good quarter of financial leverage.

All of that led up to a second quarter diluted earnings per share of 40% above the street consensus.

As an added bonus for stockholders, we completed the $1 billion stock repurchase in December as John mentioned, less than six months after we announced that we were going to do the repurchase.

And increased our dividend payments 43% in the second quarter and 62% for the six months just ended.

I can tell you I wish my personal portfolio was doing that well.

Put it all together and you can see why we're proud of our results for the second quarter and the first half.

And well on our way to posting our 18th consecutive year of record revenue and earnings.

So very, very good quarter.

We feel very good about the performance that was put forth by our people across the country and again, very proud of that quarter.

Now, let me spend a minute on our guidance adjustment and provide you some of my color on the decision.

John talked about it and I wanted to do so also.

As you can imagine, there was lots of discussion internally about whether or not to adjust guidance on the payroll services revenue growth line.

I can tell you it was a very close call because our current modeling which consists of six months actual results and six months forecasted results ended up being a coin toss, about whether or not we were going to finish inside or outside of guidance.

Now, I know this isn't a surprise to many of you since many of you are forecasts have been published on payroll services revenue growth or conversations that we've had with you were around the 8.8% level.

Just as a point of reference, if we saw the year ending at 8.8%, even though it would round to 9 in our way of providing guidance that would be outside 9 to 10% range provided and would cause us to adjust our guidance.

In the final analysis it came down to one simple thought.

We pride ourselves on our transparency and on our commitment to communicate any changes to our outlook as soon as we see them, for the first time this year, we now see the possibility that we could finish the year slightly below a true 9% on payroll service revenue, and therefore decided to adjust our guidance down 1 percentage point.

I hope it turns out that we're wrong but that's how we see it right now and we felt the responsible thing was to adjust it down.

In reality it's a few million dollars on a 2 billion plus revenue plan but we felt you should know about where we were at this point in time.

I hope this color was helpful for you.

To close out my comments I would like to spend a couple of minutes on what we're doing to ensure a strong finish to this year and position us for growth beyond the year.

The activities cluster into four main areas.

The first one as you have probably guessed, given the history of our company, is to continue our execution focus.

Let me talk about sales first and then talk a little bit of operations.

Now sales, obviously the first thing that we're doing is staying very, very focused on this current selling season.

December and January are extremely important months for us from a sales cycle standpoint.

I'm proud to tell you that we feel like we're in very good shape going into the December, January period.

Time will tell how it will finish out, but as we look across all of our different sales divisions we feel very good about how we're entering into this very important sales season.

Now, in more general conversation, the other things that we're focused on are things like attrition.

We've been talking about this for many years, for the three years that I've been here.

Our coverage efficiency that really talks about where are we in terms of territory coverage, where are we in terms of the strength of our sales reps in the field.

We're spending time on our channel effectiveness.

What are we doing to assure we have superior relationships with our CPAs and banks.

The AICPA, which we have a very strong partnership with.

What are we doing in the area of National Tele sales?

What are we doing in the area of web sales and web marketing and our whole web presence?

Lots of focus on that area and we'll continue to keep that focus there.

On the operations side, it's on customer satisfaction.

I told you about the results there.

It's on client retention.

We focus on attrition in that area as well.

Back office productivity.

Back office effectiveness.

Especially important as we get into some of the new areas, like insurance, some of the new 401-K offerings that we brought to the marketplace.

Obviously, discounting is important both on the sales side and on the Ops side and we've got lots of activity in that area as well.

And then finally on the IT area, there's a lot of work going on in terms of adding new technology, improving our field productivity by introducing things like tablets and new form factors that make our sales reps much more efficient, drive the efficiency of the movement of data between our clients and our company as well and then obviously filling in gaps in our offering base which sort of brings me to the second area and that's the focus that we have on adding products, adding capabilities and adding clients.

We have got a lot of activity on this area, client acquisitions you know that we do client acquisitions year in and year out, typically small payroll companies.

We're having one of our busiest years in terms of volume in client acquisitions and that will continue as we've talked to you in the past.

On the new offerings side we're doing things both in a generic side or organic growth from inside the company as well as partnering and buying capability outside.

We've talked to you about the 401-K open architecture that's going very well.

You know about the investments that we're making in the insurance area.

We purchased a company that provides us with an offering called BeneTrac which is a very exciting offering on the tracking of benefits for particularly our MMS customers.

We have just started to release for sales to our sales force something called TLO which is time and labor management online and the whole labor management area we had a good offering, a solid offering on the low-end of that which is called Time In A Box.

We have a very strong offering on the high-end of that which is Stromberg, which is an acquisition we did a few years ago and now this whole online labor management is an offering that goes right in the middle, again, very strong in terms of its ability to both generate revenue on its own, but also to enable MMS sales that in the past would not be enabled because the client needed time and labor management tracking.

We did a partnership with a company called [TELEO] which gives us applicant tracking capabilities and so on and so there's a lot of focus that we have on our offerings and our capabilities area and obviously adding new clients.

The third area that we're focused on is adding man power and investing resources to help grow our business.

On the man power side, sales, you know that we continue to add sales, man power, both across the board but more specifically in selected areas like insurance where we're gearing up all of our activities and particularly our sales activities to drive that business.

On the payroll side of the house, on the payroll specialty side of the house we're both adding new and growing the percent of our payroll specialists, that are senior payroll specialist which gives them the ability to both handle more accounts and perhaps more importantly drive higher levels of customers satisfaction.

Tenure and experience is something that is very important in our business in all areas but particularly in sales and in payroll specialists.

And then finally, staying committed to the strategies that we've been on and the investments that we're making and being patient.

You know, in this business, it's a -- there are not very many overnight successes.

It's a slow and steady growth business and it is extremely important that you make the right investments and then you be patient to allow those investments to take route and grow.

All those things combined put us in a position where we feel like we're in a middle of a good year.

Clearly, it is going to be another record year for us and I think we are doing the right things, both to insure that we are successful in the second half and more importantly that we are successful in the years going forward.

I'll end comments and open the line up for you questions and comments.

Thank you.

We will now begin the question-and-answer session.

(OPERATOR INSTRUCTIONS).

It will be one moment, please.

Our first question comes from Adam Frisch with UBS.

Hi.

It's Glen Stout, actually.

Congratulations on completing your buyback program.

Got a quick question on the guidance.

How was it that total service revenue, the guidance was unchanged but the payroll component --

Obviously, the change in payroll revenue wasn't big enough to affect the change in service revenue.

Simple as that.

Change in the payroll revenue wasn't big enough to affect the change in service revenue.

Understood.

HR and benefits we're seeing average revenue per client show year-over-year growth, by my calculations for the first time in I think it was eight quarters.

Can you talk about what's driving this positive trend and do you expect --

You say average revenue per client.

How are you calculating that.

Annualizing the total revenue in the quarter,.

Into the 560,000 some odd thousand clients?

Exactly.

I've never even done that.

You just gave me a statistic I've never looked at.

What I think the key factor is, we keep driving human resource revenue growth with all the areas ran and that business is growing at 20% plus and we keep pushing it.

I wouldn't have an answer for why it changed first time in eight quarters because we've never actually looked at the calculation that way.

The penetration in HRS to begin with across the entire client base goes from extremely penetrated in some to no penetration among others.

Some of our clients that are in that number might have two, three, four, five employees.

Okay.

And you have current sales force growth plans of about 9% out there.

I don't see that number changed.

Has the component between the different verticals that you're adding sales force to changed at all or are you still on track with your guidance from the k?

We're on track with our guidance.

But that's a number that's -- it's not across the board.

There will be years where we'll be increasing our sales headcount into specific targeted areas like the build-up that we're doing in insurance right now.

There will be years where we might shift that toward putting more people in the premier world.

There are years where we'll have more or less in core and more or less in MMS.

So it's a number that works itself up from the bottom.

And it will -- the components will change but because the penetration rates in the United States are not yet anywhere near saturation levels and because we continue to try and find new offerings, which would drive the requirement for new salespeople, we don't see anything that tells us in the future that we're going to significantly decrease the addition of salespeople.

Market is still that good for us.

And the results that we get by putting new salespeople into play are that good for us that it appears that we'll continue to be adding salespeople for the foreseeable future.

Thanks, I appreciate it.

Our next question comes from the Liz Grausam with Goldman Sachs.

Thanks for your prepared comment on the payroll services revenue growth.

Wanted to dig in a little bit more there today given how many questions we are getting about it.

You said your retention is strong or strengthening.

Sounds like your new sales program going into the selling season is strong.

Execution seems to be across the board in line or better than expectations and certainly the second quarter was.

In bringing down the revenue growth expectations, are you hedging a little bit on the economic outlook and if you could just give us a little bit more granularity on what changed in your thinking specifically in your guidance change?

Well, it was -- thanks for the question, Liz.

It was a lot of things, but the most important thing I would like you to get out of it, it was a very small number.

Part of it is our philosophy and our commitment on what guidance is all about and we've been very clear I think, certainly for the time I've been here, my understanding is before I got here that when we post guidance, we're very clear about if that changes, the minute we think it will change we will let you know.

On the specific question on that, the change was minor but it was for the first time as I mentioned it was the first time that we felt like there was a possibility that we could finish outside or below the 9% which was the basement of where we had posted that number and so we made the change.

In terms of looking at it, the things that you're trying to get out of it, if you look at the different factors that could change, it could be things like the size of the client that you're bringing in or the size of the client that you're losing, is one smaller or is one bigger than what you planned.

We spent some time looking at that.

There's nothing there that we see that would suggest that that's part of the problem.

You could talk about whether or not this movements inside the existing clients.

Are they not hiring as much as they were in the past and so we look at new hire reports that we do for the majority of our clients and there's really nothing that we see there.

We do see a slight diminution of checks per client, I mean, very slight.

When we did the analysis on this to try and put our finger on exactly where it was, it's one of these things where there's no clear thing that's jumping out at us.

It's more likely than not a small change to a lot of different factors.

The economy is an interesting question because we keep getting asked that and the reality is that the macroeconomic environment at least to this point appears to be something that will affect large clients much more than small clients.

In other words, when we look at our clients, we don't see anything that tells us that the economy is slowing down our clients' world.

We don't see bankruptcies accelerating in the small clients.

We see some minor changes in some of the things that we look at but the economy still to this point does not appear to be affecting our world and while we're aware of what's happening on the macro level and in the retail markets, in the insurance -- excuse me, in the real estate markets, what's happening in subprime and so on, to this point we can't say that the economy is really having any effect on our business.

That was very helpful.

On your M&A program with the BeneTrac this quarter, just wondering, obviously great returns on equity in the business, returns on capital, are there a lot of opportunities out there to make small acquisitions?

Are you seeing pretty reasonable valuations on those acquisitions, market-wide?

If you think about it in the general world, there are clearly lots of things out there that could be purchased and we clearly have dramatically strong purchasing power, be that the fact that we have no debt, that the strength of the currency of our stock and so on.

But the difficult part is, it's not so much what's the volume of stuff that's out there, it's what's out there that fits into our strategy and is something that we feel that we have a very good chance of integrating into our company in a way where it makes sense strategically, financially, culturally and so on.

And when we put that limitation on it, as well as the fact that our current strategy is one that says that we're going to stick to our knitting, we're going to stay around our core competencies, as opposed to buying things that could take advantage.

It turns out that there are lots of things out there but there aren't that many quality things out there, at least we haven't seen that we feel strongly enough about buying.

We have a -- we've got a small group of people that that's all they do, day in and day out.

We have as I mentioned in the past, if we were a venture capital firm or private equity capital firm, we have extraordinary deal flow because anybody who is trying to sell anything to small business will ultimately come talk to us because of both the number of clients that we have and the extraordinary distribution capability that we have to small business.

So we see lots of things.

In terms of are we going to buy 50 new small companies in the next 12 to 18 months, probably not, although we have the financial capability to do so.

If we found 50 we would buy them.

Thanks, John.

Pleasure.

Our next question comes from James Kissane with Bear Stearns.

Your line is open.

Thanks, John, given that you used up the buyback pretty quickly, any thoughts on a new authorization.

Basically, where I am, we've not discussed anything with the board so it's strictly -- I think John and I are in the same place.

We will again now go back and look at our cash flows.

Ideally I would like to have something we'd be doing all the time.

I don't think we reached the period where we would borrow money to buy stock back.

But I think we're still going to be cash flow positive.

So we'll be looking at that again over the next six months and take a look at it obviously where the stock price will matter too.

I think when you look at it, if we did another program, we'll be much more opportunistic in what we're buying.

This last program, we watched the stock price.

We watched the activity daily.

We have rules on how much we could buy.

Our goal was really to buy the stock back in a reasonably period of time, but to fulfill the commitment that we said we were going to buy it back and then do it.

We taken want to be the type of company that announces a buyback and then doesn't do anything.

Could you review your internal accretion analysis?

Recently do it.

You talked about it being accretive up to 44, 45.

That's about the range it is.

It varies on factors.

We don't think we bought any that wasn't accretive.

I don't think it had a dramatic effect.

When you look at the earnings per share guidance that we changed, go back to the beginning of the year, basically we're down about three pennies in my mind and the three pennies are three items.

About a penny reduction due to FIN 48 being a little harsher than we thought.

About a penny coming from the stock repurchase program and $0.03 from interest rates.

Any update on your insurance initiatives.

Do you have an opinion on the question you asked?

Well, you like it at 44.

Stocks at 37.

So I assume you should have an appetite for buying back stock.

Okay.

Just curious about your opinion.

On the insurance, one thing I will add to Johns, on your question about the accretiveness.

If you are taking about in the future he answered it perfectly if you were trying to get out how did our final purchase finish out, we were well below the 44 number.

On insurance, the insurance program is going very, very well.

The sales volumes for the year are dramatically up year to year.

Several hundred percent rise on a year to year basis in terms of the success that we're seeing in the marketplace.

We're getting more mature in a lot of areas that are important.

We're getting more mature in understanding the profile of the types of people that would be successful selling insurance in our environment and to our client base, which is very helpful to us in terms of recruiting the right people that have good opportunity or good chance of finding great success in our business.

We're making great strides in terms of what's happening in our back office maturity.

Our ability to effectively and efficiently process all the business that we're booking.

We made good strides in terms of our relationship with the providers that are in the marketplace.

Over 100 providers that we're dealing with today.

We're on our way to 200 providers.

But luckily for us from a standpoint, there is an 80/20 rule that looks like it will materialize which is great because the reality is, at least in one man's opinion, I would prefer not to be in a business where I had to have relationships with two or 300 providers, I would like that number to be a smaller number.

But the work that we did getting prepared to go into the marketplace, the market analysis all looks like it was very well done and the results that we're seeing are holding true to what we thought we would see.

We still remain extremely bullish on what this program could be for our company in the short and medium time frame and if we're right about that, in the long-term time frame it's going to be extraordinary.

So we're still very, very -- I'm happy with where we are.

We're moving as fast as we can.

We're bringing on as people as we can bring on under control.

I feel very good about where we are.

Thank you very much.

The next question comes from David Grossman with Thomas Weisel Partners.

Thanks.

John, I think in an earlier question you had indicated that when you looked at the payroll numbers, you tried to really look at a more granular level to see if you saw any particular trends.

I'm assuming that would include the new client growth, the check growth, the pricing and retention.

So is it fair to say that you really haven't seen any real material changes in any of those items.

You saw the microscope we went under.

Actually, we did it in the first quarter too because we know we have a view on what the economy may or may not be doing and the same time, we don't want to say something that we don't believe is true.

And so we looked at this very hard.

We looked at all the component that changed and actually not many of them changed very much and came to the conclusion that we had a small projection change that is small enough that you almost can't come up with a real general purpose of it and when you look at the economy, when you look at new hire reporting and you look at all those aspects, there might be some that are off a little bit, there's others that are up a little bit.

We really haven't seen any change in what I would call small business America.

All right.

And so as you look into last year, when you were below your target as well, there was nothing that when you look back then that there's any kind of changes in the business at all that we should think about, that would change kind of the components of how we thing about growth for Paychex going forward?

No, we didn't -- you look at comparing the last year, things are relatively stable.

If you look at elements in last year that could have affected this year, we factored all those in.

We had lots of debates here.

Some were a little heated at times.

We like to make sure we're challenging each other right to the limit.

At the end of the day, we felt the best thing to do was what John and I talked about earlier on the guidance and we feel very comfortable with it and we feel very comfortable with our process.

And one other question I had is on the client fund balances and do we get to a point, sometime or do you have any visibility on a time period when you anniversary that kind offence of phenomenon.

Some of the phenomenon is not going to totally go away.

One thing we looked at is we probably haven't been -- we've been probably a little bit too conservative on some of our coding for tax filing and so we're going to change that so we will abate some this diminishment.

But the issue of inflation on wages affecting the positive frequency, that's not going away.

And I don't think the government is going to change the rules because they're benefiting from it.

So we'll have to fight that.

But I think one thing we'll be able to get some of this back is we're going to look at how often we're depositing.

I think we'll been a little too conservative.

We've got a great penalty abatement group here.

Is never to have the penalty.

When I talk about abatement, they're usually in preventing the penalties.

They have gotten so good that we feel we don't have to be quite as conservative as we've been and we're in the process of putting those changes in.

They're not going to go in until after we get through the client busy season.

We don't want to do anything that disrupts any client service.

I guess as I'm thinking into fiscal '09, then, is it still reasonable to think that the client fund balances would grow slower than the overall payroll revenue growth again?

Yes, I don't think that's going to go away.

The worry I have when you go forward, we haven't seen anything but you get people to predict is those balances will get affected a little bit by the economy.

It's kind of interesting, somebody is going to ask eventually, we're in the bonus season.

The bonus season is funny, I'm driving my treasury people crazy.

The bonus season runs December 15th to January 4th.

Unfortunately, about 85% of the bonus season is on the last two days of the year.

So and we looked -- I've looked at this.

I've come to the conclusion I can't predict anything.

I look at a trend and I say that might be negative.

We wound up with a great bonus season.

So it's too early for me to tell.

I just don't know.

I got you.

Then just one other thing, I guess, looking at the portfolio at large.

Given where we are in the rate cycle, do you have any thoughts on whether you'll change the structure of the portfolio at all in terms of duration or do you think you're pretty comfortable where you are now, given where we are in the cycle.

Pretty comfortable with where where we are now.

We might do a little repositioning but when you look at the size of the portfolio, the amount of repositioning we'd do would be relatively immaterial.

We are looking into -- we don't have board approval yet, to whether or not we want to do something ADP has been doing for years., which is, right now with the stock repurchase, we might have to borrow money on four days a year.

If we took that up to 20 or 25, how much of a better yield can we could get on moving more money into long-term.

You'll see us doing some things.

I don't think it's going to change too dramatically.

We will change some things to try to improve this at least a little bit without taking any extra risk.

I got it.

All right.

Guys, thanks a lot and have a great holiday.

Thank you.

Next is Rod Bourgeouis with Bernstein.

Hey, guys.

I'm calculating that your year-over-year operating margin expansion excluding float was about 157 basis points.

It seems that that's a pretty high number, maybe even above what you were planning at the beginning of the year when I look at your guidance targets.

I guess the question I have is, is that level of margin expansion higher than where you were originally planning and is there any growth tradeoff at all in the level of margin expansion that you're putting up right now?

I would say there's no growth tradeoff.

Because we're not postponing any investment in anything that relates to the future.

When you go into a period like this and just like on this call, all of you have concerns about where the economy is, while we haven't seen anything, that doesn't mean we don't have any concerns.

So we are managing our expenses very tight right now in such areas as payroll specialist for client and other areas.

We're making sure we're not hiring people ahead of time.

We get better and better at everything we do.

The human resource side, matures in areas like 401K, we keep getting very good performance improvements on what we're doing.

The goal is still there.

The thing that helps that margin is basically this management team is pretty well focused on making the 15% operating income without float target.

That means we have to suck up some of the expenses that don't affect the future we're going to do it.

And when you look at the beginning of the year it might be slightly ahead but it's not significantly different.

We had pretty good productivity goals built in.

You've also got to be careful, these quarters don't all even out.

You can get to the third quarter and it could be a little bit different.

You really got to look and say what will the year wind up.

I think it will be pretty close to what we expected.

Okay.

And John, when you look at the futures market, et cetera related to the interest rate environment, are you thinking there's a reasonable probability that the float outlook may need to be reduced again or are you feeling fairly comfortable with the current level of guidance on the float.

Our float guidance -- great question.

It's good that we reaffirm this.

I learned I can't make estimates on interest rates because what happens is we estimate what's going to happen, and then you don't quite know what we estimate unless we articulate it perfectly which is probably impossible and then you do something on interest rates an then we wind up with a situation with where don't know where we are.

Several years ago everybody believed rates, I forget th change it was up or down, I think it was up.

Was imminent and we were absolutely crazy not to forecast improvement.

And we sat there and said we don't know.

So basically the guidance we gave you is based upon the last Federal Funds rate adjustment.

We don't estimate any changes in interest rates.

And obviously, if interest rates change, the guidance has to change.

So if the Fed does another 25 basis points in January, that will affect us.

Now, to give you some help on that, we disclosed that 25 basis points would cost about 4.5 million, pretax, it's close to tax exempt, you can assume about 80% is tax exempt.

It cost 4.5 million over the next 12 months, that's isn't 4.5 million for the rest of the year.

It's 4.5 million for the next 12 months.

That's the best way we can deal with this, it's worked real well in the past because we actually avoided a lot of volatility on estimates because we said look, this is where we are today.

If you want in your models, you want to put something in, you could put it in.

But then you know you're just putting in what you think the change is.

You don't have a change on top of my change.

Just one other question on the health insurance sales process.

Are you feeling better about the progress in that business with another sort of three months under the belt or things on track or are there any obstacles that you're starting to face as that business ramps up.

I would say somewhere between on track and feeling better.

I mean, we're on track with where we wanted to be.

The only reason I would tell you that we maybe feel a little better is the comment I made about the fact that what we're seeing in the March expert is very close to the market analysis that we did.

It sort of says what we thought was going to happen and the plans we laid in place are a little stronger.

Is what we thought we were going to find.

That coupled with the fact that we continue to make progress on strengthening the back office and we continue to make progress on refining the profile of the types of people that we can hire that we know will be successful in the business.

So you know, those things added together make us feel a little bit stronger.

On the market itself, I've talked about this in the past.

I don't know that we will find any time soon a more natural market for where we are as a business.

With our existing infrastructure, the fact that we've been in insurance businesses before, that there's a natural weakness in the coverage model for the insurance business as we see it, the independent agents might not agree with that statement, but that's as we see it, it's a natural market for us and that's why we're so excited about it.

Those are all helpful answers.

Thanks, guys.

Next is Brian Sakakeeny with Deutsche Bank.

Can you guys hear me.

Sure, we hear you fine.

Thank you.

I had a question just around the payroll services sales force growth.

Can you give us that number.

Was the 9% across your whole services businesses or was that a payroll only.

Payroll only was less than that.

I think the payroll only was around 5 or 6.

The best place to go to look at that is in the investor relation's page, the sales force is listed there.

The comparisons to prior years.

One thing to go over again quickly is we basically assign new territories effective June 1st.

We very rarely and it would only be on something that would be a brand-new product line, probably like insurance, do we increase territories during the year because obviously when you increase people, you're revising territories and you want to keep people highly meet motivated.

We don't change those things during the year.

You could get something like health insurance where territories are so big and the thing got so good that we could add something but most of the time we live with the territory assignments right off of June 1st and you'll always see us disclose that in the investor relation's page right there on the website.

And so I guess just given that figure, and if you assume maybe pricing up 2 to 3% and new client growth 1 to 2, seems like you really certainly seen any negative change in sales force productivity in that figure; correct.

We wouldn't use those numbers that you used on either price increase or on client growth.

To get to the 9% figure with the 5 to 6% payroll sales force growth.

We have not seen any erosion.

Par on revenue, we feel very comfortable with what the sales force is doing.

I guess to get to nine, what figures would you use for pricing and new client growth?

Well, on only on payroll revenue?

Yes.

I'm not sure I know.

We do the model on the whole business.

Okay.

Okay.

All right.

Thank you.

Next is Mark Marcon with RW Baird.

Good morning John and John.

Just going back to the margins, if we take a look at your incremental EBIT margin, ex float, it's picked up significantly here.

We're now at 50.4%.

With your fee margin in total at 37.5%.

Do you think you can keep this incremental margin up?

If so, that implies that long-term your fee margin could continue to go up quite materially.

Basically, right back to the formula.

12% revenue growth, 15% operating income without float.

You have to be careful.

I would never calculate any of that with with float in it.

I always take float out.

I can't control float.

It is what it is.

That's the motivation.

Rights now, if we wind up with revenue growth a little bit low, then we're going to push on the margins, as long as we make sure we're making all the investments we need to make.

You guys kind of look at it differently.

We're trying to make the 15%.

The incentive systems are there for us to make it.

That's what we keep pushing.

I agree, margins can increase forever.

I've got to tell you the hardest part of our equation in this formula is not the leveraging part.

The hardest part is making sure we get the revenue.

We get the revenue, we get the leveraging.

You get the 100% gross margins, then you can't go any higher.

Right now we don't feel under any undue pressure and I don't see any over the next few years where I think we've still got opportunity.

Let me add something if I could.

It's just some philosophy, Mark, but it might help you with the what I you think about it.

When we think about things like margins, which by the way, especially our end year execution, I wouldn't say that it's the altar but it's in the church.

It's pretty important to us.

And we have a general philosophy in the company about improving everything.

I mean, we don't -- we would never enter into a year thinking it was okay to slide someplace.

In general you should assume we wouldn't allow a backsliding on margin.

With that said, ties into the question that was asked earlier, the thing that slows us down or would preclude us from making an investment really is not the formula.

We're as financially stable a company as you're probably going to find out there.

The thing that slows us down is that we have a philosophy that says if we can't get a business proposal or pro forma on a suggested investment that we believe and that is accretive to our business, it's very hard for us to say yes.

So the thing that will hold the margins in place is more the management philosophy about improving and making only sensible investments that will improve our business that will keep us in line from a margin standpoint.

Great.

I mean, it certainly looks like you still have a lot of upside, based on the way the model seems to be be running right now.

We sure hope so.

In terms of the net income growth, if we strip out like the adjustments from a year ago, looks like net income growth is slowing in the second half of this fiscal year, due primarily to the change in interest rates, plus the change in the tax rates.

As we think about longer-term, where do you think the tax rates could end up moving.

I think the tax rate at 32 is pretty consistent.

The only thing that changes this is that rate I don't think will move for anything, other than how much tax exempt income you have.

Tax exempt income or float income is not going to grow at the same level as the rest of the company because the two products that John generate most of the float income, the growth of those products can't match the rest of the company.

When you take a look at the metrics you're going to see operating growth we talked about without float, that's going to somewhat impact the tax rate.

It's all tied back to the interest rates.

Got it.

Okay.

Great.

And then finally, with regards to your share count, how are you thinking about your options policy for next year, because it looks from our perspective as if your share count on a fully diluted basis is probably around 361, 362 million at this point in time.

370 we gave you is this year.

We didn't give you next year yet.

Right.

Right.

I'm just talking about right here, right now.

Right now.

So now on options, though, last year we changed the philosophy.

We give mostly RSUs and then we gave some stock options.

The amount of shares we're granting is probably going to be down compared to what we used to.

Stock option expense may stay the same.

The amount of shares we're going to issue is down.

We will continue to look at that.

But I don't think you're going to see significant dilution off options.

When we talked about a stock repurchase program just a few minutes ago, in the first place that I would go to talk with the board about it and John I think agrees is to talk about trying to keep the delusion from stock options and not be there.

We're looking at share counts but I don't think the option program is going to change materially.

Okay.

Great.

Terrific.

Thanks.

Next is Gary Bisbee with Lehman Brothers.

Good morning, guys.

Two questions, I guess.

First of all, looks like Florida's lowered the manual premium pretty dramatically as of January 1.

You haven't disclosed the size of the PEO revenue base in a while but how material who you expect that to be in the next couple of quarters in terms of impacting HR growth?

Number is probably less than 5 million.

It's significant.

I don't know whether it's as significant as the last two.

It's something we have to work our way through and it's something that won't affect us until fiscal '09 but it's a way of life.

It happens and then we have to go dig it from someplace else and that's what we've done in the past.

So it's there.

Hopefully this thing is somewhat stabilized.

The state of Florida has its issues.

I'll make a little kind of prediction, doesn't affect their business, but workers ' comp rates fluctuate.

They'll chase them to low and then yhey'll bring them back some day.

But usually you chase them low at the worst possible time because workers ' comp claims really do mirror image the economy.

And so is it still safe or the right thing to assume that most of that, the vast majority of PEOs in Florida and the premier product is still the one that's selling.

much better outside---

It's better than that.

Virtually all the PEO is in Florida.

We've also made a move lately where everything we grow in Florida no longer goes to the PRO.

We crossed over this year, where the number of adds in Florida that go on premier versus the PEO is becoming more significant even in Florida.

Our goal, I mean, we like the PEO model but we prefer the premier one.

How it affects what we do business really isn't much different except the service model is pretty much the same.

We would continue to service Florida the same way.

The only difference is we're not taking risk on workers ' comp and as we stated before we don't take risk on health care.

And then the second question, could you give us a sense, now that you're a couple quarters into the new multi manager 401-K product and you talked about the 401-K light product, we haven't really seen the number of client additions accelerated.

Been sort of the thousand a quarter or so.

Would it be reasonable to expect that or are these new products more just something that you think is going to allow it to continue to grow at that pace?

We're in a -- 401-K is in a moving period now.

You have a lot of people talking about what the funds should look like, a lot of people talking the fees should look like..

We're a leader.

We think we're world class in this.

We're moving our fund choices consistent and hopefully ahead of the markets.

I don't think you're going to see an accelerate until something was to change.

For one thing, 401-K isn't a new product.

A lot of companies, especially in the 50 and above, have looked at that product and kind of made a decision whether they're going to have one.

Most of our 401-K growth is down in the 50 and under.

Doesn't mean we don't get any in the 50 and above.

We do.

It's not as accelerated.

I think 401-K growth is going to stay about the same.

I'm not looking for it to accelerate nor did we when we put the products in.

I think the only way we're going to get acceleration is if we can get a conversion program into the client that's have a 401-K that don't use ours but that is always a difficult thing to do and as we get better and better at these guided choices and multi funds, we'll increase our programs in that area.

We can't do that until we can handle those a little better than we do today.

We do it fine.

But to switch over and convert 10,000 clients suddenly, that would not be easy to do.

Okay.

Thanks a lot.

Next is Tin Gin Wong with JP Morgan.

Thanks.

First I had a follow-up question on the client fund balance growth.

I can fully appreciate that the visibility is tough but is there a way that we can look back to prior bad bonus seasons and apply that to the second half of this year and what that might look like?

We believe that the funds held for clients should increase about 4% a year.

That's the inflationary part of it.

More wage inflation in the.

I think even in the bad economy, back in 2002, I don't know that balance has ever decreased on a per client basis.

Okay?

But you might have fewer clients in some of those products, although that probably didn't happen either.

I don't think it's going to be significant.

Bigger impact on float is not the balances.

It's the rates.

We'll know more about this as John said in a month, because the bonus season is on us.

I'm not so sure though that I would make the assumption that the bonuses are going to be bad.

The macro environment is really -- it's really hitting specific industry sectors and large enterprise clients way more than it's hitting small.

We have -- I want to be careful.

We've seen nothing that's going to say the bonus season is going to be bad.

Agreed.

I'm just trying to think about the standard deviation.

I think you get some effect but most of it's off the rates.

You look at float income fell dramatically.

That's because they went from 5% plus in the Federal Funds rate to one.

I don't think that's going to happen again.

Maybe assuming something in the mid single-digit range makes some sense for now.

If I thought I was in a down market, I would say the float income balance might grow between 4 and 6%.

Okay.

I get this question all the time.

Ask any of them.

We don't answer all of them.

What's percentage of your client base is tied to home construction, mortgage lending, some of the weaker areas in the U.S.

that we read about all the time.

My gut tells me it's below average exposure for you.

Just wanted to be sure.

When anybody asks me about exposure to versus various segments, we replicate small business America.

When you think about small business, as much as we all think about small business, we are really small.

When you think of 17 employees, 40% of the client base is four or below.

Probably aren't many restaurants in Manhattan that have less than 25 or 50 employees.

Basically, we are way at the low-end.

So if there was a predominate of that stuff at the low-end, which I don't think there is.

Then we would be overweighted.

We mirror image small business America.

We don't have too much in manufacturing.

We don't have too much where the companies would be larger.

We have our fair share in MMS.

When you talk about the distribution going across -- I don't think we're overweighted on any sector.

If go to that analysis, I appreciate the way you ask the question.

This person I know has this problem.

But because we're a utility product, then the only real issue is whether or not the clients go out of business.

And everything that we've seen to this point tells us that we have seen nothing out of the ordinary in terms bankruptcies, in terms of business closures, in terms of business shrinkages.

I know that might sound odd to you with all the headlines we are all reading, but the anomaly so far is that we have been relatively unaffected by the concerns about the macroeconomic environment.

Got you.

I'll go ahead and ask one more question on the payroll guidance.

In the past I think you guys have called out normal payroll revenue service growth to be 8.5 to I think 9.25 or 9.5.

It's at 8.5, 9.25 I'm satisfied in that zone.

Outside that zone, generally you've got some other condition going.

Doesn't mean it will always be that way.

Generally you get above 9.25, you need wind from the economy.

Generally don't go below 8.5 without wind in your face.

Are you trying to get a different gradation on the guidance?

I know we're talking about basis points here.

I guess the question I get posed here, why not just guide to the 8.5 to 9.25.

I want to make sure there's not something more than just conservatism.

That's what it feels like to me, at least.

I would say that your conclusion is that -- if your conclusion is that it's conservatism and that we're talking about tenths of a point, not points, you would probably be accurate.

Thanks a lot.

Enjoy the holidays.

Next is Sanil Daptadar with sentinel investments.

My question got answered.

Thank you.

Thank you.

I like those kind.

And next is Kartik Mehta with FTN Midwest.

Good morning, John.

I just wanted to get your thinking.

You said earlier you don't want to use debt to buy back shares and I can appreciate that based on the strong balance sheet you have always had.

You've also said share repurchase up to $44 is accretive.

Looks like there's real any no acquisition opportunities out there.

You have a strong free cash flow model.

I'm trying to think about why or why you would not recommend using debt.

I said based on our being conservative with the balance sheet, I won't say that would never happen, but when you talk about 44 bucks, the difference between 44 and 40 on earnings per share is so small, I don't think I would change my capital structure to gain that.

Now, I also said that if we went into a stock repurchase program in the future, it would be a lot more opportunistic, meaning you would want something in place that the stock had for some reason real weak ness you could take advantage of it.

I think for us to go take on debt and restructure balance sheet where I no moveability left to change earnings per share by a very small number, that wouldn't make sense to me.

Okay.

So I guess in the long run right now, it really isn't -- wouldn't have the impact you would want and why take on the extra added interest cost and debt for the balance sheet,.

We're not even two weeks finished with a billion dollar repurchase.

So maybe we should breathe for a minute.

Thank you very much.

The next question is from Pat Burton from Citi.

Hi, congratulations on the quarter and I hope you guys are right on the bonus season outlook.

My question is as follows, and that is John, you made comments about the structure of the portfolio perhaps changing.

When I think of Paychex I think of short liability, short assets.

When I think of your competitor I think of short liability and much longer duration assets.

That helps when rates but it creates its own new set of risks.

Could you just amplify in your comment there about the portfolio structure?

I'm talking very minor.

I'm not talking -- what you just talked about, that would be a major change.

We know where they are.

We don't want to -- I'm not saying what they did is wrong or different it's just we're not going that zone.

We have really adopted a philosophy that return on the portfolio is not our highest requirement.

I mean, we like to earn something reasonable.

We're not going to try to differentiate ourselves, that portfolio.

I think people understand a whole lot better when my income statement moves with the rates as opposed to when it kind of moderates and sometimes that's good and sometimes that's bad.

Yes.

I mean, my personal view is you probably don't get the credit when the rates go up and you get hammered when the rates go down.

But I know you're not a big fan of looking at hedges.

How about variable rate debt?

This will tie to the buyback question.

If you want to pass, that's fine.

Some sort of structure where perhaps if rates come down, the cost of your interest goes down along with earning less on your float.

I like to pass on this for now.

What I want you to understand, we think we made a significant capital structure change when we took the dividend up to what we did and we did a billion dollar stock buyback.

That was a big thing for Paychex to do.

I think the commitment that John and I would say, we're going to continue to look at these things, do what we believe is best.

I don't think we're where in the past we were kind of we're not going to do that.

I would say were more open, we'll look at them.

And what makes sense we'll strongly consider doing.

At the moment, I think John's comment about let's breathe a little bit, that's okay too.

We got the board to agree to those things.

It was a good discussion on it from all ends.

You can expect that we'll continue to be looking at these things.

It's too early to say we would do one or the other right now.

By the way, as we were thinking through the changes that we wanted to make, we got some extraordinary help and guidance and recommendations from your community and we are very open to that.

So to the extent that you guys have ideas that you think would be helpful to our shareholders and our capital structure, shoot a note to John or myself.

We would be very happy to receive it and I promise you we'll think it through.

I echo that.

One last question.

You made a comment about the mono line insurers, and to my understanding only one of them was downgraded.

The other ones were put on watch.

The question is, the underlying fundamentals of the munis, the issuers are super solid, right, independent of the wrath.

He never bought instruments based on whether it was insurance.

We buy based on the underlying assets and where the munis are, 40% of the portfolio just happened to be insured.

But again, we average AA and if it goes below A we sell it.

And you got no issues with delinquencies or defaults or anything like that in the portfolio?

No.

Thanks for clearing it up.

Good quarter.

Next is Charlie Murphy from Morgan Stanley.

Thank you.

John and John, is it fair to extrapolate BeneTrac revenues from this quarter through the rest of the year and if that's true, did you modestly reduce the organic growth guidance for HR and benefits?

I'm not -- you would be getting more technical about it.

We look at we're in the range.

You leave it there.

The range we still believe is 20 to 23.

Throw BeneTrac in for 10 million on that side, it's still inside the guidance.

Our goal is not to change guidance.

We're still inside the guidance, we don't change it.

On the last call and on this call you said operating managers have identified expenses to reduce in a tougher environment.

Just to be clear, are they reducing those right now?

Have they not started?

What that refers to is more again of the management philosophy.

We do two types of planning.

We do budgetary planning and we do strategic planning.

One the budgetary side, when we release our budget for the year, one of the things that we do and you can sort of put it in a just in case bucket, is we require all of the senior management team to identify areas where they would cut expenses if required in the course of the year.

Another way of saying that is we essentially put into the planning process a concept that said that we want to be able to buffer our expense world in the event that we need to deal with that.

That's what the reference is to.

Where we are right now, we have not forced any reductions in the our expense lines in the course of the current year, but you know, if things started to soften on us, we were just merely trying to communicate to you that we've got a pretty good control over the things that we can manage and we do it in a proactive way.

Thank you very much.

And our last question comes from T.C.

Robillard from Banc of America Securities.

Great.

Thanks.

John, just a quick question.

If we look at the Paychex premier and PEO, the client based growth, is that a pretty decent proxy to assume that that's what that revenue base is growing?

You should really look at the client employee growth.

Work site employees.

I'm sorry.

That's what I meant.

If we look at the growth rate there, is that a decent ballpark to.

Decent ballpark.

It can vary because we do price increases there.

We also -- you get a situation where the client size in the PEO and the premier isn't always as consistent as what we get in our regular businesses.

Sometimes that might jump up.

It can vary.

It's going to be pretty close to that but not exactly on it.

Okay.

Give you an example.

I've had times when the revenue growth has been greater than the work site employees and I've had times when the reverse has happened.

Okay.

Great.

Thanks for the color.

Enjoy the holidays, guys.

You do as well.

There are no further questions.

Want to thank everybody and again, same time, really appreciate your interest in Paychex and all the help you give us in this process which I think works extremely well I want to hope you and your families and everybody close to you has a wonderful and safe holiday season.

Thanks a lot.

That concludes today's call.

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