沛齊 (PAYX) 2008 Q3 法說會逐字稿

Good morning, and welcome to Paychex third quarter results conference call.

Your lines have been placed on a listen-only mode until the question-and-answer portion of today's conference.

I would like to remind all parties today's call is now being recorded.

If you have any objections to please disconnect at this time.

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

John Morphy , Senior Vice President and Chief

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

Also with us is John Judge, our President and CEO.

The call will be comprised of three sections, a review of third quarter financial results including comments, updated guidance for the fiscal 2008, and overview from Jon Judge and lastly a Q & A session.

Yesterday afternoon after the market closed, we released our financial results for the third quarter ended February 29, 2008, 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 Relations 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 April 28, 2008.

The third quarter reflected another quarter of very good results and we look forward to achieving our 18th consecutive year of record revenue and earnings for fiscal 2008.

We achieved record net income of $142.5 million, or $0.39 diluted earnings per share in the third quarter.

Total revenue increased 10% generated by payroll service revenue growth of 8% and human resource services revenue growth of 18%.

Service revenue growth of 11% was in line with our expectations.

However, we are seeing signs of a weakening economy indicated by a more difficult than normal third quarter selling season and increases in business failures.

John will be giving a lot more color on that when we get to his section.

On a positive note, checks per client have not yet shown any significant weakness.

In light of volatility in the bond markets, I wanted to share some information with you about our portfolio of investments.

For many years we have followed a policy of a maximization of liquidity and protection of principal.

We have a strong investment group at Paychex and work closely with senior investment managers at McDonald and BlackRock to assure we meet our investment objectives.

This conservative investment profile was readily apparent last summer when we became concerned over potential liquidity of auction notes and we chose to exit the market.

We invest primarily in highly liquid investment grade fixed income securities with triple A and double A ratings and short-term securities with A-1/P-1 ratings.

We limit amounts that can be invested in any single issuer and invest in short to intermediate-term instruments whose market value is less sensitive to interest rate changes.

We do not utilize derivative financial instruments to manage investment rate risk.

We currently have no exposure to the following investment types: Asset backed commercial paper or asset backed securities, auction rate securities, collateralized debt obligations, enhanced cash or cash plus mutual funds, structured investment vehicles, or subprime mortgage securities.

As mentioned, we exited the auction rate market in the early fall of 2007 and have never experienced a failed auction.

Our investments in variable rate demand notes are rated A-1/P -1 and they have no exposure to municipal bond insurers except FSA, and I'll comment on that in a minute, and must carry an irrevocable letter of credit or stand by purchase agreement issued by highly rated financial institutions.

Approximately 40% of our long-term portfolio is insured, with an average underlying credit rating of double A, and the average rating for the remaining 60% of the portfolio is double A plus.

Ignoring the insurance rating and using only the underlying rating of our insured bond holdings gives us a total long-term portfolio rating in excess of double A.

Today, we continue to be extremely conservative in choosing investments of our funds held for clients and corporate funds.

We are not investing in taxable money markets since they may still exposure to subprime debt and we are not investing in any tax exempt money market funds because they may still be exposed to insurance risk.

We are buying funds back by Financial Security Assurance, FSA , since they have no exposure to subprime credits.

Our investment portfolio is approximately 50% taxable and 50 % tax exempt at the present time, but they are subject to change due to the rapidly changing environment and we will continue our philosophy of choosing the most liquid and safe investments.

Our quarterly earnings release process accompanied by simultaneously filing our Form 10-Q and your early analyst reports always gives us an indication of what you would like us to comment on during this call.

In response to your comments we provide the following couple comments.

During the quarter, we recognized $3.3 million of realized gains versus $0.5 million a year ago.

These gains are recognized as we sold long term taxable investments to reinvest in tax exempt instruments.

The long-term taxable investments were purchased originally to minimize a corporate AMT tax issue that was removed in connection with our stock repurchase program.

So basically the generation of these realized gains was not any attempt to diminish the effect of lowering interest rates.

It was related to a better investment strategy that came out of the repurchase program last fall.

The $3.3 million of realized gains generate approximately $0.006 of EPS.

HRS service revenue for the quarter was 18% compared to 25% a year ago, and 21% for the first nine months compared to 24% for the same period last year.

As you have mentioned before, HRS service revenue growth is not as consistent or predictable as payroll service revenue.

Some of the factors affecting the third quarter include some weakness in our 401 (k) fees from our fund managers due to decreases in the value of investment portfolios, accompanied by lower levels of contributions and increased loans by 401 (k) participants.

We also experienced limited growth in our PEO business due to our choosing to be risk avoidant in taking on new clients, continuing reduction to workers compensation rates in Florida, and weak economic conditions in Florida.

Our PEO operations are heavily based in Florida as we normally sell under our non-PEO offering named Paychex Premier when we're outside the Florida area.

On a positive note, the insurance experts are predicting that workers compensation rates in Florida will bottom out in calendar 2008.

Year-over-year revenue growth has been also affected by the timing of the SEBS, a 401 (k) provider, and BeneTrac acquisitions.

Despite the revenue fluctuations, the more important aspect of the HRS growth in the quarter is that we met our profit expectations from those revenues.

We will now refer to the consolidated income statement.

Payroll service revenue increased 8% to $374.2 million and 8% to $1.1 billion for the three and nine months ended February 29, 2008.

This growth was again driven primarily by client-based growth, higher check volume and price increases.

As of February 29, 2008, nearly all of our clients utilized our payroll tax administration services and 72% of our clients utilize our employee payment services.

Human Resource Service revenue increased 18% to $120.6 million, and 21% to $349.4 million for the three and nine months ended February 29.

The following factors contributed to the growth in HRS: Retirement Services' client base increased 10% to 47,000 clients, comprehensive Human Resource outsourcing services client employees increased 17% to 409,000 client employees, workers compensation insurance increased 19% to 70,000 clients, and the asset value of the retirement service employees funds was $9.1 billion.

In addition, the acquisition of BeneTrac contributed approximately $3 million in both the second and third quarters.

For the three months ended February 29, 2008, interest on funds held for clients decreased 1% due primarily to a decrease in average interest rates earned, partially offset by higher realized gains on sales of available for sale securities and higher average investment balances.

For the nine months ended February 29, 2008, interest on funds held for clients increased 3% as a result of higher average investment balances and higher realized gains on sales of available for sale securities, offset by lower average interest rates earned.

The average interest rates earned on funds held for clients were 3.6% and 3.9% for the three and nine months ended February 29, 2008, as compared to 4.1% and 4% for the same periods last year.

The funds held for clients average balances increased 4% for the first nine months of fiscal 2008.

Growth in clients' average balances for the full year fiscal 2008 is expected to be consistent with the growth for the first nine months of fiscal 2008.

Excluding the expense charged to increased litigation reserve of $13 million in February 2007, consolidated operating and selling general and administrative expenses increased 8% for both the three and nine months ended February 29, 2008.

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

As of February 29, 2008, our employees increased 7% from the same time a year ago to 12,300 employees.

Operating income net of certain items excludes interest on funds held for clients and the expense charge in February 2007 for the litigation reserve, operating income net of certain items increased 17% to $173 million and 16% to $530.1 million for the three and nine months ended February 29.

We expect the growth in operating income, net of certain items, will be approximately 15% for the full year of fiscal 2008 consistent with our long-term growth objectives.

Investment income decreased 66% to $3.6 million and 22% to $23.3 million for the three and nine months ended February 29 , 2008.

The changes in investment income reflect the funding of the stock repurchase program completed on December 14, 2007.

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 yet it is expected to yield slightly higher earnings per share results for fiscal 2008 due to fewer common shares outstanding.

Our effective income tax rate was 33.4% and 32.6% for the three and nine months ended February 29, 2008 respectively, compared with 31.0% for both the respective prior year periods.

The increase in the effective income tax rate for the three months ended February 29, 2008 is due to anticipated lower levels of tax exempt income for the balance of fiscal 2008 from securities held in our investment portfolio.

Again, as we discussed before, that is our choosing to flight to safety has caused us to be more in taxables.

The increase in the effective income tax rate for the nine months ended February 29, 2008 is compared to the same period last year as a result of lower levels of tax exempt income derived from securities held in our investment portfolios, as well as the adoption of new accounting guidance related to uncertain tax positions.

We will now move to the balance sheet.

Cash and total corporate investments were $427 million as of February 29, 2008.

Our cash flows from operations were again strong at $590 million, for the nine months ended February 29, 2008, an increase of 11% over the same period a year ago.

Our total available for sale investments, including corporate investments and funds held for clients, reflected a net unrealized gain of $13.6 million as of February 29, 2008, compared with a net unrealized loss of $14.9 million as of May 31, 2007.

The three-year triple A municipal securities yield decreased to 2.75% at February 29, 2008 from 3.71% at May 31, 2007.

Our net property and equipment balance activity during the first nine months of fiscal 2008 reflected capital expenditures of approximately $65 million, and depreciation expense of approximately $46 million.

Client fund deposits as of February 29 increased to $4.4 billion from $4 billion as of May 31.

Client fund deposits vary widely on a day-to-day basis and averaged $3.3 billion during nine months ended February 29, 2008.

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

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

Readychex is a service whereby we pay our client employees with checks drawn on Paychex bank accounts.

Total stockholders equity was $1.2 billion as of February 29, 2008, reflecting $334 million in dividends paid in the first nine months of fiscal 2008 and $1 billion of stock repurchases.

Our return on equity for the past 12 months was an outstanding 34%.

Our outlook for the fiscal year ended May 31, 2008, has been revised to reflect the current Federal Funds rate of 2.25% and current economic conditions.

Consistent with our policy regarding guidance, our projections do not anticipate or speculate on future changes to interest rates.

As disclosed in our Form 10-Q for the three months ended February 29, 2008, the earnings affect of a 25-basis-point change in the Federal Funds rate at the present time is expected to be approximately $4.5 million after taxes for the next 12-month period.

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 Resources Services revenue growth is projected to be in the range of 19% to 22%, with total service revenue growth of between 10% and 12%.

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%.

The effective income tax rate is expected to approximate 33% accompanied by net income growth in the range of 11% to 13%.

We expect our average outstanding shares for the year to be approximately 370 million, and purchase of new property and equipment are estimated to be about $85 million.

The Company by depreciation expense of $65 million.

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

At this time I'll turn the meeting

Thanks, John, good morning, everyone, and thank you for joining us today.

I'll just add a few comments to John's and then open it up for your questions.

As you can see from our earnings release we had a very solid quarter, particularly so given all of the headlines and concerns about the economy.

Our quarter was another record breaking quarter and virtually assured us of our 18th consecutive record breaking year of revenue and profit.

Total revenue growth hit 10% for the quarter and 11% year-to-date.

Total service revenue was 11% for the quarter and nine months.

Payroll Service revenue growth of 8% was solid, and our HRS revenue growth of 18% on the quarter while slightly lower than last quarter still positions us very well at 21% for the nine months.

Expense Management and focus on margins also produced excellent results as evidenced by our very strong profit performance.

Operating income growth, [ex float], hit 17% which translates to $0.39 a share or 18% EPS growth for our shareholders.

When you add on top of that a cash dividend of $0.30 a share or 43% above this quarter last year and 55% above the same nine months of last year, you can see why we were pleased with our overall third quarter financial results.

The third quarter was also a very important quarter for our operations team.

It's our clients' year-end close, and our operations team performed extremely well.

We continued to achieve record level results in client retention and client satisfaction.

We processed over 12 million W-2's without a glitch and got them to our customers well ahead of deadlines, and in general had a very smooth year-end closing for our clients.

Let me now move to what we're seeing in the macroeconomic environment as John mentioned earlier.

For the last several earnings calls, there's been significant interest in what we were seeing relative to the economy, and with over 570,000 clients we have a pretty good window on at least a small and medium business sector of the economy.

For the most part, as we've said in the past, we saw very little relative impact on our business.

That's still the case with two minor exceptions that we pointed out in our earnings release.

In the third quarter, we started to see more business failures than normal.

Not a huge number by any stretch of the imagination, but still the same noticeable and very clustered geographically and by industry.

That is Florida, Southern California, very heavily in the construction, mortgage and real estate businesses.

And our salespeople tell us that the third quarter selling environment was more difficult than they had noticed in past years.

They still got through it okay, but it was clearly more difficult than we experienced in past years.

Other than those two areas, our business is holding up very well and clearly does not match some of the more gloomy headlines we've all seen relative to the economy.

Based on our past experience with economic downturns our relative resiliency is consistent to what we've seen in the past.

So to sum it up we had a very solid quarter.

We feel very confident in our ability to hit our guidance and to achieve our 18th consecutive record breaking year.

With that I'll open it up to your questions and John and I would be happy to comment on any areas you all would like to take us to.

Thank you.

(OPERATOR INSTRUCTIONS) Our first question is from Rod Bourgeois from Sanford Bernstein.

Hi, guys.

I wanted to follow-up on the comments, particularly about the weak selling season that you've had over the last couple of months.

Can you give us any way to dimension how weak the sales were and any way to gauge to what extent that can could impact your revenue growth going forward, and I guess a specific question on that front would be can you tell us how much of your next 12 months revenues are contingent upon the selling that has taken place over the last three months just to give us a way to dimension your commentary about the weak selling season?

Well first of all, I said difficult, I didn't say weak.

I didn't catch whether John said weak, but to put it in perspective, one of the things I do is I look at where we were this year versus last year, which will help you if what you are trying to do is to project out if we had some issues in the quarter, what does that project out the next several years.

When I look at this year versus last year and how we did relative to plan last year versus this year, what we're talking about from a difficulty standpoint is a matter of a couple of percentage points.

So it's not, you're not talking about an enormous number by any stretch of the imagination.

Really just talking about a more difficult season this year than last.

In general when you think about what impact sales has on any given calendar year, the normal rule of thumb that we use is that the sales in a current environment or in a current year normally will rarely have an impact of more than 10% or 15% of our revenue.

Okay.

And so when you say was difficult, is there any way to quantify, I mean what your sales were in the last three months maybe versus the year ago period just to give us a baseline for that?

Well, I did.

When I told you that you're talking about, we don't talk about what the actual sales performance was.

We always give you P & L performance, which is the actual revenue, not the selling revenue, but what I told you was that to give you an opportunity to kind of understand the difference, I said it was a couple of percentage points one way or the other.

Okay, so over the next few quarters, is it reasonable to assume your services revenue growth could decelerate a couple of points over the next few quarters based on the experience you had in the last three months, if that doesn't rectify itself soon?

A couple points is too much.

Okay.

I think what you have to recognize, and we look and we know you're looking very hard at what we see with all of these clients, how the economy gets affected.

So basically we've spent a lot of time looking at this again, and when you look at what happened and the early stages for us is selling gets a little harder, so don't interpret it, I think people reacted stronger than what we said, but that's okay.

We saw the beginning of it being affected.

We still haven't seen much check difference and the other thing we do see with clients is if you're not near the subprime construction kind of the areas of California or Florida, we still see things as being okay.

Not expanding, but we don't see any significant weakness yet.

But when you go to sell you just see a little more caution on people, doesn't affect it significantly, but some in the caution is they're just going to wait and see a little bit.

But, again, it's early stages and we said to you before we would tell you exactly what we were seeing and that's what we've been seeing.

That's very helpful and, Jon, can you clarify in the difficulty in selling, is it difficulty mostly by region and industry or is it difficulty in selling particular services?

In other words, is the difficulty across all services or is it relegated to things like 401 (k) services?

Can you dimension where the difficulty is primarily showing up in this field?

Well, when you talk about industry, because of the nature of the products that we sell, this business is really one that goes across the entire spectrum of the industry, so it's not like we're heavy in one industry versus the other.

When I talk about difficulty, what I talk about is we look at pretty detailed metrics on our sales teams and on our sales activities relative to the number of calls they're making on CPAs, what the closing rates are by territory, and so on, and the difficulty to me, the comments that I get from our salesforce is just the sledding was a little bit harder.

They were working a a lot more hours, they were pushing it a lot harder, and as I said earlier, they got through it, but it was harder for them to get the sales than it had been in prior years.

So from a geographic standpoint, that tends to show up more on the loss side of it than it does on the sales side of it.

And the loss being by the failed businesses that we talked about, and, again, that number, to calibrate it, is measured in hundreds or very low thousands, versus hundreds of thousands of clients that we have.

But those tend to, those have definitely tended to cluster in the Florida markets and in the Southern California markets, to a lesser extent in Arizona.

Beautiful, thanks, guys.

Pleasure.

Thank you our next question is from James Kissane from Bear Stearns.

Thanks.

Good job, guys.

Not to pin you down, Jon, but you think you'll still do better than 3.5% net new client growth for fiscal '08?

No.

No, okay, and just given the tick up in bankruptcies, where do you see your retention tracking right now?

Maybe if you can put some historical perspective around that?

One thing about retention is the controllable retention is clearly at its best ever, again.

So where retention has changed and it's not a lot.

When you start talking about the number of bankruptcies there are and how much it's changed by, again, it's just a little bit of an uptick and I think this original uptick is almost directly related to subprime construction and people are just simply struggling.

We don't see something that's widespread.

So we've seen a little bit of a tick up, but just it's greater than normal, but not unbelievable.

The other thing to remember in our business versus when you're dealing with large clients, what typically happens in ours when a company fails, the owner often will either start a new business the next week or go join one of his buddies businesses, so the impact to us is not as one-to-one as it might be if we were dealing with larger clients where those employees would be out of work for a long period of time.

One last question.

Are you seeing change in the competitive environment?

It does seem like Intuit has stepped up their marketing of the payroll offering in the last several months.

Well, it just depends.

Remember in the Intuit world, you will remember that Intuit got out of a large part of the business we're in not 12 month ago.

So Intuit's focus from what we can can see has remained pretty much where it was.

We tend to be exclusively in the fully outsourced.

They tend to be in the assisted and do-it-yourself world, so we don't see them that much and where we would see them, it would be in the one to four, one to 10 sell.

Okay.

But on a general comment about competition, there's nothing that's involved with any of what we're talking about with just it being a harder sledding to get the sales that has to do with competition.

We don't see anything different on that landscape.

ADP has not ticked up higher on us.

In fact, I think we might be doing a little bit better against them, but it's a pretty small number.

We almost never see Ceridian, so that landscape really hasn't changed that much for us, and quite frankly on the economy, part of what we're doing is we told you if we ever saw anything change that we would tell you we saw it change, but the changes that we've seen are no where near what the focus has been so far in this call.

It's much smaller than that.

Great.

Thank you very much.

Pleasure.

Thank you.

Our next question is from Kartik Mehta from FTN Midwest.

Hi, good morning, Jon.

Listening to your comments and talking about only 10% of the revenue really impacts your next year, is it safe to say that if we stay in this environment, assuming the economy doesn't change from this point, at least downward, that you could at least sustain 8% service revenue growth at least the bottom end of the long-term guidance?

We'll talk to you about guidance in three months.

I don't know that I want to go in and say what I think the bottom could be or not be.

You've watched us change in the cycles so I wouldn't over react to think the change can be dramatic because I don't believe that's the case.

When you talk about revenue growth, what basically happens, because we didn't quite say it, I want to make sure you understand it, in the year we're in, only in Payroll, only 10% of the revenue comes from what we sell in that year.

So it isn't like you're at risk for 10%.

You're at risk for a fraction of 10% because the salesforce isn't going to sell zero.

Now, obviously, what they sell this year probably has a bigger impact, again, the following year but, again, they aren't selling zero.

Now, that's 10% on Payroll.

I'd say in Human Resource, it's probably in the 15% to 20% range simply because there are sign up fees in the front end.

So when we talk about things weakening, I think you'll see in similar economic cycles we can get some weakness in revenue, but it's not like it goes all to hell and then it changes dramatically.

And John, is there any impact on pricing if you look at what happened last recession, or is your ability to sustain kind of normal pricing in that 3% to 4% range, stays?

Pricing for us, hard to believe, has never been based on the economy.

Again the price increases are modest and they're small to an employee, $6 or $7 a month to the average client, and the employer and it just doesn't seem to be a problem.

As long as we maximize the service levels, which right now we believe we're providing the best service we ever have, we actually, believe it or not, right now discounting is a little bit less than it's been and client loss is due to price less than they've been.

So here we are in a tough environment and I think our pricing power will continue.

And last question, I was wondering if you could give us an update on the healthcare initiatives, maybe number of salespeople you have now and successes or failures you've witnessed and any changes you might need to make to that particular program for it to grow?

It's growing great.

I mean healthcare, the healthcare investment, if you will, has been going very well.

I won't get into too much detail with you on it and I've told, I've mentioned in past calls that we're up just over 100 salespeople, I think at this point, and we'll continue to expand that as quick as we can and stay under control.

From the standpoint of the plans that we've set for ourselves you can imagine given the fact that it's our number one investment right now that we've put fairly aggressive plans in place relative to growth, and we're exceeding those plans from a sales standpoint year-to-date.

So we're pretty, we're pretty happy with where we are.

We're happy with the number of providers that, or carriers that we're signed up with.

We're happy with the deployment of the sales teams in the field.

We're happy with the receptivity of the prices.

As I've talked several times on these calls, this appears to me to be a completely natural market for us, and we're investing appropriately and we're getting the results that we hoped we would get.

So I feel very, very bullish about the whole health benefits world.

Thank you very much.

Thank you.

Our next question is from Pat Burton from Citigroup.

Hi, and congratulations on the quarter.

My question has to do with the investment portfolio and in the lower rate environment.

A couple things.

Would you guys consider increasing duration, number one, and number two, would you consider perhaps leveraging against the portfolio like your competitor does issuing liabilities to earn a spread on the assets, and then I have a follow-up, thanks.

Basically, Pat, we are looking at all of these strategies.

Probably will, we did move the duration out some when we chose to take the billion out of the short-term investments and put in the long-term because to be able to do that because we'll have to borrow, I'm going to say 10 to 15 days a year.

Now, for us to go to the philosophy that ADP has we have to then look hard at getting totally out of tax exempts because generally you can't borrow money to invest in tax exempt securities.

But we're looking at all of those things, what can we do to minimize this, but the biggest thing we want to make sure is we go through these cycles is we really do protect the principal and we don't have any liquidity issues that cause us problems, so obviously, these are very changing times and we're, I think, right on top of them.

We did some great things with the auction notes we ran, looked at the insurance on the variable rate demand notes, and we'll continue to be aggressive and we'll continue to look at this area for better ways to do this.

Okay, thanks, and the follow-up is if the flow continues to get pressured, let's say the Fed goes arguably to 1%, would you guys consider cutting costs to offset that impact to shareholders or would you just view it as the cyclical nature of rates and wait for it to recover?

In the past we've looked at that as a cyclical rates because while it's lower revenues, none of the work goes away because the rates went down.

So I think we look at our business kind of of outside the rates, we'd react to them as best we can, but that's some of the vagaries.

Sometimes you get the benefit of higher rates.

I don't think they're permanently going to be at 1, and it will come back, but I think we just would have to weather the storm there, but obviously we would removal costs we could, but at the same token I know one thing about this business that's crucial.

You can't do anything that harms client service.

Okay, thanks.

Thanks for your conservatism in terms of how you run the portfolio.

Our next question today is from Greg Smith from Merrill Lynch.

Yes, hi, good morning.

Obviously, we know the net unrealized gains as of the end of the quarter, but any chance you can give us where that sits maybe yesterday?

Do you have a realtime number there?

I think it might be in the 10-Q.

I think it's in the 10-Q.

I believe it's in the 10-Q in the investment section and what it is as of a recent date.

If it's not, we'll put it somewhere, but you can't miss it on the website.

Okay, great.

And then what is your philosophy?

Obviously, you guys had some gains this quarter and you explained why that happened.

But what is the philosophy, again, in the scenario we go rates come quite a bit lower, the gains go up, what's the philosophy on that?

The old days in the last cycle interest rates we chose to take gains in cycles.

We've taken losses to allow us to try and maximize or minimize some of the distortion.

I've come to the conclusion that in the end, you just change where it is.

You don't really change it.

The accounting rules have also come out and they're a little bit different, but if you take losses as a norm, you can't be considered to be holding to market, and therefore, you have to book the fluctuating rate environment.

You could argue every day, I mean it would be every quarter.

We're not going to get into that environment.

The SEC has relaxed that rule a little bit in the current environment saying that these investment portfolios, these are unusual times so some people have been able to take losses.

We would too, that basically you don't have to change your accounting, so right now, I would say we're not looking to take gains and losses.

The $3 million that we took we laid it to a very unusual tax issue on an AMT that when we bought the stock back and it's very complicated, the issue went away, so we no longer needed the taxables and that's why we sold them.

It had nothing to do with trying to generate any gains.

Yes, okay.

Thank you.

Thank you.

Our next question is from Liz Grausam from Goldman Sachs.

Great, thanks.

Obviously, the margin was very strong this quarter and wanted to get any sense from you if sales commissions were a little bit lower than you'd expected given the selling environment, and also, how you think about salesforce hiring going forward, if we're in a little bit more of a choppy sales environment, give us some perspective on how you manage hiring in these types of environments?

Tell me exactly what you're looking for in the first part of your question?

Just whether or not sales commissions, the SG&A expense is a little bit lighter than you'd expected given where the selling season came in.

Assuming where the margins are, but the selling expenses were a little bit lighter, but it was, from commissions, it was very small.

As I've tried to mention earlier, the difference on a year-to-year basis of the sales through this past quarter and the sales through the same quarter last year were very minor.

I mean, if you called one 100% you'd call the other 98%, it was that kind of a thing, so it wasn't quite as big as I think some people were concluding.

Margin in general, we're very focused, obviously, on margins not to the point that we are constraining expense that's required to run our business or to grow our business, but we, as part of our culture, we are very focused on expense and cost containment and on margin expansion, so that will always happen.

Relative to the salespeople going forward, if we see that we need to increase our salespeople, we will definitely make that expense.

In the fourth quarter this year, and remember, we've gone, I don't know, it's been every year, I think, since I've been here and probably many years before I got here, we've done pre-hires in the third, in the fourth, excuse me, in the fourth quarter to get ready for the first quarter.

We're very focused on where our coverage is relative to the territories and making sure we have a full slate of salespeople in it, so we'll make those expenses as are needed to run the business.

Great thanks.

And then mechanics, John Morphy, on the tax rate going forward given where the investment portfolio is now, should we see it kind of staying around 33% or would you expect that to move up more as we go into '09 as well?

I believe the 33% is a good number now, but I think we'll have to get better guidance when we get to June only because this environment is changing.

I mean, three or four weeks ago we were in tax exempt, taxables to the tune of almost 80% to 90%.

We're back down to 50%.

It's going to keep bouncing around.

I think if the liquidity crisis goes away you'll see us getting back to the old way, but I don't know.

Now, it isn't as big an issue as you think because if you stay with what you've got and what we've given you on the disclosure, if I'm in taxables I'll have a little more tax exempt income which probably will be above your estimate and you missed the tax rate by a little bit, but you won't be very far off in net income.

Great, thank you.

Thank you.

Our next question is from Adam Frisch from UBS.

Thank you, good morning, guys.

Just judging from the conversations we've had with investors and the questions that I'm hearing on the call today, forgive me for a second if I'm going back to like kind of Paychex 101 and ask you guys to revisit the secular trends versus the cyclical trends.

If we look at the cyclical stuff, it's Armageddon unemployment, interest rates, small business lending, all that kind of stuff that we read about.

But if we look at your model and we mapped out your service revenue growth since '98 up until the present, it's been fairly consistent after the last recession despite employment trends going up and then coming back down.

So do you feel like people are kind of missing the story a little bit?

We're arguing if sales in the third quarter was weak, you said it was weaker, not weak.

Were they really that much weaker given where your multiple is from what you described Jon Judge, doesn't really seem like a whole big difference at all to make anything out of, but do you feel like people are kind of missing the secular story here versus outsourcing payroll growth versus what we're hearing about?

I think it's possible.

I think the analysis that you did is is why I've said in the past that while nobody would ever, I think, be crazy enough to say they're completely resistant to any economic downturns we tend to not be affected anywhere near the way the rest of the economy is affected.

So, and there's a variety of reasons for that, but we don't, when the economy went down the last time in the early 2001-2002 standpoint, we kind of went right through it.

It's not to say we weren't affected, that we didn't have some minor issues, but relative to what the happened in the economy in general, we went right through it.

And my feeling has been, and I've been somewhat vocal on this, is I suspect that will happen in this current environment as well.

It's not that we won't be affected, but we won't be affected anywhere near the way other companies are or the way the headlines on the economy are.

So, I think the analysis you did the long-term analysis in looking through different past periods when there have been downturns what you came out with was right.

So on the focus on the --

Is that because, Jon, the secular trends to outsource payroll that it still is a relatively unsaturated market?

It is very much an unsaturated market.

Typically what happens when you get into downturns like this most companies try to figure out ways to get other people to do what they would consider to be non-essential and non-strategic things so they can get focused on their business.

So, typically, when you get into downturns you might see more outsourcing rather than less, but where we stand, it's what we've said from the beginning, if you look at what the penetration rates are in the existing U.S.

market, there is plenty of room for us to move without a single dollar of growth in the environment, just because it's still a relatively under penetrated market, and quite frankly with the type of businesses that we serve, the products and services that we offer relative to what their business issues are are perfect.

It's, if you think about it, to be able to have somebody take care of all of your payroll processing, all of your tax filing, and so on, and for an average client of ours for $2,300 or $2,400 a year, and most of our businesses the greatest single problem is resource shortages.

It frees up what little people they have in their company to get focused on the things they need to focus on which is growing revenue and staying alive.

Right.

So, again, sorry to retreat or go back to that but I thought it was kind of necessary.

Two questions that I did have.

One, are the ancillary services getting a little bit harder to sell just because companies are tightening up a little bit on expenses and what they want to pay via benefits and all that kind of stuff?

Is that any kind of difference than what you've seen in the past?

I don't have any data in front of me that would tell me the answer to that is, yes.

The theory on it, though, in some cases you'd say, yes, in some cases you'd say, no.

The where you'd say no is and it's very evident in what we've seen so far, the immediate ancillaries, tax pay employee pay, those continue to defy gravity.

They continue to sell at very strong rates and from a tax pay we're virtually at 100%.

When you get into some of the others, if you think about things like Safe Harbor 401 (k)s, which in small businesses which require contributions by the owner to the employees piece, the theory would say that as the economy gets tougher and tougher those might be affected, but so far we haven't really seen anything that would tell us that our ancillaries are under stress.

Okay.

And then last question on, I think Kartik asked this before, I wanted to follow-up on it.

You guys have always run a real tight ship, obviously, that shows up on your operating margin line, but are you guys in any kind of a more aggressive mode here to take a harder look at SG&A or operating costs right now than you would be otherwise?

Not more so than any normal period.

We have said that we tend to be a very disciplined financial organization starting with Tom from day one and it's been ingrained in our culture from the beginning.

We don't have a lot of perks in the business, and we sort of run a relatively tight ship and we tend to be very focused on delivering profits.

So when we book our plans for the year, we're not constraining the way that we spend money relative to growing our business.

We're clearly constrained in how we spend money relative to wastage, but there's nothing going on right now that says that we're going to start dragging expense out of the business that could potentially hurt us to sort of survive the next period.

We're just managing our business prudently and I think you can see that in our results.

Yes, absolutely.

Okay, guys, thanks a lot.

Thank you.

Our next question is from David Grossman from Thomas Weisel Partners.

Thanks very much.

Just to go back to some earlier questions, it sounds like you're comfortable with growing the client base this year, you're pretty comfortable with the pricing environment and retention has been good.

So with all that bundled in, is there any reason to think that the 5% to 8%, 6% to 8% kind of gross in the core payroll business is a realistic look at fiscal '09 just from where we sit today?

Again, not asking for specific guidance, but just trying to put the various pieces together.

Basically, we're not going to give guidance today, David, and as we're still in the middle of the process of developing all of this, and obviously right now we've said we haven't seen any significant check weakness except related to what the people that go out of business.

And you look at what's happened in the past.

I don't think we're talking about anything that's dramatic here and we'll continue to watch it closely.

But for me to say what's the bottom line, it really comes down to I don't know what kind of an economy or what it's going to be.

The paper would have you believe that we're in the midst of a huge recession, which we don't certainly see, and you just got to wait and see how it works out.

Each one has got a little bit different so I think for me to guess would just be a guess.

But I don't think we're looking at numbers bottoming out at extremely low levels unless something changes we're not aware of.

On unrealized gains, they just gave me the number.

At March 20, the unrealized gains were $37 million.

So it's what happens in the portfolio goes down, but we're not looking to take those gains.

Thanks, John.

And just one other thing, and I know this comes up every quarter, but are you considering, or at least give us your updated thoughts on a more systematic share repurchase program?

Basically, we're in the same place we were.

I mean we have a Board meeting in the next 30 days and I'm sure this subject will come up and we'll talk about it and we'll think about it, and I think it depends on where the stock price is and you can say, well, at this point, would you be an aggressive buyer.

But at the same token, we're living in a world of liquidity so it isn't like I don't mind having the $400 million to be flexible to do something with.

We've been very good at being disciplined and not take this money and buy something we lost a lot of money in.

We aren't going to do that.

So the issue to have you keep looking at this, but the more you take the cash down or you go to debt you do start to minimize some of your flexibility, and now when I had $1.4 billion it was pretty hard to say I was minimizing anything.

I go back to 2002 and 2003, the opportunity came up to buy Advantage and Interpay and very little notice and one reason we got those deals done so fast we didn't have to go to anybody except the Hart-Scott-Rodino for approval.

We just paid the cash and we were done.

So we'll keep looking at it but we haven't made a decision on what we're going to do yet.

Two things, David, and I've talked about this publicly.

We did talk about this the last Board meeting and one thing that our Board reminded us of and we reminded ourselves of is we had just completed a billion dollar share repurchase, so we sort of taken our breath and seeing how things were playing out.

Obviously, it's something that's under consideration.

I would be curious in what your position or your opinion is?

Well, I guess, it's really deferring to you in terms of how you want to manage the business and manage your earnings growth.

It just looks like after the dividends, you generate considerable free cash flow and you certainly have the flexibility, I guess, to institute a more systematic repurchase.

I would say this.

If we put one in, it would be not exactly like the last one where we had an objective to reduce the cash.

It would be strictly an opportunistic program where we would announce something, but whether we would be active we would only tell you after the fact which is what the requirement is.

So it would be, if we did one it would be different from what we have done, but at the same token we would announce what we plan to do something ahead of time.

Very good, thank you.

Thank you.

Our next question is from Tien-Tsin Huang from JPMorgan.

Thanks.

I had a couple questions on the 401 (k) side.

How much of your Retirement Services revenue is actually derived from any kind of fees that you might get from the value of the assets under management, and, secondly, John Morphy, I think you mentioned some fee pressure in the 401 (k) side.

I think that's similar to past quarters.

I just wanted to verify?

It's not fee pressure, it's basically we get about 30 basis points on the money so we disclose how much money we have so you can figure out how much that is.

We never give the exact number but we get approximately 30 basis points.

Those basis points points are under a little bit of diminishment due to the fact when we go to guided choice and some of the other fund offerings we aren't going to get as many basis points.

But as we've talked on prior calls, we have a number one position in 401 (k) and we believe these more sophisticated investment choices, while they don't quite earn the same basis points on them, they provide us to be, to maintain our number one position and we believe that's critical to evolving as a player in this market.

And right now we believe we have some of the best product offerings in 401 (k) marketplace of anybody, so we feel real good about it, but at the same time we know there's going to be a little bit of pressure on the fees or what you call the basis points back.

Okay, so about 30 bips on the $9 billion or so.

Yes.

How we should model it, okay, got it.

And then on the client fund balance side should we assume mid-single-digit growth there over the next, say, two to three quarters?

Is that a safe assumption?

I wouldn't make it any higher than that.

Okay, so mid-single-digits there, and then lastly on the, just wanted to clarify geographically I think you mentioned Southern California and Florida being a little bit tougher.

Were those the primary regions or are there other regions that were difficult as well?

It wasn't being tougher.

It was where we were seeing some of the bankruptcies which is is a relatively small piece of the equation.

Almost a miniscule piece of the equation.

Okay, so nothing else worth calling out then geographically?

No.

Very good, thank you.

Thank you.

Our next question is from Charlie Murphy from Morgan Stanley.

Thanks.

The other expense line within operating expenses and SG&A has grown only around 1% year-to-date, which is impressive.

That's stuff like delivery and T& E and forms and supplies.

How have you been able to keep that line so flat year-over-year, and what could cause that if anything to suddenly shoot up?

Well, we just, we were very effective.

We had a great year-end and we watched the stuff, and we get better and better.

We keep watching, but you can get a quarterly aberration if something happened, but we have a lot of people pushing on telecommunication expenses.

We have lots of people that walk in and say well we can do this better and they have a tough time but we just keep watching the expenses.

I don't know of anything particular and maybe this quarter is a little less than normal, but we'll still keep our watch on those and we're going to keep leveraging.

Okay, and as a quick follow-up is it management's intention to stay invested in those VRDNs going forward?

Only if we feel they're very safe.

We're talking to our investment cohorts every day and the ones we're in are the banks are making liquidity and I think it gets to the point where those aren't safe because the banks have no liquidity, I don't want to think about what that is like.

Okay, thanks.

Thank you.

Our next question is from Gary Bisbee from Lehman Brothers.

Hi, good morning.

You know, we can all look at the last recession and see that the core payroll business was a pretty resilient business throughout that.

Do you have any sense, any broader sense about how the HR services offerings fare and do you expect it to be the same, and I know you mentioned a minute ago the 401 (k) you could make the case that that might do a little worse, but is there any other that seem like they would be wildly different one way or the other?

I don't know if it would be wildly different but you know , I think all of us know when you look at process and Jon talked about it earlier, payroll by itself is a necessity.

You got to pay people.

You got to do it.

When you get to some of the HRS stuff some of it is a little more optional than other stuff and the last time we went through this HRS wasn't as big an entity as it is today.

But now, we've got other products where the world never goes to completely stop, so while there's some businesses that say well I don't want to put a 401 (k) in, there will be other businesses that do well and when you talk about recessions and how you measure one, it's still a modest amount of percent change, so I think there will be affected some.

How much, hard to say, and some of that will depend, we got to keep pushing our sales efforts and enough good stuff, but it may be a little bit more difficult than payroll, but until we see proof or evidence, I think we really

Okay.

If on, in terms of the M & A landscape, is it too early to see potential acquisitions where they're struggling a bit and more willing to sell at a reasonable price and you mentioned you've done that in the past with payroll businesses.

How would you think about what you'd like to do?

Are there other small or mid-sized payroll?

Would there be something that's slightly bigger client or would it mostly be HRS?

Any sense?

Our strategy on M & A is not a bargain hunting strategy.

It's a strategy that's based on filling out the product portfolio that we have that fits into our offering strategy and so, yes, when you get into an environment like this, you may be able to buy things that are better priced than you'd buy them normally, but we're not out bargain hunting.

The one exception might be just buying pure payroll businesses, for sure we're interested that.

They may become more available in tough times than they are in the easier times and that, obviously, would be something that would be a great benefit to us.

We buy quite a few of those every year.

We're always in the market for them.

We don't pay ridiculous prices for it, but whenever we find a scenario where the price is within our model and in particularly if it's just a payroll operation, we'll snap them up immediately.

So that part won't change.

And on the other side of it, it's really more strategy driven than it is bargain hunting driven.

Okay, and then just lastly, you've obviously done a great job over the years on the cost front.

How comfortable are you that if revenue growth were to slow one or two percentage points that you'd be able to slow that , the cost growth to continue to put up

There are things I worried about but that isn't one of them.

I believe the costs come out, we have one huge advantage over most companies.

First off, we are continuing to grow, so it's not like you got to reduce anything.

It's pretty much you just don't add.

The second thing is we have half our jobs are in two job classifications, salespeople and payroll specialists.

Payroll specialists number automatically, because we have some turnover in both those jobs, is adjusted ongoing to the client base.

And it's done not at any harm to any people.

It's basically you have a number of payroll specialists and it goes up and down based upon what we have but isn't a matter you got to go tell somebody they don't have a job.

The only people I know we really reduced here is totally performance based.

The same thing on the salesforce, we have territories, we generally add them at the beginning of the year.

But both those classifications, which means it's like 6,000 people between the two of them, is monitored closely.

So we've kind of got some built in things that most people don't have.

The same thing that we're not in the major contracts, we don't have major events that all of a sudden you're missing $4 million or $5 million and what are you going to do?

So the biggest thing that affects us and somebody talked earlier is float goes down, unfortunately work doesn't go down when float goes down, so we'll continue to manage this business.

But I think we have a culture of margin expansion and it's going to continue.

Great.

Thank you.

Thank you.

Our next question is from Glenn Greene from Oppenheimer.

Thank you, good morning.

Couple questions.

Just to go back to the comment related to the more difficult than normal selling season, just wanted to make sure that this was specifically macro related and nothing to do with sort of salesforce execution in any way, or is it a combination in any means?

Well, again, to reiterate, I guess I didn't think hard enough about putting this in because I think you guys were reacting way more than what we intended it to be.

But with that said, the pieces we were referring to were clearly macro related.

I mean there's always opportunities to improve your sales execution and we have a sort of an ongoing program in that area like we do with all of our jobs.

But the difficult selling season was, we watch our call volume that comes out, we're very activity based sales organization and we watch the call volumes that go out and the sales activities that go on and all of that was fine, so it was clearly a macro case.

Okay, so there's nothing unusual that you're doing in terms of going forward in terms of managing the salesforce as we sort of go into '09?

Not anything, I mean, how do I answer that?

Not anything significantly different, but obviously part of our business model is continuous improvement.

We are an essentially organic growing business and the only way you get that to happen is you're in a continuous improvement project.

So we're always evaluating what we're doing, what we think we're doing well, where we think we have areas to improve and we're pretty aggressive on going after the areas we think we can improve in.

So you shouldn't think that we're static in terms of the sales side.

We're not, but in terms of anything some brand new project or brand new thing that we're doing there is nothing like that going on.

Okay.

And then for John Morphy, another question related to the the expense growth, obviously, you've held the line pretty tightly there.

Have you sort of held back on any investments would you have liked to have made this year and just trying to get a sense for how you're balancing investments sort of achieving that 15% operating income growth target going forward?

We're always looking at what we'll do a little harder, but I don't know of anything that we felt we needed to do we didn't do.

Let me say, add something to that.

We're a Company that is a very healthy Company and we're in the midst of very protracted long period of growth.

So the reality is that every year when we walk into the budget process, our teams can dream up way more than we can afford to spend.

So I can't imagine in my lifetime I'll ever be in a scenario where we don't have people making proposals to do things or spend money that would be great to do or nice to do.

But the realities are the way we manage this business is that the revenue that we believe we can pull out of the marketplace by and large will dictate the expense that's allotted to run the business and then from that point on, it's a prioritization.

And that will continue.

Now if we saw something where we believe that there was a market in front of us that was a natural market for us to go after, we would spend whatever we had to spend.

I mean if you look at our balance sheet you can tell it from a financial stability standpoint, we have enormous resources if we choose to put them after a particular target.

So if we saw a target that we felt was going to materially change our business, we have no issue spending it.

But I think in lots of cases it's just bad form to just spend without having consideration for what the relationship is between expense and revenue.

All right, that's very helpful, thank you.

Thank you.

Our next question is from T.C.

Robillard from Banc of America Securities.

Thank you.

Jon, I don't want to harp on the difficult selling season that you guys commented on, but I guess maybe if you could help put that into historical perspective.

Is that one of the canaries in the coal mine that if you look back at past cycles tends to be something that pre-dates a more challenging checks per client type of environment or some of the other key metrics that you guys aren't seeing issues of right now but tend to look at?

I'm just trying to look at that historically.

It really wasn't meant to be anything other than what it was.

It wasn't really all that complicated.

It definitely, I'm trying to think about the canary in the coal mine, I don't think it matches that analogy.

I'm not even sure what that means.

I presume it means you're starting to lose oxygen and the canary dies and two or three or four days later everybody else dies?

Basically, I guess another analogy, is this the tip of the iceberg?

Is this one of the early indicators that as your salespeople come back to you and start to say that the selling environment is getting tougher, there's a lot more effort going into it, getting more challenging.

Is that kind of the first crack that you start to see then, a couple quarters later, you start to see higher bankruptcies, and then a couple quarters later you start to see the checks per client start to slow.

Is this one of the -- if you look back historically, in each time where your revenue decelerated on the payroll side into a recession, is this one of the early indicators that has popped up or is this something that's never really popped up before?

No, it's, what I would say, the reason that we chose to say what we said was because we have had multiple conversations with you all in the last several quarters, many of them focused on the economy.

And we basically said that, we look at all of the sort of our macro indicators, if you will, and as we looked at those, regardless of what we were seeing in the headlines and what was being said about the economy, we with weren't seeing anything relative to our business.

But we said as soon as we saw something, we would tell you.

That's really more the spirit of why we said what we said and that so it's not, I don't see it at all as the first stage of a three-act tragedy.

I mean what I see it as what we said, we just saw that it was getting a little bit harder.

It appeared to be linked to the economy.

We felt like we told you that we saw something we would tell you that we saw something so that's what we did.

Same thing on the business failures.

The business failures as I mentioned earlier, you're talking about high hundreds, low thousands difference attributable to the economy, not a 100,000 clients fell out.

So it was really more a point to say to you that we are starting to see some impact out of the economy.

It's very minor at this point.

There's nothing I know relative to history that would say it's an early indicator of something bad to come in the future.

I'm not sure we're smart enough to know that, but John can comment.

He's been around longer than I have.

I've been here three and a half, four years now.

But it was really meant to be nothing more than to say we have seen some indications for the first time whereas in the past we saw almost nothing or very, very, very modest stuff and we felt like we were obligated to tell you about it because we told you we would tell you if we saw something.

So I don't see it at all, I am in a very different place than where a lot of the questions are.

I'm not in a place that says I think the year is in trouble.

I clearly believe the year is not in trouble because we told you we'll hit guidance and I don't see anything that tells me that I'm overly concerned about next year.

I mean, we're going to buckle down and work harder and if it's a little bit harder to get the sales we'll have to work a little bit harder.

That's just the way it is.

Okay great.

Thanks.

That's great color.

Thank you.

Our next question is from Mark Marcon from Robert W.

Baird.

Good morning, Jon and John.

Can you tell us where or what sort of effective yield you're achieving on the funds that you're now investing?

It's in the 10-Q.

What is that exactly, John?

We got, we got -- it was in the press release, too.

No, I'm just talking about like right now.

What's our investing rate now?

Yes.

That I don't know.

That's the question.

I'm just trying to figure out like what I'm trying to do is trying to ascertain if rates don't change relative to where they are today what sort of effective yield we could potentially look at for next year?

I haven't disclosed that yet because I'm not even sure I know exactly what that is.

This market is changing so rapidly.

I mean we gave you disclosure, you know kind of what's happened and you can measure the $4.5 million, you know how much happened since December.

Right.

So I think you can work it out and that would probably be the safer way to go at it than to figure out what the yield is going to be because remember the yield doesn't peel off.

I got a duration, I got (inaudible), I got a lot of things moving around, taxables --

Sure.

Lots of balls moving.

So can can you help us think about some of those balls just in terms --

We'll go off the $4.5 million I said for the next 12 months.

So you can look and see what the float income was in the quarter and you can say, okay, and maybe go back to last, second quarter and you say, okay, how much did it drop and the $4.5 million, I'll think about it some more, but I'm not sure if I just give you, the reinvestment yield number, I'm not sure that's going to tell you anymore than what you've got now.

Well, what percentage of the portfolio would come up under reinvestment over the next year?

Well, I've got a duration of 2.6 so it's got to be half, 40%.

Okay, so we've got 40% that's being reinvested and --

Yes.

All right, that's helpful.

Although, it sounds like --

If I had a better answer, but I don't.

It's almost as much of a mystery to me as it is to you.

We're looking at it all the time, and we've got some estimates, but we'll give you guidance when we get to June, but I think you can get close enough.

Yes, I was just trying to narrow it down a little bit because it's obviously one of the areas that people are looking at, and your competitor gave a lot of disclosure on that and it was quite helpful.

They know what's going to happen in the liquidity markets in the future?

Well, they obviously don't, but they can give some sensitivities in terms of if rates do X, then based on the amount that comes off the portfolio, we could do X.

Well, I just gave you 25 basis points, I restated again and we stated more exactly, we gave you the net income impact not the pre-tax impact.

So you know what's peeled off.

So I think you can get close.

I don't know whether you can get to the nearest million.

I'm not sure I can get to the nearest million.

Okay, and do you think the float balance should continue to grow at a small rate?

The float balance will grow somewhere between 3% and 5%.

Okay.

Subject to what the world does.

Yes.

And then in terms of the PEO growth, that's just because of Florida.

Your ASO continues to grow at a rapid rate, does it not?

Our ASO, yes, the ASO absolutely does.

The ASO, our ASO is bigger than the next three combined, with the competitor I assume you're talking about we're probably 12 to 15 times their size, but it's growing well.

The PEO, what we've always said is that our PEO is not a growth engine for us.

We grow that PEO when we find clients that match our risk profile and when clients don't match our risk profile, we let other people have them.

We don't want them.

Uh-huh.

The other thing that's aggravating the PEO growth which is why it's not really indicative is it used to be we only sold the PEO in Florida.

Today we don't do the that.

We sell both.

Some of the growth in Florida is just isn't going in the PEO.

Yes.

And then health insurance, 12 months from now we will have had that out for about three years.

At what point does it start becoming noticeable in terms of having an impact?

Noticeable?

Yes.

Define noticeable.

Where it starts moving the numbers a little bit.

I think we're 18 months away from that.

Okay.

But that's what we said in the beginning.

Yes.

I mean health care is a good one and you guys talk about investments and all that is.

In this business, unfortunately or fortunately, spending more doesn't always get you more.

Everything is kind of got a pace attached to it, and you can't make it go faster than it wants to go, and just the way it is.

Remember the model in the health benefits market is a lot different than the model in other things.

Oh, sure.

Because of the recurring revenue.

Uh-huh.

So if you happen to be a Company like us, who does a very good job at retaining clients, all your costs in healthcare are in the first year and as the client gets the second year or third year fourth year, all of the benefit that comes from the commissions go almost completely to the bottom line.

So you end up with almost, the model can almost be a geometric growth model.

You get into the out years it gets extremely attractive.

We've modeled it out and we are just wondering when we get to the critical mass where we start really seeing that, because incremental margins look like they're huge in that area.

Yes.

Okay.

And just --

Before we get off I'll get to the reinvestment rate.

I appreciate that.

Thanks, John.

In terms of the turnover that you were mentioning or the client attrition, the high hundreds, low thousands, that would be relative to what you would normally see in a given year, correct?

What I was talking about was the incremental failures to what we would normally see.

Okay, and I've got that number.

And then in terms of the, since there were so many questions on the selling season, just can you just say what specifically your salespeople said made it more difficult?

Was it that they called clients or potential clients and they didn't get called back?

Was it that they called them and they started going down the sales process and just on the margin, a few said, I'd like to do it but I can't afford to do it?

What specifically was the feedback from the salesforce that indicated that it was more difficult?

Just, I'm not sure that if what I told you would be anything other than purely anecdotal so --

No, I understand that.

But just a general feeling was that it was just a lot harder to get to their numbers, that it was a lot more work, it was a lot more calling on CPAs, a lot more farming references, a lot more customer presentations to get to the same result.

And this was in those specific areas that you mentioned?

No.

The geographic areas that I was talking about had nothing to do with sales.

It had to do with business failures.

Okay, so that's widespread in terms of your salespeople were saying they had to work harder in order to get to quota across-the-board?

Right.

And that would be because they had to approach more clients in order to net the same amount?

That would be one part of it, but and again, I'm not sure it's worth, it's anecdotal if it's worth going into a lot of detail.

It was a tough season.

It was tougher for them to get to their number.

Okay, all right, thank you.

Yes.

The reinvestment rate is 2.5%.

Thank you.

Our final question is from Sanil Daptardar from Sentinel Asset Management.

Thanks.

Just a question on the guidance that you gave for the Human Resources Services revenue of 19% to 22% growth, when the second quarter numbers were released that guidance was 22% to 23% growth.

Is this something basically more than what you talked about in terms of some weakness in the 401 (k) fees, limited growth in the PEO business, weak economy in Florida, other than that can you just give more color on that?

No, I think we were simply, we went into the year a little too optimistic, probably challenged the sales growth to a salespeople to a plan that was a little too high, and we've gone into the year and got a little more realistic and we feel very comfortable and pleased with what we're doing.

Okay.

Because if you look at the total revenue growth, the guidance is the same 11% to 13% and the earnings growth also remained the same.

All other factors are remain the same, so would those numbers not change with this Human Resources Service revenue guidance being pulled down?

The change isn't enough to change those numbers.

Obviously, we look at the guidance in every one of those and you move Human Resource a couple points.

Payroll revenue is 75% of the revenue so it doesn't change total revenue very much.

Okay, appreciate that, thank you.

That is all the time we have for questions today.

I'll turn the call back over to speakers for closing remarks.

Well, thank you very much for participating.

As usual, it's been a spirited call, which is good and, again, we're trying to meet your needs both as a Company and how we're investing and how we're doing, and also hope we've given you a little perspective on what we're seeing in the economy, and I hope all of you have a great spring.

So take care.

Bye.

Thank you, and this concludes today's conference.

You may disconnect at this time.