沛齊 (PAYX) 2009 Q2 法說會逐字稿

Good morning and thank you for standing by.

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

After the presentation we will conduct a question and answer session.

(Operator Instructions).

Today's conference is being recorded.

If you have any objections you may disconnect at this time.

I would now like to turn the call over to your host, Mr.

John Morphy, Senior Vice President and Chief Financial Officer.

Sir, you may begin.

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

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

The call will be comprised of three sections; a review of our second quarter 2009 financial results including comments and revised guidance for the full year fiscal 2009, and overview from John Judge and lastly a Q&A session.

Yesterday afternoon after the market closed we released our financial results for the second quarter ended November 30, 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 of had and available on our website for approximately one month.

To say the least these are difficult times.

Virtually every business entity is encountering an environment that is both challenging and one that very few have experienced before.

Before moving on to the normal sequence of the teleconference, I would like to make a few comments about the well-being of Paychex.

Our first half of fiscal 2009 reflected total service revenue growth of 7% or $62 million.

Operating income, net of certain items particularly interest on funds held for clients, grew 9% or $32 million.

Through the efforts of our employees we were able pass over 50% of our increased revenues to the operating line.

We project full year fiscal 2009 total service revenue growth to be between 5% and 7%.

While fiscal 2009 may not be up to the usual Paychex standards, we are still growing and leveraging our operate operating margins.

Our liquidity position continues to remain strong with $479 million in cash and total investments as of November 30, 2008, and no debt.

Our cash flows from operations were $328 million for the six months ended November 30, 2008.

During the first six months we generated just under $300 million of net income.

During the same six months we returned $224 million to shareholders in the form of dividends.

Our dividend yield at our current stock price is in the 5% range.

A primary contributor to our lower than desired earnings results relates to interest on funds held for clients, which decreased $19 million or 30% during the first half of fiscal 2009.

Our updated guidance projects the year to reflect a 40 to 45% year over year reduction of $52 million to $60 million.

Hard to find much good news here but there is some.

Our guidance for interest on funds held for clients is not subject to any downside rate risk as we have reached the bottom on short term investment rates and our long-term investment returns are very predictable.

Our long-term portfolio currently yields 3.3%, has an average duration of 2.6 years and slightly less than 20% of the portfolio will mature in each of the next two twelve-month periods.

The recent 75 basis points reduction in the Federal funds rate had minimal if any impact on us because our short term portfolio was already investing at rates below 25 basis points.

We invest on average approximately $4 billion of our clients and our own cash with daily balance changes frequently in the $1 billion to $2 billion range.

In these turbulent markets we have managed these sizeable investments with no losses of principal and have met all of our clients daily cash needs related to the payment of wages, taxes and other benefits to their employees.

A few comments on our guidance philosophy.

Our guidance philosophy has been in place for a long time and, except for very few occasions, our actual performance has been exceptionally close to our guidance.

Our philosophy has been to provide guidance based upon what we are experiencing in financial terms and quantifying our expectations for the current fiscal year.

While we do not change the steepness of trends lines, we do project current trends into future periods of time.

We believe it is extremely difficult if not impossible to accurately predict significant upturns, downturns in the economy, even more difficult to forecast increases, decreases to short term interest rates.

Who could have predicted the rapid and significant changes to the economic environment that have taken place in the past several months?

We believe our guidance philosophy assists the many people developing and evaluating expectations for our future financial results.

They know what it is based on and they can, if they choose to do so, make their assumptions on what they believe are realistic assumptions of the future whether it be changes to interest rates, employment levels, et cetera.

We will provide more information related to guidance throughout our discussion of our fiscal 2009 financial results.

We opened the call with, these are difficult times.

Looking out our historical and expected results, I believe most companies will be very willing to trade their difficult times for ours.

Rather than read the press release we will move to the various components of the income statement including comments and guidance as applicable.

So moving to the income statement, I start with payroll service revenue growth.

Payroll service revenue increased 4% for both the three and six months ended November 30, 2008, to $376 million and $755 million, respectively.

This growth was primarily driven by price increases and growth in the utilization of ancillary services.

Client growth for the past six and twelve-month periods have been relatively flat on a period over period basis.

Utilization by our clients of our payroll tax administration services was 93% as of November 30, 2008.

Employee payment service utilization was 74% with more than 80% of our new clients selecting these services, which include direct deposit, Access cards and Readychex.

Our ability to attract new and retain existing clients continues to be challenging in the current environment.

Over the past six months we experienced companies going out of business increasing 12%, sales to new business starts declining 13%, checks per client decreasing 1.5% and lower levels of new hirer reporting.

Second quarter trends were consistent with the first except for checks per client which decreased 2.1% in the quarter and new hirer reporting fell sharply in November.

Checks per clients continue to decline,slightly but presently the decline is far slower than we experienced in the early 2000 economic cycle.

Monthly new hirer reporting is volatile and some of the drop off may relate to the fact fewer employees are leaving their current jobs.

Looking forward we expect payroll service revenues to grow between 3% and 5% in fiscal 2009.

Human Resource Services growth.

Human resource as far as revenue increased 11% to $128 million, and 14% to $260 million for the three and six months ended November 30, 2008 respectively.

Second quarter growth was less than anticipated, and based upon detailed analysis a substantial portion of the lower revenues were outside our control.

Factors contributing to the 11% growth include; comprehensive human resource outsourcing services, client employees increased 11% to 445,000 client employees served.

We continue to be the market leader for this offering as our total number of work site employees is almost equal to the next three competitors combined.

The 445,000 work site employees represents a slight reduction from the first quarter of fiscal 2009 due to lower levels of employees per client, as we grew this client base 3% during the second quarter.

Workers' Compensation insurance client base increased 11% to 75,000 clients.

Retirement services client base increased 10% to 50,000 clients.

You should be aware that all of the above client growth figures are based upon the comparable number as of November 2007.

Our growth in health insurance revenues continued to be strong as approximately $5 million in the first half of fiscal 2008 became nearly $10 million in the first half of fiscal 2009.

Factors which adversely affected growth include; volatility in the financial markets caused the asset value of retirement services client employees funds to decline 23% from August 31, 2008, to $7.2 billion.

The S&P 500 declined 30% during the same period.

The decline in asset value, accompanied by client employees moving their portfolio to safer investments, reduced retirement services revenue by $2.2 million during the quarter.

We experienced some volatility in our PEO net service revenue due to fluctuations in Workers' Compensation claims of $1.5 million.

Basically these claims is a handful; it relates to several years ago and is basically where there was an estimate for a claim and based on subsequent evaluation or health issues, the claim was deemed to be worse.

Excluding these two items human resource service revenue growth would have been slightly above 14% for the quarter.

We are also seeing some softness in Workers' Compensation rates.

Looking forward we are expect human resource service revenue growth to be between 12% and 15% in fiscal 2009.

Total service revenue increased 6% to $504 million, and 7% to $1 billion for the three and six months ended November 30, 2008.

Looking forward we expect total service revenue growth to be between 5% and 7% in fiscal 2009.

Interest on funds held for clients.

Interest on funds held for clients decreased 36% to $20 million, and 30% to $44 million for the three and six months ended November 30, 2008.

This is primarily the result of lower average interest rates earned on short term investments.

The average interest rate earned on funds held for clients has decreased to 2.5%, and 2.7% for the three and six months ended November 30, 2008, as compared to 4% -- 4.0%, and 4.1% for both of the same periods last year.

Short term interest rates have been particularly volatile since September, as investors sought the safest financial instruments possible and at times accepted negative short term investment returns.

We have responded to the credit crisis that heightened significantly in late September by moving our day-to-day investments from variable rate demands notes to short term US agency discount notes that have been yielding less than 25 basis points.

Accordingly, the recent 75 basis point reduction in the Federal funds rate would have minimal if any impact on our financial results because our short term portfolio was already investing at rates below 25 basis points.

Under normal financial conditions we estimate the earnings effect of a 25 basis points increase or decrease in the Federal funds rate would be approximately $4 million after taxes.

It is not possible to quantify the after tax effect of a 25 basis points change within the current investment environment.

Our guidance projects 40% to 45% year over year reduction of $52 million to $60 million in interest on funds held for clients.

We believe our guidance for interest on funds held for clients is not currently subject to any downside rate risk, as we have reached the bottom on short term rates and our long-term investment rates are very predictable.

Expenses.

Consolidated operating and selling, general, and administrative expenses increased 5% for both the three and six months ended November 30, 2008, to $312 million, and $625 million respectively.

These increases were the result of increases in personnel and other costs related to selling and retaining clients and promoting new services.

As of November 30, 2008, our employee base increased 4% to 12,700 employees.

Our philosophy on expense management is to continually look for efficient ways to conduct our business, not deteriorate the level of service our clients expected when they added our services and to invest in the future.

In these turbulent times our employees are doing an excellent job of cost management, ensuring we continue to provide our best service levels ever and we are investing in our future.

Examples include our continued investment in healthcare offerings that has been rewarded by 100% growth in the first half of fiscal 2009 and the fact we are managing our sales forces with the objective that alter territories will be staffed with no reduction in territories.

Operating income.

Increased 1% to $212 million, and 3% to $434 million for the three and six months ended November 30, 2008.

Operating income excluding interest on funds held for clients increased 7% to $192 million, and 9% to $390 million for the three and six months ended November 30, 2008.

Operating income excluding interest on funds held for clients is projected to increase 5% to 8% in fiscal 2009.

Investment income net decreased approximately 75% for the three and six months ended November 30, 2008.

The changes in investment income were due to the lower average interest rates earned and lower average investment balances resulting from the funding of the stock repurchase program completed in December of 2007.

While the stock repurchase program effectively reduced net income, it had a positive impact on earnings per share.

We expect investment income for the full year and fiscal 2009 to decrease by 70 to 75%.

Our effective income tax rate was 34.4%, and 34.1% for the three months and six months ended November 30, 2008, compared with 32.2% for the same respective prior year periods.

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

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

Net income for the second quarter decreased 5% to $140 million or $0.39 diluted earnings per share.

Net income for the first six months decreased 3% to $289 million.

Virtually all of the decrease in net income plus more was attributable to the decrease in interest rates and to a lesser extent the one billion stock repurchase program completed in December of 2007.

The increase in diluted earnings per share related to the stock repurchase program was approximately $0.03 for the first half, and is expected to be slightly higher in the second half of fiscal 2009.

Diluted earnings per share decreased 3% to $0.39 in the second quarter and increased 1% to $0.80 for the six months of fiscal 2009.

Looking forward we expect net income to be 5% to 7% less than a year ago.

We'll now move to the balance sheet.

Our liquidity position is strong with cash and total corporate investments of $479 million as of November 30, 2008, and no debt.

Our cash flows from operations were $328 million for the six months ended November 30, 2008.

Our working capital balances increased since May 31, 2008, with accounts receivable increasing $36 million due to normal fluctuations in our billing cycles.

Cash flow from operations were $328 million for the six months earned November 30, 2008.

In September we entered into a one-year revolving credit facility that can provide up to $400 million in additional liquidity.

We do not expect the covenants to have any impact upon our dividend, acquisition or capital structure policies.

We continue to maintain a conservative investment strategy, emphasizing maximum liquidity and principal protection first, and then versus investment yield.

We have been able to limit our exposure during the current investment environment as a result of our policies of investing primarily in high credit quality securities with AAA and double A ratings and short term securities with A-1/P-1 ratings by limiting the amounts that can be invested in any single issuer.

Our priority towards liquidity is to ensure we can meet all of our cash commitments to clients that took place as we transferred cash balances from their accounts.

Our funds held for clients routinely fluctuate daily by $1 to $2 billion, meaning we must be positive our investments can meet our daily liquidity needs without any failure.

Our total available for sale investments including corporate investments and funds held for clients reflected a net unrealized gain of $32.5 million as of November 30, 2008, compared with net unrealized gains of $24.8 million as of May 31, 2008.

The three-year AAA municipal securities yield decreased to 2.51% at November 30, 2008 , from 2.65% at May 31, 2008.

The net unrealized gain was $31.6 million as of December 12, 2008.

Our net property and equipment balance activity during the first six months of fiscal 2009 reflected Capital expenditures of approximately $39 million, and depreciation expense of approximately $32 million.

Clients fund obligations as of November 31, 2008, decreased to $3.5 billion from $3.8 billion as of May 31, 2008.

Client funds held very widely on a day-to-day basis an average $3.2 billion during the six months ended November 30, 2008, an increase of 2% over the prior six months.

The growth rate in average funds held for clients has been negatively impacted by current economic conditions.

Total stockholders equity was $1.3 billion as of November 30, 2008, reflecting $224 million in dividends paid in the first six months of fiscal 2009.

Our return on equity for the past 12 months was 46%.

At this time I'll turn the meeting over to John

Thanks, John.

Good morning all and thanks for taking the time to join us on this call.

When I think about the quarter we just closed and the macroeconomic environment that we find ourselves in the thought that keeps crossing my mind is, I'm glad I'm at Paychex.

I'm glad I work with the quality of people here.

I'm glad we have the product offerings that are needed in good economic times and bad.

I'm glad we have the financial strength to weather the storm.

Lots of cash on our balance sheet, excellent cash generation ability, no debt and no need for debt but should that change excellent access to credit.

And most importantly a business model that's produced excellent financial results for 35 years and will continued to so in the future.

By all measures and especially Paychex measures this was a tough financial quarter for us and for the US at large.

The turbulence in the financial markets is the worse anyone has seen since the great depression and it took it's toll on our float revenues, our management fee from 401(k) assets and on our customers and prospective customers.

John, took you through the details of our second quarter and first half business performance.

I'd like to just emphasize a few points and then we would be happy to take your questions.

First and foremost we generated $524 million of revenue and $140 million of profit in this tough macroeconomic environment.

We expanded our margins slightly during the quarter from 37.5% last year to 38.1% this year and at the same time as we managed expense to protect our margins, we continued to invest in important areas for our business.

We added sales headcount again this year.

We continue to invest in important strategic growth areas such as health insurance.

We paid out $224 million in dividends in the first six months and will continue to distribute our profits to our shareholders in the future, in future dividends.

We have a very large and loyal client base and our customer sat is at an all time high.

Customer satisfaction is critical to our business model and is another area we continue to invest in.

We added important new product functionality that has helped our performance, especially in our major markets accounts.

Products like our time and labor management online product and our HR Online product.

And our health insurance investment led to us a doubling of that business in the last 12 months with much more to come.

So when I think about the headwinds we are facing and all the macroeconomic challenges in the marketplace and I talk with my colleagues running other companies in Rochester and throughout the United States, there is no question we are all in for a tough and challenging time.

But if we have to be in an environment like this, I wouldn't trade my position with anyone.

We would be happy to take your questions and comments.

Thank you.

(Operator Instructions) First question, Rod Bourgeois of Bernstein.

Your line is open.

Yes, I want to do ask a question about the guidance.

In the volatile economic environment here I'm wondering if you can give more specificity on what specific economic assumptions you're making about the next several quarters of the fiscal year?

And the mechanics of that would be really helpful to understand.

Are you assuming year over year rates of decline in your key economic metrics that are similar to the year over year decline that you experience in the quarter you just reported?

Or are you incorporating economic events differently in your forward guidance?

No, basically the steepness what if the direction would be on checks per client, new sales, losses, we pretty much maintain the curve at where it is and we projected that into the third and fourth quarter.

So basically we didn't see there and say, okay, checks have declined, some percentage in the first six months, we'll say 1.5%, and then we said, okay, we'll just make it 1.5 for the next six months, no.

We projected that to decrease.

Now you also have to understand, though, we don't put significant differences in because to estimate there's going to be another significant downturn I have no way of doing that.

And the same thing on interest rates.

We do the forecast there, if the prime rate changes subsequent to when we give guidance, you know how to quantify that.

Now in this instance, though, the float funds have reached a point where there is no rate risk any more because the rates couldn't go down any more.

We basically have three components in funds held for clients; long-term, very predictable.

A short term better rate which we have some money in that, we know it's going to peal off over the next three or four months, that's where we get about 150 basis points.

But we know exactly when it's going to appeal off and then we have the day-to-day stuff which is currently getting about ten basis points.

All right.

So just to kind of handicap things a little bit for us, I mean when you gave your last guidance, it was probably pretty quick after giving that guidance that it was clear the world had changed and that the guidance would probably need to be tweaked some.

Is it less likely that that will happen again based on the current guidance because of the way you structured it or is it in some respects equally likely given the volatility that we have in the economy?

Is there any reason why lowering guidance again is less likely here given the progress you've made in the year and the way you're structuring your guidance?

Hi, Rod, this is John Judge.

One of the things that you have to remember is what happened in this quarter.

Right?

Shortly after we did that guidance the AIG fell apart, Fannie and Freddie fell apart -- I mean there's a tremendous amount of turmoil that happened in this past quarter.

If you think something like that could happen again in the next quarter that would drive as significant a change in the macroeconomic environment then you'd take one path.

We are not assuming that it's going to be another quarter like this last one, which was pretty dramatic.

But as John said when we do our modeling which is a fairly sophisticated set of modeling very similar to yours I'm sure we run two analyses.

We run won that takes the trends of the existing environment and if those trends are down we keep them running down.

And then we take another one which is for better or worse we'll call it worse case and we talk through both of those and try to think about where the world is going to come out.

But, I think as John said just before, unless you think you are going to see another set of events that were as dramatic as what happened in this past quarter, and we don't think that's going to happen, then you'd kind of go with the trend versus a step function which is really what happened in this quarter.

Got it.

One final question on that, I mean you're entering the critical period for client retention.

And so is there anything about the current environment that might cause your experience with client retention to be different than normal?

And I understand bankruptcies are a factor here, but outside of bankruptcies are there any factors that would cause you to have a heightened concern about your upcoming retention experience?

No, and I would say the way I would phrase it is the bankruptcies are there and we've quantified those for you.

The representatively week new business origination environment that we are facing is there.

So those things that are in the environment you know about those, we've talked about those.

In the accounts themselves, our clients on a retention basis our client sat is running at its all time high.

We have a very high touch model as you know.

We touch our clients depending on the frequency of their payroll weekly or every two weeks or twice a month in almost all cases.

We have some clients that are monthlies but for the most part we touch our clients on a regular basis.

Our payroll specialists are essentially the payroll department of our clients.

So we feel pretty comfortable about where we are relative to knowing our clients, about the validity of the customer sat survey data that we have, about where we are in the marketplace.

So we feel pretty good about that.

So the retention piece, I think you take into account what's happening in the economy, but I don't think that we've got anything out there that, there's nothing I know of that would cause us it to run any different than it normally would run outside the things that you mentioned.

And on the sales side I would say the same thing is true.

I mean it's a tough sales environment, no question about it, I mean clients are taking longer to make their decisions.

But there's nothing going on relative to competition, competitive offerings, any issues with our offerings that we are aware of that would change the landscape for us.

Thank you, guys, very much.

The next question comes from Kartik Mehta of FTN Midwest.

Your line is open.

Thank you, good morning.

John, I want to do ask about the float portfolio.

Obviously the short term rates are almost near zero.

Will you change your duration at all or increase the amount of long-term to offset that or will you just kind of keep it where it is and let the market correct itself is eventually?

We will let the market correct -- but we have another thing to watch.

Our primary goal is, it's a great deal to get this float money.

There's a tremendous amount of responsibility that goes along with it.

And we've got to make sure that the deal we told our clients we would do when we did it, we have to do.

So right now you have to be a little bit careful in the long-term portfolio because while we don't project it getting significantly worse than it is right now, we have to make sure we are managing our money that if it gets significantly worse we're okay.

And the reason is if had you a significant drop in the float balances then I've got to liquidate some of the long-term portfolio.

So I think it's a matter of our first objective is to take care of the money for our clients, the next one is principal and liquidity and yield is down the curve a little bit.

And I think that's simply being responsible in the industry to what we have to do.

John, I think you said in the last six months, client growth has been flat.

If you look at the environment today do you think client net client growth could remain flat based on what the environment is today going forward?

It's a reasonable assumption.

I will not rule out, I mean ADP had negative client growth in fiscal 2001 or '02 Negative clients growth to some degree is possible, do I think it will be significant?

I don't.

But we are going into the crucial selling season and the crucial retention season and we've got some optimism.

It's funny, when we've talked to our salespeople they don't feel too good, but the key is that they are not projecting anything to be significantly worse than what we have experienced.

And that to me was good news.

We did that the other day.

Now you don't know until the pudding shows up, but we'll see what happens.

We are optimistic yet cautious and we just keep executing and we mentioned we kept all the sales positions full.

We are not looking to decrease that sales force.

Now obvious in operations and other jobs people that leave the Company are opportunities to reduce costs but we are not doing that in sales.

And a last question, is there any opportunity to move pricing more than 4% to offset any of these negative fundamentals or do you keep it at four just because that's the way it's been and that's what the model says?

Hi Kartik it's John.

We'll get into those discussions about pricing in another two or three months.

It is something that we do in the springtime.

The -- the way I'd answer your question is if you looked at the history we have as a Company the answer that you would probably come up with is that yes that we can probably push it a little harder than that if we chose to.

But when you look at the environment we are in right now, I'm not so sure that that would be a smart thing to do.

I think that, I think it's going to be, it's always a healthy debate that we have every year around the price increase time.

And I think it's going to be very healthy one this year.

I think that quite frankly there will be more pressure on the downside on that than on the upside from our sales and marketing teams just because of the environment.

But it is true that at least so far it appears that we have a relatively price insensitive market, and I want to be careful about that and it's relatively price insensitive because the prices are so low.

When we changes as you know, when we change something 3% or 4% the net impact on a client is normally less than $100.

Right.

Thanks, John, I appreciate it.

Thank you.

The next question comes from Glenn Greene of Oppenheimer.

Your line is open.

Thank you, good morning.

I wanted to go back to sort of the retention attrition issue and to just to get a little bit more granular if we could.

I know -- I appreciate sort of the double-digit trends you've seen in the business failures.

But in a normal environment you sort of have and correct me if I'm wrong about a 20% attrition of customers.

In that context, what have you seen to date and do you expect -- how meaningfully above that 20% do you expect attrition to run this year?

Just some color around that context.

Well, the number that you're talking about with the 12 or 13%, I mean that's a number that refers to the increase in clients going out of business over a normal environment.

Right.

So you're right, in a norm, but if you said that aside for a second, you talked about all attrition, we've been running in a 19 to about a 20, probably a 22 or 23 range if you looked at our long-term history.

In the time that I've been here watching it pretty closely which is a little over four years now, we've been somewhere between 19 and 20.5, maybe 21.

So the only, when we look at attrition right now the only thing that is different is the macroeconomic environment.

The piece that's different is companies going out of business have increased.

There's a little bit more companies that have stopped processing.

They are still in business but they've stopped processing.

It could be a five person firm that went down to two people and they stopped running the checks on our system and they are either doing it manually or not paying themselves at all as they hang on.

But the overwhelming majority of our clients -- what's happening inside of them is actually different than what I would have guessed given the environment.

I would have guessed that there would be a larger decline of decline of existing clients than there is.

It's down but it's down ever so slightly.

So that part of it has been a surprise to me.

And the overwhelming majority of the clients that are still there because of the high client satisfaction, because of the high touch model that we have with those clients we don't think we are going to see any changes in that.

So the majority of what have we are facing is mostly the environment.

And quite frankly, it would be hard for me to imagine with what we've been through over the past six months that it's going to get a lot worse and cause a much greater business failure scenario for our clients.

But again, who knows, these are pretty un--

And business failures are typically 70% or so of the attrition trends if I recall right?

Yes.

Oh, you mean of our total attrition, how much is that?

Yes.

In a normal year if we lose 20% of our clients we will lose somewhere in the neighborhood of 12% of them to business failures.

We will lose another 1% or 2% of them to clients who have either stopped processing or have lost the ability to pay and we take them off the system.

And then in a normal year somewhere in the neighborhood of 4% to 6% will be other things.

They are unhappy with service, they want a different type of product offering than we have.

There's a variety of other things.

We call those the controllable events and spend a lot of time working on that to try and get that number as small as we can.

But you're in the right neighborhood in the numbers that you've talked about.

Okay.

And just one more question, on the pricing front and I'm not that concerned about the rate card, the 4% that you normally get, but then it relates to a comment that came out on sort of the ADP call their last quarter about regional local providers being more aggressive in discounting and trying to get whatever market share they could in the context of the challenging environment.

Right.

And that seemed to be squared sort of in the small, mid-size business environment, your market.

Right.

Have you seen any of that on sort of new business or ancillary service sales or retention or anything like that.

We have and it's, it's normal by the way at this time of year.

And it would, it's a normal thing to think about when you are in this type of an economy that people will get more aggressive on price.

I mean one of the ways that to think about it is when you have a market like ours that is dominate beside two players, ourselves and ADP, if you think about the amount of weapons you have in your arsenal if will you when you try to convince a client not to go with a market leader you come to price pretty quickly.

They are not going to out service us.

They are not going to put more product feature functionality into the marketplace.

So the only weapon that they have available to them is price.

And they sell, in a normal market they will typically and I will just use a core client as opposed to an MMS or HRS client, but they will typically bring their products in the marketplace at a discount to our of somewhere in the 20 or 25% rate.

And we usual very well very little problem winning in that environment.

So, will they tend to get a little more aggressive on price?

They will.

But you know our business well enough to know that we have very healthy margins and have a very significant amount of price delegation authority down to the field.

So to the extent that our people have to discount, they have the ability to discount.

And it would be somewhat of a losing battle to them.

We've been pretty happy with where we are.

We've got a little bit more discounting in our environment right now than would be normal, but nowhere near what I would have expected given the environment.

So the discipline that's in place on the discounting piece is pretty good.

We spend a lot of time working with our teams to make sure they understand the value that they are delivering so that they don't get caught in any type of price war.

And the other side of the coin to keep in mind when you think about these regionals is that in an economic time like this their financial stability is no where near the financial stability of ourselves or a company like an ADP.

So this is a much more stressful time for them than it is for us.

Understood.

Thank you very much, extremely helpful.

The next question comes from Julio Quinteros of Goldman Sachs.

Your line is open.

Hi, this is [Helio] sitting in.

The first question I have is what percent of revenues this year actually get an impact from the sales you did last year?

And based on that question like how do you see that impacting next year given that your sales probably is down this year?

Obviously the sales we don't make this year will have an impact next year and generally it's a little bit bigger than what it is in the current year.

In payroll, the revenue in the year only about 10% of it comes from basically what's sold in the year.

Now obviously the following year it's a little bit more.

HRS as a is a little bit more in the current year because they have sign up fees, but again the same phenomena.

Okay.

Got it.

Thank you.

And the other question is -- the different between, I think you explained this last quarter but it would be great to explain it again.

The difference between percentage of checks between client decline and business failures, like how do you calculate because there's a disconnect, there's 1.5% in checks per client but more than 10% in business failures, could you explain that again?

We are talking about how many clients fail.

We are talking about 12% of clients fail but and it's up 10% but we a baked in 12, so it's only up, the 12 is up 1.5%.

So it's not that big a factor because we are going to lose 19 anyway.

As John talked the range that I've been here is 19 to 23.

We are not at 23 right now.

I mean we are above 19.

We are probably somewhere between 20 and 21.

So it has not changed that dramatically yet.

But, clients when you don't have them it's not as good a situation.

When you talks about the checks per client that's simply a calculation.

It's kind of detailed where we take the client base and then we don't do it exactly like ADP does it because our numbers should be a little bit worse because they I think do it based on existing employees or clients.

In other words, the client had to be there a year ago and today.

We take the client base what it looked like a year ago, the whole base, and it looks like now and we measure what the check deterioration has been on a client by client basis.

That was what was down 1.5% Now, in the last cycle that got to 4% but it went like a rocket.

That hasn't happened yet this time.

Got it.

Thank you.

The next question comes from Charlie Murphy of Morgan Stanley.

Your line is open.

Thanks.

I wanted to do ask about compensation related expenses, Paychex' biggest cost.

If you include options expense that number rose 6% year over year.

Is it fair to say that that rate of growth should continue over the next several quarters given your comments on maintaining service or should it perhaps decrease given your comments about people and operations and related areas?

I would guess it would decrease some.

I saw some comment on the analyst reports that talked about how much of a benefit did we get from, for example, sales not being exactly where would we want them to be.

The amount of money that came out of expenses as a result of performance being less than planned was less than was like maybe $3 million or $4 million.

It was not a very big number.

So we are managing this quite well.

Obviously we'll put whatever measures in place we think we need.

But again I want to reemphasize, we know we have a to service the client base and decreased interest rates don't change the levels of work.

So we have to make sure we are doing what we need to do for the clients because that's the best long-term philosophy.

Okay.

Great.

As a quick follow up, do you have any first impressions on how the new US Presidential administration may impact the small business environment?

I would say only positively.

I mean I haven't seen anything in recent years do anything that favors big business over small.

I would not expect that to change.

If you look at what has been talked about throughout the primaries and, of course, he has to take office and he's got to do things.

But whenever there's discussion about increasing health benefits, increasing offerings in retirement services areas, increasing job growth -- all of those thing are positive for our business.

And we have existing products in every one of those three and those are three pretty big planks on the platform.

So anything that is done that moves the needle in those three areas or others are good for our business.

Great.

Thanks very much.

Yes.

You're welcome.

The next question, James Kissane of Banc of America.

Thanks.

John what portion of your HRS revenue is actually sensitive to 401(k) assets and maybe touch on the 401(k) revenue model, what portion is asset based and what is account based?

I would say -- in the401(k) model 25% of the revenue is floating on that stuff, about 25%.

Now over time that's going to diminish because our new product what it basically does it offers you more investment choices.

We lose basis points, but we charge more for the product.

Some people ask, why did you go in a direction to lose basis points.

Because we are the leader in the 401(k) product and we have to make sure we are evolving so we are going to meet the needs of those investors.

And more and more people want more opportunities to decide what they invest in.

And a real good thing on 401(k) that I feel the best about we have a lot of good sales Vice Presidents and they are always very quick to complain to the product people when they don't have what they need.

And our Vice President of sales here on the HR side is for about six months been telling us, he's got all the product he needs, he almost can't even think of what new product would be in the 401(k) line.

So, we continue to go that way, but it's about 25%.

Alright, great.

What percentage of your sales force compensation is commission based?

I guess going back to one of the answers you gave earlier.

The commission based, the normal salesperson is going to make about $40,000 base and about $25,000 variable.

Now what you have to recognize though is you get the better salespeople the variable goes up significantly.

And that's kind of how it works.

But also don't assume that we are selling nothing.

Sometimes you can look at this and say, it's horrible, it's not like we like it but it's not like nothing is happening.

I mean when I looked at the source of business and saw that new business starts were only down 12% that number didn't quite jive with how I felt although all the time I don't feel good, but we like it to better.

But it's not like nothing is not happening out there.

Okay and just one last question, kind of big picture.

John, what is the tone of the credit markets?

Las call I think you had said it kept getting worse.

I would say the tone right now is stuck.

No place to go.

I mean there's no return.

So when we went out of the variable rate demand notes because we began to believe they might not trade every day which did happen.

And they didn't not trade for very long but I can't call 100,000 clients and say, well, I can't move $1 billion today.

That's a bad day.

I mean there's bad days but that's a real bad one.

So right now I think it's kind of stuck.

We came out of those and went right to the US dealer security so we are at basically about ten or 15 basis points.

The variable rate demand notes though over the quarter eventually came down.

So you could take that risk, you are only going to pick up about 20 basis points.

So I think right now it's trying to work it's way through the system, the shock of all those thing that happened in late September, I would say things are slightly better.

But is there another way?

I don't know, but my people are doing a good job in this.

I mean I think for us to not have any principal losses and meet all the clients demands means that when you come to this responsibility I would have a tough time seeing how we could have done it better.

Yes.

Great job, thanks.

The next question comes from Jason Kupferberg of UBS, your line is open.

Thanks, good morning, guys, I wanted to do try and cross reference a bunch of these data points.

We were talking about flat client growth.

We know about the slow down in core payroll and ancillary sales.

And some would argue that macro conditions at least as it relates to unemployment m,ay very well get worse before better and now it sounds like there might be some more incrementally more cautious comments on pricing as we looking forward.

So when we start to project out since we are halfway through fiscal '09 and start thinking about fiscal '10, I mean just logically speaking I know you aren't going to give any specific guidance but services revenue growth logically would it slow versus fiscal '09 just given everything that I just mentioned?

It could.

I think the people that know our story know how the revenue model works and it's possible that revenue growth and payroll next year could be a little bit less than it is this year.

We won't no all of that.

There's a lot of factors that affect that.

The timing of a lot of things affects that.

And we won't know that until we get into the budget cycle and in the May period.

Okay.

And then more of a historical housekeeping item have you guys ever had a down net income year or a year where adjusted operating income grew as slow as it's projected to do grow in fiscal '09?

The only year we ever had a down net income growth year was 1990.

And actually that will year was worse than what we are having now because there was no-interest rate then so the down number actually was operating income without any float.

And this year we are still projecting 5% to 8% growth in operating income without float.

There was other factors that are in here.

You go back and you want to say go back that long I mean this business now is it $2 billion?

Back in 1990, it was about $150 million.

The market was a little bit different.

We weren't in all these electronic products.

HRS was somebody's dream, the revenue there was zero.

We are a totally different Company.

So I think when we look at what we've been doing and we maintain this streak for about 18 or 19 years I think all streaks really are kind of made to be eventually broken.

We feel real good about what we are doing, we feel real good about our prospects and based on size some of them aren't at the same growth levels they used to be.

But we don't think much has changed.

When the cycle ends, we'll come back and be very good.

Last question just to follow up on the pricing comments.

How do you handle the situation where a customer maybe comes to you and says hey look, you put in 4% earlier this year but I got ADP knocking at my door to say they will do it for, I don't know 5% less than you are doing it now and now is a good time to cut over before the beginning of the calendar year.

I mean how do you handle that situation in this environment?

It's always the same.

There's nothing that's different this year versus the others.

I mean there is, it's, we put customers on all through the year.

We put a lot of customers on at this time of the year because of the natural affinity of getting your books lined up with January.

But that's a business as usual business value.

I mean we either are providing a value or we're not.

Same thing is true with ADP, they are either providing the value or not.

So that's a normal scenario in our world.

It is nothing different that's going on this year versus others where that happens.

The only guidance I would give as you is we watch pretty closely the amount of clients we lose to ADP each year and the ones that we gain from them, I'm sure they do the same.

And in general terms they tend to be flat.

For the last several years we've been running a little bit ahead, we've taken more of theirs than we've lost to them, but the numbers are relatively small.

Okay, thanks, guys.

A point I want to make when you look at '10 because often we pick up the slightly negative and miss some of the positive.

The float diminishment that took place in fiscal 2009 can't be anywhere near that in '10 because there's no place left to go.

The next question comes from Tien-tsin Huang from JPMorgan.

Your line is open.

Hi.

Thanks so much; John Morphy I was wondering to the extent possible can you give us the sensitivity for Paychex revenue and earnings to the changes in some of the key metrics like attrition and checks per client and new sales?

Similar to what you do on the Fed fund side?

Basically, I mean let's take interest rates out, we already beat that to death and we are where we are.

If you take clients moving it doesn't really affect margins too much unless I really had a significant reduction in clients because almost all of our costs related to supporting a client are metric based.

And as the metrics change the things have to change.

And we balance with that.

Obviously that's a little bit easier to deal with in an environment that's positive than one that's highly negative but I would not anticipate a highly negative in that area.

The one that affects margins the most is checks per client.

And that declined slightly; we've been able to fight that off and we've done that so far in this cycle.

There does come a point though of checks per client fall enough or precipitously where for a short period of time or until it kind of recovers we could have some margin degradation.

Now one thing and I saw another point and I meant to put it in my comments and I forgot to is somebody was commenting does the guidance imply margin degradation across the rest of the year?

Well, historically our margins are not the same all year.

The highest margins are in the first quarter.

And then they basically drift off a little bit because of the timing of when the price increase goes in, our budget process, and the Paychex kind of year end which really isn't a May 31 year end, the business year end is basically December, Jan, February.

So basically we'll watch margins, will watch our costs aggressively.

I don't remember any time in our history where margins have changed dramatically and I wouldn't anticipate that will happen here.

But you could get some events that would put them under a little bit of pressure but again when we look at this guidance that we are changing today, while by Paychex standards it seems like it's real big most companies would love to have our guidance problem.

Sure, no I would agree.

I guess just thinking about it further then checks per clients if it were to shift down 100 bips what happened the impact be?

100 bips, that's one person per client?

Moving from down 1% to down 2%?

1%, 2%.

Yes, sorry.

Probably less than $5 million.

Less than $5 million.

And attrition if we were to go to say 20 to 21% is it a similar sort of thinking?

No, that revenue could be a little bit higher but the costs move with it.

So that's the one I don't worry about as much.

Okay.

So it ranks really checks per client and then attrition?

Checks per client is hard because I don't get a cost offset.

That last check is the lowest revenue per check, but it is probably the most profitable check.

Now, another thing that's kind of interesting when you look at the data when checks per client goes down, my revenue per check actually goes up.

Right.

Against the base from a math standpoint.

I'm just trying to think this about [on savings] because I know ADP gives some of the detail around checks per client changes and how that influences earnings.

That's why I was asking.

So the $5 million is a pretty good proxy for now?

Reasonable.

Now the other thing you have to remember when you are talking with them, I mean they have that whole upper ends, a lot of the revenues and I'm not in.

So I'm not sure their metrics and mine would be exactly the same.

Sure.

No, I appreciate that.

The last question for me is just the I guess the ancillary services.

Is there any risk of existing clients dropping some of the ancillary services particularly 401(k)?

Have you seen some of that and how has that pattern looked in the past cycles?

First off we didn't have that much HRS in the past cycles.

So it is a little bit -- new territory.

Highly unlikely many people drop taxpayer direct deposit because those are almost a basic part of the product.

The 4041(k) plans though when I think they do start to drop and you will find that that client has already reached a point where I'm not getting much economics from them any way.

When you get down to three or four employees, the guys stopped the match, you stopped all these other thing so I lose that client, it's not, I don't like it but the financial impact is not the same as others.

Because in the 401(k) model -- the pricing model is not quite as good as our payroll model on the low end.

On the low ends in pricing of the payroll product we have great leveraging on pricing for the work we have to do.

Obviously the client doesn't pay as much but we have good profit levels.

The 401(k) gets to be a little uniform based per employee.

So the charges don't quite have as big effects.

So the small client base that goes down is not as big a deal.

Okay.

Good to know.

Thanks so much.

Happy holiday.

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

Your line is open.

Hi, thanks.

Just to get back to something that was asked a little bit earlier and this may be overly simplistic but it appears the payroll guidance assumes flat clients growth plus your annual price increase.

So if in fact that's a fair way to look at it with bankruptcies up, et cetera, can you help us understand how strong of a selling push relative to prior years that you need in the February quarter to keep that client base flat year over year?

We -- this guidance is not based upon the selling season being better than the last one.

It's based on the level of percentage of plan that they've done the first six months will continue.

And sometimes people are, are you selling 50% what have you expect?

No, we are way above 50%.

We are not where we like to be.

I mean a normal range for a Paychex sales force is probably somewhere between 95 and 102, 103.

So we are below the 95, but it's not like the world has ended.

When you say 95 you mean 95% of the prior?

Plan.

Prior year?

Plan.

We work off plan.

I don't work off prior year.

Got it.

And just one other question, John, in the 10(Q) there was a comment and I may have misunderstood this about that your base line clients float income would be $60 million which looks like that would be down, I don't know about $15 million from the midpoint of your guidance for this year.

Did I understand that right?

Basically what we are trying to do is to quantify a rock bottom number with the long-term float.

But we are not projecting it's going to do that.

Basically that would say the bottom is around $60 million assuming the short term you get zero.

That would mean would you have $2 or $3 billion invested at nothing.

Interest rates can't stay at ten basis points.

So the $60 million would be essentially all of the income off the long-term float?

Yes, and what I'm trying to identify is everybody worries about, well, I'll drop $52 million to $60 million this year.

It can't drop $52 million to $60 million next year because it's not enough left to drop.

The drop is probably, it's less than half of that.

Okay.

Got it.

Thanks very much.

The next question comes from Mark Marcon of R.

W.

Baird.

Your line is open.

I was wondering on the float, can you talk a little bit about what you were assuming with regard to just the average float balance for the year?

What it's been.

It could -- could be subject to some there but the only place that that's going to have an impact is going to be in the bonus season.

I don't believe wages, that variance can change dramatically.

The bonus season could change but that's money or extra money we are only holding for like three days.

The bonus season really is amazing.

I wish I could give you some information on it because you think it must have started.

Well about 95 of the bonus season happens between December 29th and January 3rd.

There's probably some risk on that but that's not going to be a big number.

So when you say what we are seeing you mean essentially if we take a look at the last quarter.

I got float balances probably flat.

Okay.

2% is nothing.

And so I mean if we are looking at the guidance in terms of the E&S revenue then essentially that if we are running the average float balance at roughly flat then that will tell us exactly what your guidance is assuming with regards to the yield?

Yes.

I think you can figure it out and one thing I would tell you is that it will be better in the third quarter than in the fourth quarter.

And that's only because we have some short term instruments that are still above the 10%, ten-point basis points.

Now the average duration, they have defined durationer, they are not at risk but they are going to mature in this environment.

We are not predicting you can get the same rate back again.

At some point there's got to be a little more sanity to some of these rates but we are not trying to predict when it will happen.

Yes.

I mean the futures are basically assuming that there's an 87% chance that by the time we get to November of next year things pick up which certainly seems logical.

We didn't forecast any improvement.

Okay.

But just along those lines at what, what would the trigger point be for you to move into slightly riskier assets?

It's once the banking -- I'll be back in variable rate demand notes once the bank's start working well together.

Right now I just can't trust the system and the Fed and the people they have to get the system back under control.

I mean variable rate demand notes really aren't a problem.

My problem relates to the fact that I can't miss even for a day.

But I believe the order will be restored to that and rates will be restored, I can't tell you when.

I mean if you have any confidence that is going to get better or recover that all has to go back to normal at some point.

I believe in mean reversion over time.

What's your sense with regards to, as we look out over the, say 18 months, and let's assume that the environment stays challenging through the end of this fiscal year and certainly when will you're planning for fiscal 2010, things don't just turnaround on a dime.

How would, should we think about your expense growth for next year in terms of the controllable expenses?

Well, Mark it's very hard to answer that question now because again you are going to have to look at each one of your elements.

If I don't have any client growth when it comes to operations and G&A there isn't going to be any expense growth, okay?

Or very little because we have a long-term culture here, expenses grow less than revenue.

Now the real question you come back to then what are you going to do in this area of selling.

Selling -- one of the toughest discussions to make is if you decide to reduce the size of your sales force, it's almost like admitting defeat and I don't see us doing that.

Yes.

But I mean could you increase it at a lower rate than what you have in the past?

Absolutely.

If you ask me, it's going to go up less than it did this year.

Right.

And so from that perspective and it could potentially going up at a rate that would be similar to what you would expect with regards to your growth, could it not?

Yes.

And then your other elements would actually come down relative to the growth.

Some of them.

No, we are, we are going to be cautious and prudent.

And again we have to service clients at the level we need to.

But I guarantee money we don't need to spend we are not spending.

But we will invest in what we think the future needs.

Mark, it would be safe for you to assume that our E to R is going to stay constant or get better.

Okay.

Great.

And then with regards to just the healthcare initiative you made some comments about that it's going to get better.

The new administration is basically planning on sticking with an employee or employer based healthcare system.

And it sounds like there's going to be penalties for those who don't put in place healthcare.

How are you, how material or how big could that become over the next couple of years do you think?

Well, that's hard to say.

One thing we do know in our clients base when you go above I'll use 25 employees, a very high percentage of our client base above 25 employees offers healthcare.

It doesn't mean all the employees take it because they might not like the cost of it is, but it is offered to them.

So that.

That number is above 80%.

But two things Mark, when you think about healthcare for us, that I think are material.

One, I think that healthcare will stay as a high priority agenda item through this administration and the next.

And, two, it's a very high priority item for us and we are relatively new into it.

So I can't, it's hard for me to see anything happening other than a continuation of pretty significant growth in the health insurance business for us.

Terrific.

Thank you very much.

Thank you.

And by the way, we are spending more time on the individual health now as well so it's not just small group it's also small individual.

Great.

Thank you.

The next question comes from Gary [Cushman] of Credit Suisse, your line is open.

Hi, thanks, I just had a question on net new client growth.

Is there a way for us to think about how far new business starts or companies going out of business, the metrics would have to deteriorate for net new clients to maybe be negative for the year?

Well, we just said a few minutes ago it's possible for client growth to go negative.

So some of those metrics could exist now.

Now, do the metrics exist to take it significantly negative at the moment, no.

But we are heading into the season that will tell us a little bit more than we know now.

But we have no reason to believe that.

The good news in all of that if you think about it -- at least the way I think about it is is those are things that when they reverse we reverse with it.

So if we were having problems with our existing clients that would paint one picture.

But when the only issue that you are having is either a lack of new business starts or an increase in companies going out of business the minute that those trends reverse themselves, we reverse right with it.

Right.

So if you have to have problems those are the good kind of problems to have.

Right.

Okay.

Thank you.

The next question comes from Franco Turrinelli of William Blair & Company.

Your line is open.

Good morning, John and John.

Happy holidays.

John Morphy, did I hear you correctly did you say that in the previous cycle pace per control got as low as 4%.

Yes.

Yes?

So, and what was the client growth at the time, what's kind of a correlation between those two.

Well, you can go back, it's 2002, I think client growth was I'm going to guess about 5%.

Might have been a little lower.

We are clearly a different environment relative to that --

The only thing client growth back then is harder to determine because as I just remember that's when we bought Advantage and Interpay.

I think if you go back, I'd have to go back and look at our releases and our SEC annual report, my belief is we quantified organic growth to the best that we could.

Yes.

Actually I think you did p by my recollection.

So I'll go back and take a look at that

I will make a guess I think it was between three and five.

Which actually is a perfect segue into my other question maybe more for John Judge.

You commented on the advantages of being Paychex in the financial stresses and strains that your smaller competitors may be experiencing.

Can you just comment a little bit on your view of the opportunity and maybe your appetite for consolidating the industry a little bit more?

Well buy small payroll Company's every year and have been for a very long time and this year is no different than that.

So we continue to buy smaller companies.

I completely subscribe to the theory that when you get into times like these particularly if you have financial strength that we do while you have challenges you hopefully great opportunities that smock themselves to you.

We have a fairly significant amount of cash on our balance sheet.

We generate a lot of cash.

We have sort of an envied position relative to our credit worthiness and the credit lines secured and unsecured that we actually have in place right now.

So, and we have pretty good currency even in this market in our stock.

So should something show itself that would either help our product offerings or help our financials we have an appetite for acquisition which I assume is what your question is.

So it's sort of a combination of we have the means and we have the appetite.

As you know because we spent a lot of time with you is we are a very disciplined Company because so we are not going to go on a buying spree just because we can.

But if something shows itself and it's the right play for us -- a straight straight up payroll Company is a very easy thing for us to do because we do it on a regular basis.

Some of the other companies that might be interesting to us that have product offerings they are a little bit more difficult.

But the bottom line is that we have an appetite and we have the means and the only question is does something shows up that makes sense for us and our clients.

Which actually is a great segue into my last question if I may.

We're collectively aware I think of the investments that you've made and are making in healthcare and the new 401(k) offerings.

Are there other investments that are important that are kind of underway right now or alternatively that you feel you may choose to defer in this current environment?

Not so much on a defer side if I understand your question.

But if you think about MMS as an example, in the course of the last couple of years and without a lot of fanfare and a lot of head lines we have made some pretty significant improvements to our time and labor management offerings, to our HR online offerings.

To a series of things that are again in the HR world that have to do with things like applicant tracking, background checks for new employees.

We've dramatically increased the number of HR consultants that we have available to small and medium sized businesses to help them with essentially everything that is done in a normal HR department whether that's on boarding, termination, benefits administration and so on.

So we've made a lot of investments there.

We are going to continue again as we find things that make senses to sort of fill out that wheel of offerings if you will we will continue to that.

And when we look at this year as an example one of the strongest sales teams that we have going right now is our MMS team.

They are having a terrific year and a big part of why we think they are having a terrific year is that they've got some offerings that either are in and of themselves creating revenue opportunities or they are enabling our MMS clients to talk to customers that otherwise wouldn't talk to us because we didn't have a time and labor management module as an example.

So those things will continue.

Now in terms of are we going to disinvest or defer investments?

We have to make those discussions every quarter and every year.

And to the extent that we are, we are investing in something that's either not materializing to the extent that we want it to materialize or something else popped on our radar screen that has a much better performer to it than we do -- we do make changes.

So you know that for example that three years ago we weren't talking about health insurance.

And now health benefits is something that we not only talk a lot about but we spend a lot of money on.

So and that was a great example of one that was not on our radar screen, came on our radar screen and the pro forma was so strong and our abilities were so strong that we switched horses and put a bunch more money into that effort.

It's a pretty dynamic and fluid environment I guess is the easiest way to say that.

Yes.

But, John, it feels like and I'm sure this is by design and not by luck it feels like you are able to make the investments over the past several years and that currently your portfolio of products and services is pretty strong, pretty up to date.

And so you have to some extent the latitude to look at those investments, in other words, there's really nothing kind of critical or on the critical path right now is what it looks like at least as an outsider?

Critical, there's nothing that we are currently investing in or?

Well, nothing that you I mean as I said I mean it feels like the portfolio of products and services is in pretty good shape right now which allows you maybe to make some of these decisions factoring in the current environment.

Yes, I would say that that's mostly right but you also know us well enough to know when we are either investing in something that's not cooked yet or we're pursuing something that we are not prepared to talk publicly about yet that we just don't talk about it.

But there's rarely a time that I've seen around higher where we are just sort of standing pat and working as hard as we can on our existing environment.

We always spend some percentage of our management time and our funds quite frankly on things that are three to five or five to ten years out.

And there's no difference with that right now.

But it's that balance that we've talked about where we are pretty intense on the current fiscal year, but we always carve off some amount of our resources both management think time and funds to invest in things that will impact us in the future.

And to the extent that you get stressed in your current environment you might look a little harder on the monies that you're spending in the future.

But I can't imagine that we would ever get to a time where we are not working on things that are three, four, five, six years down the line.

Thanks for the color, John I appreciate it.

It's my pleasure.

The next question comes from [Michael Costanza of Penfield Post].

Your line is open.

Thank you gentlemen for taking my call.

A couple of things.

Let me start with what would be local and what concerns people in Monroe County.

I did hear the word attrition when speaking of different elements of your plans for the future.

I know it's not going to be in your sales force, but do you plan to not be filling positions in other areas?

When you heard the word attrition in our dialogue, Michael that was relating to our clients not our employees.

Oh, I see.

So you are going to continue to retain your employees at the level that you have them now?

Well, who knows but I mean if you, if you look at what's happening with our Company in the last four years our employment in Rochester has gone from 2,000 to 3,300.

Our square footage has gone from something in the neighborhood of 400,000 square feet to over 800,000 square feet.

We've grown our employee base in Rochester at about 55% over that period of time where in the rest of the country we've grown it at about 35 or 36.

So we are, we've been a growth engine in this town for some period of time and I don't see that changing.

Good.

Very good to here.

Also I've been wondering, hello?

Are you still there?

Yes.

Go ahead.

I'm sorry.

I've been wondering, whether the downturn might actually have provided a boom in your human resources business?

In the sence that companies that are downsizing would need to make more use of Human Resource Services to deal with the employees who would be leaving for example.

And I'm only using that as an example.

Am I mistaken about that?

It varies.

REmember, we are other low side, 17 employees, the average side of the client.

So we don't, outsourcing for us is more to get away from worry free and something you don't want to do.

Very little of our outsourcing actually means they layoff employees.

So outsourcing is a little bit of a misnomer on our end.

If you are on the large end outsourcing means you reduce jobs.

Those were my only questions.

Thank you.

Thank you.

The final question comes from Michael Baker of Raymond James.

Your line is open.

Thanks, so, John Morphy, just wanted to do get some color on the Workers' Comp side in terms of giving the change in the economy during the quarter did you see any meaningful change in claims activity?

I haven't seen any.

It's going to be interesting to see what happens because I always believed the claims went up in these times and the insurance companies tell us that claims go down.

Because people don't want to report stuff, don't want to go on disability, et cetera.

So, I haven't seen anything dramatic and we'll just keeping watching it.

The effect in the PEO went back basically accidents.

And when you have Workers' Comp you have a portfolio that has about five or six years open in it and it was back most of those claims are two or three years ago.

And whoever quantified the adversity of the claim missed it.

Now I use this as an example.

It isn't a good one and we didn't have this but we'll say you thought somebody had a broken arm now you find out you amputate the arm, so the cost goes up.

We have to get you another example.

Yeah, I know.

That one isn't the best.

Thanks for the update.

All right.

Okay.

I think if we don't have any other questions I think we've enjoyed the call.

We always appreciate your interest and we are glad to be here and I hope you all have a great holiday season with you and your families .

Thank you for participating in today's conference.

You may disconnect at this time.