沛齊 (PAYX) 2008 Q4 法說會逐字稿

Welcome and thank you for standing by.

(OPERATOR INSTRUCTIONS).

I'd like to inform all parties that the call is being recorded; if there are any objections to disconnect at this time.

I'd like to turn the call over to your host today, Mr.

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

Sir, you may begin.

Thank you for joining us for our fiscal 2008 year-end earnings release.

Also joining us today is Jon Judge, our President and CEO.

The teleconference call will be comprised of three sections -- a review of our fiscal 2008 financial results, including comments and guidance for fiscal year 2009; an overview from John; and lastly a Q&A session.

Yesterday afternoon, after the market closed, we released our financial results for the fiscal year ended May 31, 2008, and have filed our Form 8-K, which provides additional discussion and analysis of the results for the year.

These are available by accessing our investor relations page at www.Paychex.com.

We expect to file our Form 10-K by the end of July.

In addition, this teleconference is being broadcast over the Internet and will be archived and available on our website until July 28, 2008.

Fiscal 2008 was another excellent year, our 18th consecutive year of record total revenue, net income and diluted earnings per share.

It also included a significant revenue milestone as we exceeded 2 billion in total revenues.

It took Paychex over 30 years to produce the first billion and only five years to reach the second billion.

Some highlights in the past year are as follows.

We leveraged our resources to achieve solid financial results during a period of steadily declining interest rates and a weakening economy.

This continues our long-standing tradition of improving margins in both good and difficult times.

Operating income, net of certain items, including interest on funds held for clients, increased 15% to just under $700 million and represents 36% of service revenues.

We're very proud of the efforts of all our employees in managing the business this past fiscal year and expect continued success into the future.

We continue to be the premier supplier of 401(k) record-keeping services as we sold 11,000 plans, total assets in the plans near $10 billion and our over 48,000 clients means we're serving one in every ten 401(k) record-keeping plans in the US.

We continue to significantly improve our portfolio of MMS products and services.

We enhanced our MMS products to provide a broader range of industry-leading HR-related software solutions that tie closely to our payroll business, and create the ability to deliver our MMS products via the Web in a software-as-a-service model.

These service additions include a hosted version of our preview MMS payroll product; BeneTrac an industry-leading Web-based employee benefits enrollment and administration technology; a powerful Web-based time and attendance technology for our MMS clients; and separately entered into a strategic alliance with Taleo to offer their online human capital management solution to our MMS clients.

We also added applicant tracking, recruiting and other hiring management tools.

We continue to head down the path towards becoming a significant provider of health and benefit services.

Fiscal 2008 revenues were $12.3 million, up 93% over the prior year, and we expect significant growth from health and benefit services to continue in future years.

During fiscal 2008, our client base grew 2% to approximately 572,000 clients.

Weaker economic conditions impacted our selling efforts as new business formation was significantly reduced by the credit crunch.

Our client satisfaction results were at an all-time high, and client retention was approximately 80% of our beginning client base.

The higher client satisfaction results led to our best year ever for controllable retention as the slight decrease in retention relative to fiscal 2007 was caused by an 11% increase in the number of clients who went out of business or no longer had any employees compared to fiscal 2007.

Fiscal 2008 was also a year of significant change to our capital structure.

In July of 2007, we announced a 43% increase to our dividend and a commitment to repurchase 1 billion of Paychex common stock, which was completed in December of 2007.

In fiscal 2008, we returned 77% of net income to shareholders in the form of dividends.

Looking at year end and fourth-quarter highlights, total revenue growth was 10% for the fiscal year and 7% for the fourth quarter.

Total revenues for fiscal year 2008 were $2.1 billion.

Payroll service revenue grew 8% for the year and 6% for the fourth quarter.

Human resource services revenue increased 19% for the year and 15% for the fourth quarter.

Operating income, excluding interest on funds held for clients in the fiscal 2007 increased to our litigation reserve, increased 15% to $696.5 million for fiscal 2008.

Net income increased 12% for the fiscal year.

For the fourth quarter, net income also increased 12%.

Diluted earnings per share were $1.56 for the year versus $1.35 a year ago and $0.38 for the fourth quarter versus $0.32 for the prior-year fourth corner.

Diluted earnings per share for fiscal 2008 increased at a rate higher than net income growth due to a lower number of weighted average shares outstanding resulting from the stock repurchase program.

We continue to limit the risk exposure of our investment portfolios, and we invest primarily in highly liquid investment-grade fixed income securities with AAA and AA ratings and short-term securities with A-1/P-1 ratings.

We limit amounts invested in any single issuer, invest in short to intermediate term investments whose market value is less sensitive to interest rate changes, and invest in variable-rate demand notes only when such investments are backed by liquidity facilities issued by highly rated financial institutions.

For fiscal 2008, we generated $6.4 million and realized gains on our portfolios.

The gains are realized from the liquidation of long-term investments no longer required for an AMT tax issue.

The $6.4 million of realized gains generated approximately $0.01 of diluted earnings per share.

Some comments about current economic conditions.

We've seen some changes to the economy since our last press release on March 26, 2008.

Clients going out of business and/or no longer having employees increased 11% over the prior year.

This phenomenon is no longer focused on the so-called sub-prime areas and has spread throughout the United States, but at the same time we're not seeing any acceleration in this statistic.

The business formation continued to be slow, making it more difficult to add new clients.

The selling of ancillary services to existing clients continues to be close to levels that were in place before the economy weakened.

Year-over-year check growth remains relatively stable, and slightly positive as our client base has not experienced any meaningful reductions to the total number of their employees.

In summary, net client growth continued to be slow, but the stable portion of our client base continues to be in relatively good shape.

Looking at the consolidated income statement, payroll service revenue increased 8% for fiscal 2008 to $1.5 billion.

The growth was again driven primarily by client-based growth, higher check volume, price increases and growth in the utilization of ancillary services.

As of May 31, 2008, 93% of our clients utilized our payroll tax administration services.

Employee payment service utilization was 73% with over 80% of our new clients selecting these services, which include direct deposit, access cards and Readychex.

Human resource services revenue increased 19% for the fiscal year to $471.8 million.

The following factors contributed to this growth.

Retirement services client base increased 9% to 48,000 clients; comprehensive human resource outsourcing services client employees increased 18% to 439,000 client employees served.

Workers compensation insurance client base increased 17% to 72,000 clients.

And the asset value of retirement services client employees funds increased 11% to $9.7 billion.

In addition, health and benefit services in BeneTrac contributed to human resource services revenue in fiscal 2008.

Interest on funds held for clients decreased 2% for the fiscal year to $131.8 million, due primarily to lower average interest rates earned, offset primarily or partially by higher average investment balances and higher realized gains on the sales of available for sale securities.

The average interest rate earned on funds held for clients is decreased to 3.7% from 4.0% a year ago.

Please refer to our Form 8-K for further information on the effect of changing interest rates on interest on funds held for clients.

Consolidated operating and selling G&A expenses increased 4% for fiscal 2008.

The increase was the result of our continued investment in personal and other costs related to selling and retaining clients and promoting new services.

Excluding the $38 million expense charge to increase the litigation reserve during fiscal 2007, expenses would have increased 8%.

As of May 31, 2008 our employees increased 4% to 12,200 employees.

Investment income net decrease 36% for fiscal 2008.

The changes in investment income reflect the funding of the $1 billion stock repurchase program, which reduced investment income, yet yielded slightly higher earnings per share results for fiscal 2008 due to fewer common shares outstanding.

Our effective income tax rate was 32.6% for 2008 compared to 30.7% in 2007.

The increase in the effective income tax rate was primarily the result of lower levels of tax-exempt income for the balance of fiscal 2008 from securities held in our investment portfolio, and a higher effective state income tax rate as a result of the adoption of new accounting guidance related to uncertain tax positions.

Moving on to the balance sheet.

We'll now move to a discussion of our balance sheet, which reflects our growth during the last fiscal year.

Cash and total corporate investments were $435 million as of May 31.

Our cash flows from operations were again strong at $725 million for fiscal 2008, an increase of 15% or approximately $93 million for the same period a year ago.

Our total available for sale investments, including corporate investments and funds held for clients, reflected net unrealized gains of $24.8 million as of May 31 2008, compared with net unrealized losses of $14.9 million as of May 31, 2007.

The three-year AAA municipal securities yield decreased to 2.65% at May 31, 2008 from 3.71% at May 31, 2007.

The net unrealized gain position as of June 23, 2008 was $6.3 million.

Our net property and equipment activity for fiscal 2008 reflected capital expenditures of $82 million and depreciation expense of $61 million.

Client fund deposit balances grew at a slower rate than historical and fiscal 2008, as expected.

During fiscal 2008, the average balances increased 4% with client fund deposits at May 31 at $3.8 billion.

Total stockholders' equity was $1.2 billion as of May 31, 2008, reflecting $442 million in dividends paid during fiscal 2008 and $1 billion in stock repurchases.

A return on equity for the past twelve months was an exceptional 39%.

Moving on to fiscal 2009 guidance.

Our current outlook for the fiscal year ending May 31, 2009 is based upon current economic and interest rate conditions continuing with no significant changes.

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

We estimate the earnings effect of a 25 basis point increase or decrease in the federal funds rate at the present time would be approximately $4.5 million after taxes for the next twelve-month period.

Projected revenue and net income growth for fiscal 2009 are as follows.

Payroll service revenue growth is projected to be in the range of 7% to 8%.

Human resource services revenue growth is projected to be in the range of 19 to 22%.

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

Interest on funds held for clients is expected to decrease by 25% to 30%.

Total revenue growth is projected to be in the range of 7% to 9%.

Investment income is projected to decrease by 55% to 60%.

And net income growth is projected to be in the range of 2% to 4%.

Growth in operating income, net of certain items, is expected to approximate 13% for fiscal 2009.

The effective income tax rate is expected to approximate 34% through fiscal 2009.

The tax rate is higher than that for fiscal 2008, due to anticipated lower levels of tax-exempt income from securities held in our investment portfolios.

Interest on funds held for clients and investment income are expected to be impacted by interest rate volatility.

Based upon current interest rate and economic conditions, we expect interest on funds held for clients and investment income, net, to decrease by the following amounts in the respective quarters for fiscal 2009.

First quarter, interest on funds held will be down 25% to 30%.

In the second quarter, it will be down 25% to 30%.

Third quarter, approximately 35%.

And the fourth quarter, approximately 20%.

Investment income in the first quarter will be down approximately 80%; second quarter 65%; third quarter 20%; and we expect flat in the fourth quarter.

The reason we have given you the quarterly guidance here is we know it is very difficult to make these calculations from the information as it is changing and it is difficult to interpret sometimes, so we did this in the best means to give you a good idea of what's going to happen during these times when interest rates have decreased.

Our stock repurchase program commenced in August 2007 and completed in December 2007 and is expected to impact net income and diluted earnings per share growth the first two quarters of fiscal 2009 with diluted earnings per share growing at a higher rate than net income.

Fiscal 2009 diluted weighted average shares outstanding are expected to be comparable to the diluted weighted average shares outstanding for the three months ended May 31, 2008.

Purchases of property and equipment in fiscal 2009 are expected to be in the range of $80 million to $85 million.

Fiscal 2009 depreciation expense is projected to be approximately $68 million and amortization of intangible assets for fiscal 2009 is expected to be approximately $20 million.

Before we move to the question and answer period, I'll take a few minutes and take advantage our ability to issue a 10-Q-type document at the same time we make our press release.

It is always a pleasure to wake up around 6 AM, reach for my Blackberry and read some Marcon, Bourgeois, Turrinelli, Frisch and/or Grossman before heading into the shower.

On the way to work, I realize reports make my life a little easier, and with that, we're adding a few comments on why our revenue guidance for fiscal 2009 is slightly better than actual performance for the fourth quarter of fiscal 2008.

Guidance represents our reasonable expectations, ties to our financial plan for the coming year, and does not assume any significant changes up or down to current economic conditions.

Normalized HRS revenue growth for the fourth quarter of fiscal 2008 was in excess of 18%.

Some color on HRS growth is as follows.

We lost about 3% of year-over-year HRS revenue growth related to lower year-over-year revenues from our upper end time and attendance products that serve clients outside our core markets.

These revenues do not have a significant impact on our operating results.

We also lost slightly over 1% of revenue growth related to receiving less than normal revenue on 401(k) funds being managed by our investment partners.

Most of this relates to changes in asset valuations for the debt and equity markets, and some relates to a general decrease in the basis points we received as more clients choose more sophisticated investment products that return less basis point fees to Paychex.

Offering a more sophisticated investment product is a critical part of our strategy to maintain our premier position as a number one record keeper in the United States.

Health benefits revenues continue to grow and added a little over 1% to our fourth-quarter HRS revenue growth.

Fiscal 2009 HRS revenue growth will also benefit from our billing our 401(k) record-keeping clients for 401(k) plan revisions that are required by EGTRRA, the Economic Growth and Tax Relief Reconciliation Act of 2001.

Virtually all of our over 40,000 clients are required by law to amend their plan documents.

This billing will commence towards the end of the first quarter and continue throughout the year.

In regards to payroll revenue guidance, Jon will cover that in his comments in the next few minutes.

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 our discussion of forward-looking statements and the related risk factors.

At this time, I'll turn the meeting over to Jon Judge.

John, thanks.

I'll just add a couple comments, then we will be happy to take any of your questions.

As John mentioned, our business for the most part this year was very solid, and we're very pleased with the results that we achieved.

Our win performance against competitors was better in '08 than in prior years.

Our client satisfaction is at an all-time high and record-breaking for our business.

Controllable losses had another very good year; in fact, also record-breaking.

Expense management was excellent throughout the year.

Employee attrition, both our payroll specialists and sales, improved on a year-to-year basis.

We added new products and services and improved our internal processes, making us a stronger competitor and a better partner to CPAs and brokers and banks and the other people that we do business with.

We passed the $2 billion mark for the first time.

As John mentioned, it took us 30 years to get the first billion and only five to the second.

And we improved our margins.

So when we closed the books, we had our 18th consecutive year of record revenues and profits and a truly outstanding year, especially given the macroeconomic environment.

The interesting thing, though, is that it could have been even better.

Because while the macroeconomic environment did not impact us like it did so many other companies, in fact, the first couple of quarters, we barely saw any impact on our business, in the final analysis, it did affect our performance.

You can see it in our revenue line, you can see it in our new client growth performance and you can see it in our '09 guidance.

Let me elaborate.

When we look back over the year, there are four to five issues tied to the sluggish economy that ended up hurting our performance a little bit.

More business failures than normal, or planned for, then they accelerated in the fourth quarter.

That's businesses that went out of business, and we plan for those every year.

We have a very good track record on how those tend to play, but this past year, there were more than 3,000 clients more than would be normal or planned for that went out of business.

That's point one.

Point two, there were more clients that moved to non-processing status.

They stayed with us as clients, they paid a small fee to stay on our service, but they stopped processing for some period of time.

That number also was in excess of 3,000 clients.

There also less new hires in our client base and slower backfills for existing employees.

Finally, there was a decline in new business starts, and as a result a decline in unit growth for us from the new business starts.

These four areas alone account for over $12 million in revenue, or the difference from being at the lower range of our guidance range versus being above the mid-range point.

And that's just four.

There are obviously other areas that affected us.

One of those, which you could add on top of it, is the decline -- John mentioned it in his comments -- the decline in 401(k) asset growth, going to 12% in the fourth quarter versus 30% in the first half, driven largely by the poor performance of the stock market since the 401(k)'s that we record keep for are almost exclusively equity-based.

That alone cost us almost 1.5 points of HRS revenue growth in the fourth quarter.

So just those areas alone, if they were at normal economic performances, would've taken what turned out to be a very good year and made it a very, very good year.

Obviously, we factor this into our outlooks for next year, and therefore our guidance -- since the very predominant view of the leading economist is that the macroeconomic environment will continue to be stressed through much of our next fiscal year.

So, therefore, we fed it into our guidance as well.

I tell you this for what I think are three important reasons.

One, it reinforces how strong our base business was in '08 despite the recessionary economy.

Two, it has a direct bearing on the guidance that we gave you for next year.

And three, it reflects how we feel about our business balancing right back to the higher levels we normally enjoy once the economy turns, and it will turn as always does.

In the meantime, we will continue to invest in our future.

We will make whatever adjustments we need to and can make to execute better, and as best as we can despite the economy.

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

(technical difficulty).

Mr.

Morphy, you're online.

If somebody calls, are they getting in right away?

The parties are being readmitted.

Are you still readmitting some, or has it stopped?

It has stopped.

We can go ahead.

Did you want to go ahead with the questions at this point?

Yes.

(OPERATOR INSTRUCTIONS).

Rod Bourgeois.

I guess John Morphy, you gave some information on why your HRS revenue growth will accelerate in fiscal '09 relative to where it was in Q4.

I was hoping you could also give some similar visibility into your float earnings growth assumptions.

In other words, the yield and the client funds' balance growth.

And then also some more color on where your payroll revenue growth will come from, because that growth rate may need to accelerate a little bit from the Q4 level as well to hit your guidance for next year.

So more visibility into the float earnings assumptions, but also the payroll revenue growth assumptions.

On the float earnings, basically, we have gone through what we project float income to be.

And we've got the database, it's got all the investments in it; we make no assumptions on changing rates; we know what we can invest at; we know about where we are on taxables and tax exempts.

I gave you the quarterly data to basically steer you into the best number I have.

I don't know what more to do.

We're usually pretty accurate, so I think you should look at those ranges and pick the middle of them, or sometimes we even gave you a single point, and that's what should load in.

You can work it backwards.

I don't know any better way to do it than that.

John, if I assume 3% client funds balance growth, that implies -- your guidance then implies a yield for fiscal '09 of about 2.7%.

Does that sound about right?

Sounds about right, but I don't look at it.

I've got treasury people know that exactly.

I would say the client funds increased balance was somewhere between three and four, the estimate.

Okay.

Maybe a little better, but not much.

You know, you've got the number (multiple speakers)

Then your yield will still be in the 2.65 to 2.7 range, if your guidance plays out.

That's probably true, and we told you how much a change of 25 basis points would be.

So I don't know -- I think I've given you all you need.

And then on the payroll revenue growth side, the guidance looks pretty encouraging relative to your recent growth rate on payroll revenue growth.

So can you give us some more visibility into where that is coming from and why that number in '09 could be better than where it is in Q4?

We've talked before.

When you look at quarters and a little bit moves around.

We've got some things going on.

Basically, the three factors are the ones Jon mentioned.

A little bit of check reduction for clients but insignificant compared to what we've seen in other downturns.

Not very much.

A little bit there.

We've got a little bit on the out of business bankruptcies, and we've got a little bit -- a little bit harder to sell.

Now when I look at the first half of next year, I would expect payroll revenue growth to be very close to what it is in the fourth quarter.

We see some improvement related to two things.

One, eventually, the bankruptcies will anniversary because most of that problem started in the last half.

So you've got a little bit tougher comparison in the first half.

We think that we're not seeing any acceleration on that right now, so we're a little bit hopeful, a little bit optimistic, that basically that problem won't accelerate and we will get a little bit of benefit.

The other one is we've put some actions in with our sales force that we're excited about that we think is going to make it a little bit easier for them to sell new clients.

We've stepped up the Google allocation, which we know works on spending money.

So we're hopeful we're going to see a little bit of a change there.

Again, that's our plan.

We're not going to plan for failure, and we're going to plan with a reasonable level of optimism but not too much.

We think there's a good chance that will happen.

But again, if we miss one of these numbers by a small percentage, you've seen what we will do on expenses.

So we're trying to manage the business in the best way possible, conservative yet pushing where we need to push.

So we don't believe the guidance numbers -- I saw your reports.

We think the guidance are very consistent with what we think is going to happen.

Can you elaborate on the sales force actions?

Is that costing you some money now to pay off later, and then also the Google experience?

This is Jon Judge.

The last point that I would make on your first question is -- your trying to extrapolate off the fourth quarter.

The fourth quarter is always the weakest quarter that we have.

So when you look at the year, the year is not balanced.

It's not even quarter to quarter.

When you think about, in terms of how our performance typically comes in, the fourth quarter tends to be the weakest.

So that's the wrong one to pick.

If you're going to pick one to try and figure out how to extrapolate them to the year, that would not be the one I'd pick.

On the sales side, we spent a lot of time trying to understand where we were in sales and what was happening in the environment.

We've made a lot of changes there.

Not changes that necessarily come with a big price tag or a price tag at all.

We've made some changes to the compensation plan, which will encourage better retention in the first and second year sales reps.

It turns out that the overwhelming majority of the sales reps that we lose, we lose in the first and second year.

We had some very steep mechanisms in how the commission schedules were set and paid out, and so to make it simpler for you to understand without going into a lot of detail, if you were a first and second-level rep and you didn't get to a fairly high level of performance in your first year, your commission rate dropped down to a very low commission rate and you started all over again.

So we put a little more gradation in the commission schedules.

When we do things like that, by the way, we take it from the pot.

So it's not as though we threw more money into the pot; it's just we spread the pot out differently.

So that's one thing we're doing; we're making some changes to some of the ways that we mentor with some of our younger reps.

We've changed some things in terms of recognition events with younger reps.

So part of it is aimed at that.

We've done some -- made some changes in our territory alignments.

We have some territories that were set up as we added more and more salesmen into the mix that were lower performing territories, in essence smaller opportunity territories, if you will, and we've consolidated some of those territories to smaller territories to make them more robust territories; be able to get the same achievement out of that territory with not quite as many reps.

That's a minor adjustment in terms of reps growth, but one that we think will help.

So there are things like that.

I mean it's -- when you come into an environment like the one we're in, where it is a little bit tougher to sell, I think the natural reaction is you just sort of step back, sort of get a whiteboard out and take a look at everything you're doing and find the areas where you're doing things well and protect them with all your might, and find the areas where you think you can improve a little bit and then put some actions, some activity behind it.

That's essentially what we're doing.

Can you guys give a number for the employment growth in your client base, or the growth in your client hiring activity?

Basically you look at a lot of numbers.

I think what I would say there is we have seen a very slight -- I'm talking it won't be 1% -- decrease in checks for clients.

Very small, and we really think most of that is coming from the bankruptcies and no longer having the employees.

So we think the clients we have that aren't facing kind of extinction, most of them are doing pretty good.

I assume you're talking about the new hire reports?

Correct.

The new hire reports -- and we've talked about this on some of the other calls -- if you look at what's being published by the Bureau of Labor Statistics, it went negative.

And it went negative -- you would probably say reasonably hard in the last two or three quarters.

What we have seen in our world is we did turn negative this year on new hires, but as I mentioned earlier in the first to second quarter, it was measured in tenths of a percent.

It was very modest.

It did get a little bit worse in the third quarter, a little bit worse in the fourth quarter.

Our general comments on that though are the same as the ones that we've made in the past, which is it's gone negative so there's no question about that.

It is nowhere near in the same level of negative that you'll see from the Bureau of Labor Statistics.

My guess is that's more an indication of the resiliency of small-business versus large.

It's not to say that we haven't been impacted; as I mentioned earlier we have been, but it's not anywhere near what you would read in the headlines or what has happened to some larger companies.

So that's that.

The other point would be in the churn inside of our counts -- it tends to be -- what we've seen is more in the major market accounts, the larger accounts than in the core accounts.

But we definitely have seen the beginning of a trend, where either lost employees are not backfilled or they're backfilled in a delayed manner.

So you start to see a very minor erosion in terms of the employee count inside the existing clients.

But as John said, it is very minor and it has had a very minor impact relative to checks.

But when you add all these little cuts together, you end up getting something that for the first time in probably it was the late third quarter and into the fourth quarter where it was something that was more than negligible.

So new hiring was in the tenths negative earlier in the year, and now it's negative 1% or negative 2%?

Can you dimension that?

I don't remember the number off the top of my head.

It's low single digits, though.

It could be as high as 4%, but my memory tells me it's more like in the 3% range, 3.5%.

Thanks, guys.

Glenn Greene.

Oppenheimer.

The first question, I just want to go back onto the sales issues.

It sounds like you're actually taking some meaningful measures to sort of improve execution there.

It's not surprising, but I just wanted to get a sense for if sales execution has played a part in your client growth being at the 2% level, sort of below your target and below recent trends?

Or is it more macro-related, or sort of, how would you handicap that?

It's a great question; it's an interesting one.

I would probably handicap it as a little bit of both.

I think there's no question, as I mentioned earlier, and I gave you the figures, that the macroeconomic environment is such that it clearly caused a problem.

We get relatively good performance out of new business starts.

You know what's happening in the tight credit environment, so when there is less new business starts, it's a smaller opportunity for us to go against them, so it's logical we would not get as much or as robust a performance out of that as would be normal.

The second part of it though is we're still relatively lowly penetrated into this marketplace.

And so there are some issues in the economy, but there's still a lot of people out there; they still have payroll needs; they still have issues that we can help deal with.

So when we look at it, we're willing to understand what the macroeconomic is, but we're not willing to say that therefore we're going to just sort of wait out the storm.

We're going to do everything we can to try and improve our performance.

And so that's why I say part of it is driving to get higher levels of unit production out of our sales teams and higher levels of revenue production out of our sales teams.

And we're going to use different mechanisms, as I gave you just a few examples, there's lots more that would help us to try and drive for higher performance.

And then moving to HRS, which was 15% growth in the quarter, which was below recent trends, I was wondering if there are any items that you could call out that sort of drove that.

And John Morphy talked about the 401(k) plan revisions.

I was wondering if you could quantify what kind of benefit that might derive in '09 to get us back to sort of that high teens 20% level.

I think when John, in his comments, told you that if the HRS environment were normalized by just a couple of factors, that normally you would've seen would have been north of 18% in the fourth quarter.

There are two things.

One, he mentioned about the fact that we had some performance issues in our high-end time and attendance product line, which really is not going against our core clients; it was part of the Stromberg acquisition that we had.

So that caused a little bit of an issue, because that revenue line is captured inside the HRS revenue line.

The other one I mentioned, which was the fact that the assets in the 401(k) plans that we record keep were down substantially in the fourth quarter; no surprise there with what's happened with the stock market; and you expect the stock market at some point is going to pop back up again, obviously then the bips that we get out of record-keeping on those assets is going to pop back up again.

So that's what those two comments were about.

But there are other things going on in the HRS world that are pretty exciting, and we think we're going to have pretty significant, hopefully pretty significant improvements for us in the next year.

I'll just mention a couple to you.

We've talked to you in the past about the 401(k) open architecture product that we introduced last year.

Prior to that, we essentially had four or five business partners; each of them had essentially eight to ten funds, if you will; they were fixed funds.

And to the extent we could convince a client to not only get involved in a 401(k) product but to use these fixed funds, then our success was at the level that it was at.

As you know from our history, we've done pretty well in that.

But there was a whole part of the market that we couldn't touch because they were either in different funds, or with different brokers, and so on.

So we created this open architecture plan.

The difference between this is we went from essentially five partners with -- let's say for argument's sake say it's 10 plans of partners, so 50 plans, to literally thousands of mutual funds are now capable of being handled on a record-keeping basis by us with open architecture.

So we introduced that product; we're pretty excited about it.

What we underestimated a little bit was how complex this product was relative to the startup of a new client.

The easiest way for me to say it without getting into so much detail that it will make you set your hair on fire and try to put it out with a hammer, is to say that we went from a set up form that was about 15 pages long with very little input required from the client, because a lot of the things were fixed, to an input form that was almost 80 pages with lots of decisions and lots of decision trees.

So as a consequence, it took us longer to get some of these plans on board, and the process that we're using had to be changed.

We made that change in the late third quarter.

We deployed tablets to all of our salespeople.

We put smart forms on those tablets, and (technical difficulty) on boarding process and made dramatic improvements both to the productivity of the sales rep as well as the client experience.

We saw the improvement of that uptick in our fourth quarter relative to those plans.

So we are expecting that that is going to be something that is going to give us some very good tailwind going into the next year.

We've made some changes on our MMS platform relative to our premier product line, which our premier product line, which is essentially the bundling of all our products, was very strong but predominantly strong in our core clients.

We made some changes that were system-based changes in terms of how we integrate things like 401(k), our HR Online product, and so on to make it more appealing to the MMS clients, and it has taken -- it started to take hold.

Again, in our fourth quarter, it was the first time we saw more revenue in the premier product line coming from our MMS clients than coming from our core clients.

So we think that is going to give us some headwind as well.

There are things along those lines where you sort of try to improve your execution, you try and make sure that your product portfolio is fresh.

And there are things like that that give us reason to believe that we're going to have a stronger year than you might have guessed if you just looked at our fourth-quarter performance in HRS.

Thank you.

I'll jump back in the queue.

Charles Murphy.

Morgan Stanley.

I just wanted to return to the high-end time and attendance issue.

John Morphy, was that a negative 3% revenue effect to HRS for the entire year of fiscal '08?

For the quarter.

It would've been less for the year.

Again, I want to make sure what it is -- is, this is a business unit that we are kind of experimenting with to some degree, and it's got great products and it's got great customers, but it's outside our product base.

We bought the Company, we took some of the technology, and we pushed that down into our other businesses, which is doing well.

Then on the upper end, we had some difficulty; we also got a little more conservative on revenue recognition.

These are not significant numbers because we wanted to make a better image there.

And basically, it just caused the revenue growth in HRS to be affected by three points in the fourth quarter.

So it isn't anything that carries over.

As a matter of fact, it won't carryover; it should do better next year, and the revenue recognition is right where we want it to be, which better matches up with the customer needs.

It was just an aberration.

If we assume that that affect was perhaps offset by the BeneTrac acquisition, can you give us anymore --?

No, it wasn't offset.

The BeneTrac acquisition was a lot lower impact than the 3%.

(multiple speakers)

Okay, so I'm just trying to -- is there any other product line or reason why HRS revenue growth should accelerate in fiscal '09 that we can (multiple speakers)?

Sure, there is the other reason we talked about.

We've got a situation where every one of our clients is going to be billed for changes to their plans in accordance with EGTRRA.

That's an opportunity we're going to have next year that we didn't have this past year.

No, there is definitely upside.

That billing is going to start towards the end of the first quarter and it's going to continue for fiscal 2009 and probably somewhat into 2010.

Great, thank you.

Kartik Mehta.

FTN Midwest.

John, I wanted to better understand the new business formulation point you made.

Is there a way to see what percentage of new sales come from new business formations, or what the impact might be if those formations slow?

When you say is there a way to say it, are you looking for a percentage?

I guess I am.

I guess I am looking for, if it's possible -- the percentage of new sales that come from new business formation.

When we look at our sales and we do the analysis on it, we look at prior source and what was a client doing before.

One of those categories is a brand new business.

So it's something that we watch fairly closely.

We don't typically give out the specifics on what the prior sources are, but I think we've said in the past that new business formation approximates about a half of the new clients that we will bring on every year.

It sounds like you're having some really good success in the health care product.

If you look at that, are there any changes you believe you need to make to have more success, or is it fairly -- about where you would want it, and that should really help drive revenue for that product?

The health care, we are very bullish on.

We have had very good success with it.

We are expecting very good success with it again next year.

We close to doubled it this year, we are expecting a very strong performance out of it next year.

Where we are with that, as I've mentioned in the past, we're already at the point where we're north of 100 salesmen.

We're working sort of feverishly in the back office trying to make sure that we get our back office built up, so that we can grow in that business and grow under control.

So in other times I've talked about it a little bit like changing tires, when you're going 60 miles an hour.

It's not quite that crazy, but -- this is a business where it is very clear to us that our salespeople can absolutely outpace our ability to process all the work and get our back office systems built up.

One of the great things about this Company is that, different than other companies, we have a long sort of history of -- when we come up with a great idea or new market entrant, lots of times what we will do is we'll get it started in a city or two and see how it plays.

Other companies might study it for a couple years and start building back office systems for a couple years, then four years down the road, they decide to go into business.

We have a tendency to do it a little differently, which is what we're doing here.

We spent about a year piloting it.

As we've talked about in the past, the results are absolutely outstanding.

The pro forma is a very beautiful thing to look at.

So we made a decision to invest in this business, and that's what we're doing.

We're working as hard as we can and what we've said all along is that we're going to grow this business and stay under control.

Now we might be on the hairy edge of being under control, but we're going to stay under control.

So we're actually bringing salespeople on at a level that is probably below what the market would bear or what we could sell.

But we're doing that to make sure we're doing it in a controlled fashion.

So that is a business that is a terrific business.

It is relatively small now.

It's very close to being material.

And if we continue on the path that we're on -- and there's nothing we can see that would suggest to us that we should not be able to do that -- that should be a very significant business in a short period of time.

If you just think about what's happening in health care in the country, and it's going to get kick started even more with the presidential elections, because this is a major plank of the platforms of both candidates.

I think this is something that is a natural for us.

And quite frankly, small-business -- the existing coverage mechanism for health benefits in the United States is not interested in talking to companies with eight or 10 employees.

And we do it every day.

So it's a natural play for us, and that's why we're so bullish about it.

Last question.

If you look at the previous recession, can you look at how, [maybe] the attrition and checks per client, how they behaved.

And if it was a gradual decline, or if the decline happened quickly.

Maybe how that compares to what you're seeing now?

Basically, the last time when it was bad was 2002 fiscal and 2003; checks per client dropped about 4% in each of those two years.

It was kind of precipitous when it happened.

Then when it stopped, it stopped.

Checks didn't suddenly start growing again.

It just finally got so it stayed kind of stable.

But we haven't seen any of that yet.

Thanks, John.

I really appreciate it.

Mark Marcon.

R.

W.

Baird.

I was wondering, with regards to the competitive environment, are you seeing any change at all with regards to either direct competitors or alternatives?

Well, one of the points that I mentioned earlier was we do sort of -- we don't sort of, we do track how we do against competitors -- what our win rates are, what our loss rates are, and so on.

And as I mentioned in my comments, when we looked back on 2008 fiscal for us and we look at how we performed, we performed well against competitors.

We improved our winning rate; we improved our loss rates against competitors.

So against the sort of traditional competitors, we felt pretty good about the year that we had and we feel pretty good going forward.

Obviously, we talked to you about the fact that given the sluggish economy, that we're going to do some things to sort of tick our game up.

I would assume that they are going to do some things to tick their game up.

Typically when this question gets asked, before I go into the alternatives, a lot of times it will migrate towards pricing and what's happening in pricing.

That was going to be the next one.

Yes.

I would've expected to have seen more discounting.

We give a relatively healthy discount authority, all the way down to our rep level.

We obviously manage it relatively carefully, but we do that.

And I have been surprised with what is happening in the economy that we didn't -- we haven't seen more discounting.

So our discounting is very much under control.

We watch it, by the way, both with our sales reps and in the branch offices at renewal time with clients.

And there's nothing going on there that would tell me and lead me to tell you that I think that the whole price stability issue is in jeopardy.

I don't see that at all.

So that part of it is good.

On the alternative competitors, if -- it's clear that [Intuitus] has had a good run the last several years in terms of the number of subscribers that they have signed up.

There are some of the regionals that you'll hear about from time to time.

But when we look at the footprint we're in and the markets that we choose to serve, we're not in the self-serve market.

We're in the fully outsourced market.

We're not seeing a lot of increased competition or change in competition from the players that we're going against.

So there's nothing on that horizon that I would say to you is causing us to either feel like we're going to do a whole lot better or we're going to do a whole lot worse.

We're pretty much in the same environment that we've been in in the last couple of years.

So when your sales force calls a potential client, are they seeing the same sort of levels in terms of normal metrics in terms of getting appointments, win rates (multiple speakers)

Some of that is yes and some of it is no.

Our calling activity -- now, remember, we're a referral-based company, so the majority of our sales force's time is not spent prospecting; it's spent talking with CPAs and with existing clients to try and harvest leads for new sales.

So the call activity -- those are the two most productive and most profitable channels that we have.

And so when we look at the business activity or the call activity against both existing clients and CPAs, the call activity is at the levels it's been at in the past or a little bit higher.

Obviously, we're going to keep driving that higher if we can.

So that activity is the same.

We have seen some decline, modest, but some decline in closing rates.

As I said, the pricing seems to be relatively stable.

So the activity, from an activity standpoint, there's nothing there that we see that suggests we've got issues, other than, obviously, as I said earlier, any time we think we can improve something, then we're going to put some pressure on that part of the equation and try and improve it.

Just going back to the pricing, did the normal price increase go through, and what is -- what does it look like it is finalizing at?

Yes, 4% range.

We're down to the point now we would know if there is resistance and we haven't seen anything different from prior years.

Just the guidance -- just on the payroll side, just to be clear, are you assuming that the elevated rate of bankruptcies is going to continue through the balance of this fiscal year that's coming up, just that the year-over-year comparisons become easier as the year unfolds?

Pretty close.

I mean you're down to really slicing hairs here when you look all this.

We look at checks, we look at lots of factors.

Payroll frequency, checks per client, revenue per client; we look at all these things, we lump them up and we roll them up and we look at it and see if it's reasonable.

We think we've got a reasonable estimate.

I know one thing, the world won't do exactly what we predicted.

But we've got some room for some small pluses and probably some small minuses, but we did not take the bankruptcy rate way down; we just let it stay where it is.

We didn't forecast it getting worse.

Can you just talk about sales force productivity?

Because it looks like for this year, just on the core payroll, you're looking at a 2% increase in the sales force relative to a 6% a year ago.

And -- can you talk a little bit about -- it would seem like the new salespeople would end up having to be more productive.

No, I would not say it that way.

What I would say is we're going to add in total about 5% more salespeople into the market -- into our business this year.

They will be spread out into our different businesses; we have several sales forces.

We are targeting a lot of the growth at the higher growth worlds, so you can expect the increases in salespeople that we put against things like insurance and different insurance products; whether it's workers comp or whether it's health benefits, that that would get some of the more healthy increases.

But remember what I said earlier.

We're doing some consolidation of territories, we're doing some things to try and drive the productivity of our existing salespeople up.

We've made some changes the plan that we think will help us with retention of our people.

And so I don't think we're going to witness a lot lower firepower into the marketplace.

Hopefully what we're going to see is a lot smarter deployment and some, again, continued lower attrition levels.

Have you already done some of those steps and already seen some of those results?

We've done -- your question is when it comes --?

In terms of like the territory and the compensation change?

Well the territory changes were made going into this year, so that's done.

The compensation change was made going into this year, so that's done.

But remember, we're a fiscal June to May.

So we're in the first month.

So -- I'm not sure I have a lot to report to you at the moment.

But I think the plans are pretty good.

Great, thank you.

Brandt Sakakeeny.

Chris [Amoney] from Deutsche Bank.

I just want to go back to a comment you made earlier.

You said that more clients have been moved to non processing status.

What exactly does that mean?

Could you clarify that?

Well as Jon mentioned to you earlier, I mean one example would be that you might have a client that has decided that they're going to stay in business, and they want to stay on our service either for report reasons or to make it easier to come back online.

But they may have taken the number of employees that they have in their firm down from say five to two or from eight to four and they decided to -- to save money they might be writing their own checks or doing something along those lines.

So the net of it to us, though, is, the difference between that type of a client and a client that has gone out of business is really the monthly fee they pay us to stay on the service.

Because they're not doing checks, they're not paying check fees and so on.

So it's essentially the same as out of business, only from a measurement standpoint except that there is a nominal fee they pay us, $35 or $40 a month to stay on the service versus zero.

That -- I'm not even sure John knows, because we just got this information.

That statistic actually improved in the month of May.

Not a lot, but it stopped going the wrong way.

All right, thanks.

Gary Bisbee.

Lehman Brothers.

I guess a couple questions.

You've talked about sort of all-time high client retention, for the retention that you can control.

And when you combine that with the decelerating -- not just this year but over the last few years, net client growth -- I understand the economy is weak right now.

But I think you've always targeted like 4% to 5%.

Is that still a realistic goal?

And can you give us any sense, how much you think these steps you're taking with the sales force can actually impact the business over the next couple of years?

We definitely think it's a realistic goal or we would change it.

So I would start with that.

We -- when we talked about that, it's sort of the basics of our business formula and how we get to the 12.

Some years we get to it with higher client growth, some years we get to it with others because there are other pieces in the equation, the ancillary performance and price increase, just to name a couple.

You can obviously have a scenario where you have lower client -- new client growth, yet still have acceptable or even very acceptable revenue if the clients you bring in are larger or are more clothed with different offerings.

More premier clients as an example versus basic payroll.

more weekly clients as opposed to monthly clients and so on.

So that's the reason we don't get so hard fixed to one single number, because the equation is more of a four or five-dimensional equation as opposed to a one or a two.

But back to your question, we clearly -- if we had our druthers, obviously, we would like all of those type numbers to be higher, and new client growth, obviously, we would like to have higher.

And do I believe the things that we're doing to try and drive that will improve that?

Absolutely.

From the comments you made about where the sales force growth is going to come from, it seems to me it's becoming an increasingly important point to get your updated take on the profitability of all of the ancillary products in the mix of them you have today, relevant to the core business, particularly if that's going to be a bigger driver.

So any updated thoughts there, and are you going to be able to continue to get the margin gains if that's driving a bigger piece of the growth?

There are no significant changes in margin stuff.

We feel that we can do about 300 basis points better than revenue growth, and we're going to keep committing to do that.

We went and delivered the plan to the Board of Directors; we knew the revenue number was under some duress this year, mostly outside our control.

But then we've committed to doing what we're supposed to do, which is get 300 basis points of margin improvement.

I still think we can do that.

And then just -- I've heard from a couple -- you mentioned about, especially the MMS products, moving more of them to sort of a technology base, software as a service or Online as options for clients.

I've heard from some companies who do that as their core business, and I realize they're not a fully outsourced version of what you're doing.

But they've got dramatically lower pricing than where you are in the marketplace.

Are you facing any customer pushback as you try to deliver products using technology that you're pricing is sort of out of whack with what they're seeing?

Or is that not anything you face?

That is not anything that we face.

And I'm not so sure; you would have to give me some examples where you think it is dramatically lower.

I find this whole debate to be one that is somewhat interesting.

The only difference between what we do and what someone who claims to be software as a service does is that we're also software as a service.

Almost everything that we deliver to our clients comes off of a technology base.

The only difference is we don't sell perpetual licenses.

So the notion that this is a new business model versus ours falls a little bit weak in the way I think about things.

But as it relates to the pricing side of it, we are -- we've had a pricing scenario now for some number of years where we are the premier product in the marketplace, and we are the premier priced product in the marketplace.

Obviously, we have flexibility if we need it to decrease that price on a case-by-case basis.

But we have not had -- at least I am not aware of us having any significant issues with the value proposition of what our services -- the offering is into the marketplace.

So I just don't see that as an issue.

We're going to have competition every year.

This year, we may have a couple that weren't there last year, and they might have a different spin on their markets.

I guess my way of thinking is I feel sorry for those guys that aren't able to charge more money for their offerings.

Thank you.

Adam Frisch.

[Glen Ferter] from Union Bank of Switzerland.

What component of your operating guidance -- revenues down to operating profit do you think is most at risk for '09?

Margins?

Either revenue growth or your profit goals.

No, the bigger issue is always the revenue growth and the profit goals, unless the revenue growth really changes significant by the economy totally outside our control, we will look expenses and we are able to use the leverage to get there.

That's exactly what happened this past year.

We had probably the largest revenue miss that we've had since I can remember.

Possibly in 2002 it might have been greater.

We've worked the business and we looked to where the revenue is out, and we aggressively did some things we thought we could do.

We still invest in the things we thought we needed to invest in, and we met the goals.

Okay, and given that you just completed the large repurchase program and given where the stock is, what are your thoughts on future actions here?

Well, one thing, it's nice to look at this sometimes from a nice idealistic point of view.

And you can sit there with your calculator and throw debt on the balance sheet and go buy the stock back.

I just got a rude awakening over the last two months.

We went -- we're in the process of getting a line of credit to finance the long-term portfolio, only about ten days a year.

We're working with our number one provider lead bank for the last 20 years, you can't believe what we've had to go through to get this.

And we're in great shape.

They want dividend restrictions, they want all kinds of stuff.

Now, in the end, we're going to get what we want, but it was a battle.

So right now I think having $400 million of cash is a pretty nice thing to have.

Not sure what we would use it for, but I don't think at these levels, we would be saying we're going to go aggressively do a stock repurchase program unless something changed that I don't know about today.

So we continue to look all those things.

We're glad we did the one we did.

But right now, the world is a little bit different, and he who has cash can do some things others can't.

Okay, thanks.

I appreciate it.

David Grossman.

(OPERATOR INSTRUCTIONS).

I'll go to the next party.

Rod Bourgeois.

He asked a question earlier, so that could be we've still got a few.

Mark Marcon.

He asked a question too.

I'm showing no one else in queue.

First off, we apologize for the difficulty, but it sounds like we got past it.

In summary, we felt real good about the year, we feel real good about our prospects looking forward, and we look forward to talking to you at the end of the first quarter.

So thank you very much.