Paychex, Inc.
Q1 2009 Earnings Call Transcript

Published: 25 Sep 2008

[Operator:]

(Operator Instructions) Now I would like to turn the meeting over to John Morphy, Senior Vice President and Chief Financial Officer; you may begin.

[John Morphy:]

Thank you for joining us for our first quarter earnings release. Also joining us today is Jonathan Judge, our President and CEO. The teleconference call will be comprised of three sections

[Jonathan Judge:]

Thanks John, good morning and thanks for joining us on the call. I’ll just add a few comments on our quarter and then open up the lines to your questions and comments. Overall as John said, we’re pleased with the results of the quarter particularly given all the economic upheaval of the year in general and the last few weeks specifically. Our operating results were solid. Not as strong in normal Paychex quarter but strong enough to continue our trends of setting new records for revenue and profit despite the economic environment. Service revenue was up 7%, operating income ex [float] up 11%, cash on the balance sheet up 19%. And as John mentioned margins expanded to 39%; the highest that those margins have ever been and I think a testimony to the fact that we intend to manage this business for profitability despite the economic environment and the conditions that we’re in. Client satisfaction and client retention continued at world class levels protecting our recurring revenue model. Payroll service revenue wasn’t as strong as we’d like but HRS and MMS were right on plan. From a sales perspective we’re off to a good start. MMS, our major markets group, had a very solid quarter and is positioned for a very good year. We’re getting good lift from the investments that we’ve made over the past couple of years strengthening our offerings portfolio; things like time and labor management and hosting and benefits tracking and administration and expense management and several other applications. And as a result two very good things are happening in our MMS world. One, we’re achieving higher revenue per unit and two we’re competing successfully in situations where we might otherwise had been eliminated for lack of functionality. So MMS is off to a good start. HRS is also off to a good start. Very strong quarter on 401(NYSE

[Operator:]

(Operator Instructions) Your first question comes from the line of Julio Quinteros – Goldman Sachs

[Julio Quinteros:]

Can you go back through just one comment, as you were talking about the checks per client growth there was a 10% number you cited as well, what was that number about?

[John Morphy:]

Basically out of business and no longer having any employees, that loss is up about 10%. That’s about where it was at the end of last fiscal—during the quarter it got a little bit worse, not much, like 10% might have went to 11%. But enough that we felt a little bit of a revenue hit. Checks per client is what we’ve experienced over the last 12 months, we feel pretty good about that. In fiscal 2002 and 2003 that number moved four. We continue to see this environment where those who are in trouble, have lots of problems and those who are okay seem to be hanging in there pretty good.

[Julio Quinteros:]

On the client base growth, I think coming out of the last fiscal year you were running around 2% just based on the last notes that we’re looking at here, how did that finish this quarter and how do you expect that to ramp going forward from here?

[John Morphy:]

We only disclose that once a year and hopefully it will be better then that but we might not be based on new business starts when we get down to the end of the year. Anything now is purely conjecture because the real period that this makes a difference on is in the selling season which really happens in December, January and February.

[Operator:]

Your next question comes from the line of Adam Frisch – UBS

[Adam Frisch:]

MMS you made some fairly positive comments on and I don’t think you’ve broken out explicitly the revenue contribution there in the last couple of years, but can you give us a sense of what payroll services growth would have looked like without MMS?

[John Morphy:]

That would be breaking it out wouldn’t it? Nice try. We don’t just not give it because we just don’t want to give it; really the payroll business as MMS is developed is a 15 over business. We had 15 over business in core before we set up MMS. A third of the MMS clients come from core which we actually actively convert them when we think a client would benefit from the upgrade and we also sell more services into them whether it’s HR online, [Benetrack], those things. So the MMS offering—we spend a lot of time in making the product line broader. It’s working very well. We’re very competitive but we still look at this, its all payroll.

[Adam Frisch:]

And then if we look at the guidance for total services revenue it looks like its going to come in meaningfully below where you had trended during the last downturn, because I think you were able to maintain low double-digit growth service revenue during the last downturn, what’s the big difference this time? It seems like checks per client is actually not as bad this time around. Obviously you’re trying to grow off the bigger base so I understand that that’s part of it, but are there other factors at work here causing the growth?

[John Morphy:]

There are a lot of different factors. One thing back to last time we were barely over a billion, now we’re at two billion. The growth in HRS was greater because the business unit was only at around 100 million, now it’s at over 400 million. Client growth back then on a year-over-year basis was typically higher then it is now and some of the payroll ancillaries that we have today weren’t as mature then. So and we’d like to go back and kind of compare all these kind of changes in recessions and the other problem is the recession back then is totally different from the one now. The one back then, new business starts weren’t a problem. In this recession it’s all about new business starts to some extent because credit wasn’t the problem back then so I look at these two downturns and while they have some similarities, they have some things about them that are not similar at all.

[Adam Frisch:]

Is the tenure of your sales force materially different now versus how it was during the last downturn?

[John Morphy:]

No I would expect it’s about the same. Turnover is probably a little bit better now so maybe it’s a little bit better but we and our sales force, have a great sales force and the experienced group and that’s why we go out to conferences and you get to touch base with the top third and the seniority there is very high. So things really haven’t changed too much since back then.

[Operator:]

Your next question comes from the line of Rod Bourgeois – Sanford Bernstein

[Rod Bourgeois:]

I’m trying to reconcile the fact that bankruptcies hurt your payroll revenue growth, but I think I also heard that you’re having record client retention, so how do you reconcile those two points?

[Jonathan Judge:]

When we talk about the retention its what we do in that is that we normalize it to what a normal client failure would be, so from that perspective you’re right, if we didn’t normalize the out of business, then we’re slightly below record but almost right on it. The retention is going extremely well. Our client satisfaction is at the highest it’s been; it’s in the low 90’s. So both of those things are boding very well for us and obviously when we lose—when clients go out of business there’s not a whole lot we can do about that.

[Rod Bourgeois:]

Can you break that down? Can you tell us what percentage churn you’re experiencing and how much of that is bankruptcies?

[John Morphy:]

It’s slightly over 20% so in total we’re not at a record right now and bankruptcies are probably two-thirds of that.

[Jonathan Judge:]

I don’t want to say bankruptcies; the technical term is out of business or no employees. We don’t really always know whether they went bankrupt.

[Rod Bourgeois:]

When you look at the pressure on your payroll revenue growth that you experienced this quarter can you rank order the issues? Was it new business starts that were the biggest problem versus out of businesses?

[Jonathan Judge:]

First of all you have to differentiate between P&L revenue and sales, right, because sales in a given year will only affect somewhere in the neighborhood of 10% 15% of our revenue. So on the sales side new business starts in core, new business starts is probably the most significant issue that we’re facing right now because a substantial amount or not inconsequential amount of our normal new business comes from new business starts or new business origination. So that would in my opinion that would be probably the biggest issue that we’re facing on the core side. In terms of the core revenue the biggest issue would probably be the fact that we didn’t get as many sales in the prior year as we would have liked to.

[Rod Bourgeois:]

Given that the credit market crisis is still alive and well, are you assuming that new business starts and related issues are going to potentially get worse this quarter or are you [seeing] that turn at all?

[John Morphy:]

We didn’t bake anything and we baked pretty much where we are is where we are.

[Jonathan Judge:]

It’s hard to believe, you have a pretty good view on this world—its hard for me to believe that the credit environment is going to get worse then it is right now. Because it’s really bad. So it seems to me like the only thing that you can assume is that the credit environment is going to stay the same or get better.

[Rod Bourgeois:]

That’s putting faith in the bail out plan which is kind of yet to be determined I guess.

[Jonathan Judge:]

Not just the bail out plan, these banks have to make money. How are they going to make money if they don’t loan money.

[Rod Bourgeois:]

On the buyback front, are you considering a buyback or given the credit situation that we’re in do you hold your cash here?

[Jonathan Judge:]

There’s nothing that we’re doing right now that would lead me to tell you that we’re thinking about doing another buyback. We’re not that far off of the last buyback. We do believe that cash is a good thing to have in this environment. We do believe that in these types of economic conditions that there is always the opportunity for the strong to take from the weak and one of the ways that you do that is to be in a good cash and credit worthiness position so right now, I think we’ll probably hold pat with the cash on our balance sheet and continue to build the cash on our balance sheet. We’re thrilled with what happened in the last quarter in terms of the cash we put on the balance sheet but we’re still at less then—we’re about $0.5 billion of cash on the balance sheet so we’ll continue to keep doing that.

[Rod Bourgeois:]

Should I assume you’re seeing more attractive acquisition candidates out there in this environment?

[Jonathan Judge:]

Not as many as I would have liked to see. There are clearly acquisition candidates there, particularly on the smaller payroll—we continue to buy small payroll companies. We’ll do that throughout the year. Larger payroll companies aren’t that many of them left. If any of them go on the block we’ll obviously be one of the first people that will be contacted and we’ll take a look at those. We’re always looking at potential opportunities where we can buy companies that add to our product portfolio and make our sales position stronger and improve our revenue stream. All of those things are part of our strategy and as soon as we get one where it’s at a point where it’s prudent to talk about it, we will tell you about what we’re doing.

[Operator:]

Your next question comes from the line of Gary Bisbee – Barclay’s Capital

[Gary Bisbee:]

On the costs, you continued to do a great job of getting the margins and it looks like with the slowing revenue you had to hold back your cost growth to less then 5.5% year-over-year, I wanted to get your sense on is this sustainable and I think you made a comment about even in a tough environment you’re going to remain focused on profitability but do you give something up next year? Does it get harder to rebound if you under invest now to hit the earnings numbers? Any thoughts on that?

[Jonathan Judge:]

Our feeling is that whenever we find something that we think is a good investment opportunity for us, we will invest in it and we’ll do it in whatever means that we have to. What we’re doing in an environment like this though, we have very strong belief that revenue earns expense and so if we don’t see that there’s a reasonable return and we’re not going to take flyers on things, we’re very disciplined in all of the investment proposals that come to us and we have a culture and an environment inside the company that encourages people to bring investment opportunities forward. But we also force a fairly disciplined pro forma view on that and if we don’t feel like the idea has got a reasonable chance to be successful we won’t invest in it. On an operating side of the house though, we are very disciplined in the fact that we build plans that assume a certain level of revenue and for that we allow a certain amount of expense and if we’re not getting the revenue we’re pretty disciplined about taking the expense out. Its not anything that we don’t believe that its anything that will hurt our future, the types of things we cut out are the types of things that won’t have any impact on either our near-term or our medium or long-term health.

[Gary Bisbee:]

Can you give us a sense what those types of things are that you’re able to cut out?

[Jonathan Judge:]

You might have less meetings then you’ve had in the past. You might make it more difficult or make less money available for internal travel to meetings. We might cut out some non-essential meetings that we don’t need. We might delay projects for a quarter. It’s a variety of things. It’s the normal list that any company would look at. But when it comes to investments in things that will improve the health of this business as long as I’ve been here and for everything that I know for the time that Tom was here, there was never an investment that was something that could grow the business, it was never upheld.

[John Morphy:]

One thing we use the word cut, remember we’re still growing so it isn’t really cutting all the time, its as much as you might not let somebody spend something extra, you tell you’ve got to be more productive. But when you’re still growing its really about not spending money you don’t think you have. So it isn’t like eliminating a whole lot of things and if you can’t find things to eliminate, you’re in trouble.

[Gary Bisbee:]

On acquisitions that you got, last recession when there was the difficult revenue environment if I remember correctly you bought Advantage Payroll half way through that to help generate some more growth. You’ve said you don’t see as much out there as you like, is your appetite much higher given the environment right now or is that really not--?

[Jonathan Judge:]

Well first I would say the way that you put that sentence together was revisionist history. We didn’t buy advantage because we were in a recession. They were two entirely different scenarios. But our financial strength both in the cash that we have on the balance sheet and the strength of our stock as a currency and our borrowing ability, if we found something that would materially help this company we are in a very good position to execute on it.

[Operator:]

Your next question comes from the line of Mark Marcon - Robert W. Baird

[Mark Marcon:]

Can you discuss trends throughout the quarter as well as what you’ve been seeing since the end of the quarter? Are there any specific geographies or verticals where you’re seeing particular signs of strength or weakness?

[John Morphy:]

First off, I don’t like to comment on any trends that are almost a full quarter because this business while it has a lot of predictability to it, its got calendarization on it and things move around and if you look at two weeks you’re never sure what you’ve got. So what’s happened since over the last weeks, I wouldn’t probably even know but I wouldn’t probably comment if I knew much about it anyway. The quarter trends, I don’t think anything changed dramatically. The new business start--just the credit crisis is kind of stuck where it is. Out of business slightly worse. Checks kind of stayed the same through the whole thing so nothing in my mind really significantly changed so we’re kind of a little bit where we were are is where we are.

[Mark Marcon:]

I know in terms of your guidance you said that guidance is based on the current economic environment and if you look at headlines it seems like things over the past four weeks have even got worse, so do you think that your guidance really incorporates how things have been the past four weeks as opposed to just what we saw in Q1?

[John Morphy:]

Again I wouldn’t adjust something off of four weeks and I don’t know where some of this is going to go and one thing I know we’re going to get the question eventually, so I’ll talk about it is, we got payroll revenue growth of under 5% last quarter and we’ve got the guidance at 5% plus. Well last year we had the same conversation, payroll revenue growth was 7.8% in the first quarter and we had guidance higher. Second quarter it moved all the way up to 8.8%. Now whether we’ll go up a point I don’t know, but I’m pretty confident right now that second quarter payroll revenue regardless of the environment is probably going to be a bit strong because that’s how the calendar works. But the reason you’ve got to look at all this data, some people jumped on the fact that the client funds balance increased more then it has in the past few quarters and it did. All because of where June 30 fell, because it fell I think on a Monday and we held the money longer and affected the average for the whole quarter. So you get a lot of things going on in this business. Some repeat, some don’t and when you look at these short periods of time you really can get caught with some bad predictions.

[Mark Marcon:]

In terms of your HRS guidance, it implies that we’re going to see some acceleration and from what we saw in Q1 and I know you mentioned that part of this is due to the lower revenue in the second half of 2008 in terms of time and attendance and higher benefits from the EGTRRA, are these the only reasons for the acceleration or do you expect to see a pick up in other areas such as your health insurance initiative?

[John Morphy:]

We’re not predicting—now health will keep growing right to the quarter because it’s so small that when you’re going to take something at $10 million to $20 million it’s clearly going to grow each quarter. I’m not too worried about that and I wouldn’t even call that an upturn. We commonly want to use the words in this call about acceleration. We don’t compare sequential quarters. You’ve really got to look at quarter-over-quarter. Sequential quarters in this business don’t mean much. I know that everybody wants to look at it that way and keep coming back; I wish it worked that way but it doesn’t. We can have a sequential quarter be worse then the one before it with nothing happening, simply that’s the way it worked out with some of the seasonality so we’re not predicting anything to get better. We are looking at the fact that time and attendance, we talked about a revenue recognition slight change we made in the last quarter, that’s going to help us in the fourth quarter. The EGTRRA billings I know pretty much what they’re going to be. The first quarter is when we got started and we know they’re going to be some fair percent higher in the last three quarters by quarter so when we look at all those things that’s why we feel confident.

[Operator:]

Your next question comes from the line of Charlie Murphy – Morgan Stanley

[Charlie Murphy:]

Is it possible to isolate how material the EGTRRA billings are and do they go away in fiscal 2010?

[John Morphy:]

We said they are approximately $10 million and it is a one-time event. We talked about before that we have a one-time expense event that we don’t want to get into a lot of detail about because of competitive conditions but it’s something we’re doing on a conversion. It’s unusual but the impact on the P&L year-over-year should not be significant. It affects the revenue but not the net.

[Operator:]

Your next question comes from the line of Analyst – Centennial Asset Management

[Analyst:]

Just to clarity the checks growth per client, it was down 1% year-over-year or sequentially down 1% but still up 10% year-over-year?

[John Morphy:]

Checks per client are down about 1% year-over-year. So if it was 20, that’s not the number, take 1% off of 20 and that’s what it would be.

[Analyst:]

New business sales growth in the previous conference calls you had mentioned that you planned to grow better then 4% or so every year, but it looks like in this quarter due to tough market conditions, tough credit markets and tough new business starts, it was just about 1% to 2%, from the numbers it looks like. Now as you said earlier that probably the markets may not improve in the second quarter, you had not seen any kind of improvement, is that a reasonable assumption that going into the fiscal 2009 it looks the credit markets are not going to improve quickly that new business sale growth might remain in the 1% to 2% range for this year?

[John Morphy:]

First off, we never gave a percentage growth on new business starts or new business clients. Client growth basically we disclose once a year. I’m not going to conjecture on what it will be and we look at the markets staying about the same but I’m not sure what they’re going to do.

[Analyst:]

On the human resources, you are projecting 18% to 21% growth; I think last year it was about 19%. So you are in the same range. Where is the confidence coming from for that kind of a growth continuing in this fiscal year and do you think that can continue for another year or two?

[John Morphy:]

When we give guidance, we take it very seriously. So when we give it we firmly believe that’s what it’s going to be and is supported by our internal forecast process. So basically when you look at HRS right now we have seen good sales in virtually almost all the products. We know that healthcare growth is accelerating. We’ve got the EGTRRA so we feel pretty comfortable. Now are we the perfect forecasters? I wish I could do that but this is what we believe it will look like.

[Analyst:]

On your dividend policy, I think the payout is about 75%, the growth has come down to about 2% to 4% on the [inaudible] business, it looks like if you look at that payout are you going to—are you able to maintain that return on equity of about 28% that you had been putting out for the last many years? Is that a doable number or do you think that return on equity might be coming down?

[John Morphy:]

Return on equity because of stock buyback went from 28 to 44 this quarter so I don’t think it’s going to come down substantially. Its going to probably stay in the 35% to 40% level at least but—in our business I’m not sure that while that’s a great number and I like it, we’re going to generate cash. It’s kind of a byproduct of all of the things we do. But the dividend payout we are comfortable with where it is. We increased it in July because we think we have to increase it equal to about net income growth so we’re not going to let the payout drift down at this moment but that’s subject to The Board. And the reason the net income is only 2% to 4% is because interest rates are down. If you look at the number that we look at as being the strongest number which is net income exclusive of that, we’re up 11%, we’re looking 11% to 13% and we’re about 11% for the quarter so when I look at the growth of the business right now, the part that I can control, its double-digits. When I look at the part I can’t control unfortunately that’s only two to four but interest rates eventually this will annualize out and the problem with interest rates would go away probably—its starts to diminish in the fourth quarter this year, it certainly will diminish next year in the first quarter.

[Analyst:]

So you will remain at the same 75% on—in the case of dividends?

[John Morphy:]

Its not bothering us; very comfortable.

[Operator:]

Your next question comes from the line of Glenn Greene - Oppenheimer & Co.

[Glenn Greene:]

If you just refresh the measures that you took on the sales execution side and what has been the early response? I’m sure whatever you have been doing has been masked by the macro headwinds and the slower small business formation and more business failures and what not, but if you could give some color on the progress you’ve made there.

[Jonathan Judge:]

It varies by the different sales divisions but the one that I was talking about was predominantly core because core is the one that the economic headwinds is having probably the largest impact on and what I said was we made some changes in some of the management team, we made some changes in some of the territories for productivity reasons. We’ve done some different things relative to training but probably the most important thing that we’re doing is this is a very activity based business. It’s all about the calls that our teams are making on the various referring sources whether that be CPAs or existing clients, or banks, or other partners, or some of the work that we do in our national telesales call center to generate the opportunities that lead to presentations that lead to closures. The point I was trying to make is when you get into an environment like this where the sledding gets tougher, where it’s harder to get a decision out of a client, where there are more decisions that are pended waiting to start as the client thinks through their own economic capabilities. Its environments like that where we believe that the best thing that you can do is get back to as simple a model as you can, stay focused on only those things that will generate sales and revenue. So to get the rest of the noise off the lion and just sort of manage to the basics and that’s basically what we’re doing in the core side of the house because that business is driven that way and we’re fortunate in that we have a very good sales methodology in this company. Its very data driven and its just a lot more focus on the basics and a lot less time being spent on things that aren’t directly related to either sales or revenue.

[Glenn Greene:]

It’s probably too early to tell though the success that you may be getting from some of these measures and we’re probably not going to know until the key selling season and the February quarter.

[Jonathan Judge:]

I think that’s right but some of it are things that we do as a matter of course. Making sure that all the territories are filled [inaudible] in the year, getting your quotas out and getting all of the change in any calendar year calmed down as quickly as you can so that you can get right into the mode of selling. Holding your people more accountable in terms of the activities that are expected and the results that are expected and so yes, you’re right; those things tend to take more time. You’re not going to see results on them right away. They’re all very good things. You know in any business when you get more disciplined and you get more down to the basics and you drive activities that are directly related to the results that you’re trying to get, you’re going to get better results. So I’m pretty comfortable and pretty confident that that’s going to happen.

[Glenn Greene:]

On pricing I assume it was 4% or so heading into the year, and has that held?

[John Morphy:]

Yes. Our tradition of many years we continue and sometimes it amazes me.

[Jonathan Judge:]

It’s been released, it is in and this year in terms of a resistance or other fallouts from it has been no different from any other year.

[Glenn Greene:]

Would it be wrong to think that you’re sub 5% core payroll growth, if you back out the 4% your volume growth is about 1%?

[John Morphy:]

Growth last year in payroll was 2%, so you’re not too far off.

[Operator:]

Your next question comes from the line of David Grossman - Thomas Weisel Partners

[David Grossman:]

You had said that MMS is no longer getting eliminated for lack of functionality, could you elaborate on that?

[Jonathan Judge:]

To be as simple as if you are looking for a solution that where you require time and labor management we don’t have a time and labor management module then that’s an important part of what the client is looking for you’ve got to eliminate some consideration. If they’re looking for a type of sophisticated expense management capability and you don’t have one you have to eliminate it if the other players do. So it was as simple as that.

[David Grossman:]

Can you give any sense for the magnitude of the market that’s opened up over the last 12, 18 months as a result of enhancing the functionality of the product?

[Jonathan Judge:]

No I can’t give you a specific number. I can tell you this conversation was held multiple times with our sales teams over the last several years and there’s no question but that the richer functionality that we have to sell has allowed us to win situations that we would have won in the past. In terms of trying to put a number to the size of that segment of the market, I can’t do that.

[Operator:]

Your next question comes from the line of Tien-Tsin Huang – JP Morgan

[Tien-Tsin Huang:]

On wage inflation among your clients, any noticeable change in the trend there and also are you seeing any change in the number of hours worked at your clients?

[John Morphy:]

No we don’t track hours worked. Wage inflation I think it’s about the same but I wouldn’t know. The one we really get to look at on wages is when we go and look at the bonuses but since the client funds are up around 4%, I know only a little bit was related to the calendar thing that accelerated so it’s been about the same. I’m going to assume that wage inflation is about the same.

[Tien-Tsin Huang:]

But on the outlook for the float balance it sounds like we should assume something below 4% for the rest of the year, am I correct in thinking that?

[John Morphy:]

I’d say approximately 4%.

[Tien-Tsin Huang:]

On the retirement services you made a comment lower bps, do you mean lower pricing or is it lower assets under management?

[John Morphy:]

Its lower assets plus this trend that we made towards more detailed funds decreases the bps. We’re the leader in 401(K). We’re making all the right moves in the marketplace. It isn’t often when your Vice President of Sales says the product is great and he isn’t asking you for anything. The product is very good. The one reason its good is we’ve moved ahead because we’re leading the charge but in doing this we knew we were going to have to give up some bps on the money because these new products don’t carry the same level. So it’s just something that’s there but if we didn’t do that we wouldn’t maintain our number one position.

[Tien-Tsin Huang:]

The 9% growth in retirement service clients seems like its holding up around 9%, is that rate sustainable in your view?

[John Morphy:]

Yes. That number was a little bit affected in the last couple of years by an acquisition we did so 9% is pure organic without any acquisitions and we are surprised about the HR selling efforts have really been very good. You would have expected they would be troubling because those are the ones that are more optional but to date I think the sales force, you put some changes in, change the compensation a little bit, not like it was more, we changed how we paid it. We did some other things on training. We got the product under better control on the new stuff. I think we’re seeing some definite benefits which are enabling us to meet our sales goals in a marketplace that you wouldn’t normally expect to.

[Operator:]

Your next question is a follow-up from the line of Analyst – Centennial Asset Management

[Analyst:]

On the German business could you just update what the situation is in Germany, how the business is progressing there, what your expansion plans are there, and is it seeing the same kind of scenarios that you’re seeing in the US?

[Jonathan Judge:]

The German business is going well. It’s running ahead of plan. We’re at about 1,500 clients, something like that at the moment. Everything over there is going pretty much the way that we expected it would be going and we’re into four cities now and I think the point that we’ve made in the past is that it’s a business that is coming up in terms of materiality. It’s not material to the big picture yet and once it becomes material then we’ll talk more about it and give you more information. But for right now it’s doing very well but it’s not material.

[Operator:]

Your next question is a follow-up from the line of Mark Marcon - Robert W. Baird

[Mark Marcon:]

Can you talk about as we go out towards next year what your expectations would be with regards to the sales force productivity and dealing with the challenging environment, calendar 2009 and potential pickup in terms of sales force productivity and how we should think about that vis-a-vie what could still be a very challenging economic environment?

[Jonathan Judge:]

I think two things that I would say. I would say one, you should absolutely expect that we are going to get productivity from our sales force and it will be different by sales force. In the case of the core sales people we’re trying to drive higher units per sales person. We’re trying to get better productivity out of our territories with some of the territory alignments that we’ve done. We’re trying to make progress in terms of attrition. If you look at the attrition that we have in our sales force, the majority of our turnover comes in sales people that are in the one-month to 18 months to two years. It’s the overwhelming majority of our turnover. And so we’re doing lots of things there to try and make sure that we’re hiring the right people, that we’re on-boarding them properly, that we’re giving the right tools and training to be successful and that we’re managed into success. So you should expect that we will get productivity improvements in all of them. We’re doing different things to each of the sales forces so it’s not just the core scenario. With that said though, the productivity that we expect to get we bake into our plans and put into our guidance so it’s already in all of the numbers that we released to you.

[Mark Marcon:]

I’m aware of the productivity enhancements that you are putting into place and the expectations that those would manifest in better sales numbers all other things being equal. How confident are you that we’ll actually see the results of these efforts if the environment is weaker? Are the productivity enhancements so terrific that even if things are worse in the first half of 2009 then they are now, you would still expect to see a boost?

[Jonathan Judge:]

That’s a tough question. I think the thing I can tell you is that we expect to see improvements out of the productivity. If the environment gets worse we would be in a worse place if we didn’t do these things. Can I give you a numeric answer as to whether or not these productivity improvements will cover X amount of downfall in the economy? I could give you a planning number; I don’t think I will, it’s a very hard question to answer.

[Mark Marcon:]

It seems obvious that things are at least for now getting a little bit worse and you’ve probably seen that in a few of your geographies.

[Jonathan Judge:]

That’s correct, the credit situation has definitely caused some issues for us but we also—we’re a company that brings in 120,000 or 130,000 new clients a year so it’s worse then what we are historically used to. It’s in some cases less then what we want. Its still pretty good performance in and of itself. The environment is one that’s kind of the one that’s interesting to me. I was sort of in the position where I felt like we were at least half way through this thing and if not at the bottom near the bottom. And then the activities of the last two or three weeks gave the real prospect of the bottom falling out even more.

[Mark Marcon:]

I’m sure that you’ve seen some geographies have been a little bit worse then others and whether or not you’ve seen the positive impact of the new productivity enhancements come through even in those markets.

[Jonathan Judge:]

I do feel much better about the activity that we have and much better about the focus that we have. On the geography piece, when we think about last year we were blessed for awhile because as the economy was starting to turn sour, we looked at our numbers pretty hard and we weren’t seeing any of it in the first and second quarter last year; it didn’t start to show itself until the third quarter. In that case it was a geographic thing. It showed itself in Florida, it showed itself in Arizona, and in Nevada, and in Southern California largely led by real estate and real estate related environments like construction complicated obviously by the credit problem. Now I would say it’s not so much that it’s concentrated in those areas anymore. It’s pretty much across the board. Again as I said until the last couple of weeks I thought that we—if I had to place my bet, my bet would have been that we were better then half way through this and getting ready to bottom out and take the return trip of better time. Last week kind of surprised me and I’m sure others as well.

[Mark Marcon:]

Its highly possible that we’re going to see a material steepening of the yield curve, with your new financing facility which will give you more flexibility in terms of how you structure the portfolio is there a thought that maybe you go out a little bit further on the duration side to capture higher yields?

[John Morphy:]

The whole facility is in place to basically be able to do that even though we only have to borrow maybe less then 25 days to do it. So that’s going to have to be all balanced against what’s going on right now because we started down this careful road on investment all the way back when we talked about the auction rates and every time we think we’ve stopped at a place we’re okay, we’ve been good enough to anticipate and move again. We looked at the insured variable rate demand notes, we’re okay, the banks and the institutions and all of a sudden it isn’t they won’t trade and what you have to realize I may have to get $1 billion on a day because I’ve got to go pay all these taxes. So we can’t have stuff saying well, it might clear tomorrow. And we just don’t run the business that way. So some things have happened here that I wouldn’t have expected. It keeps getting a little bit worse and you hope this turns and I think from what we can tell, I think the Fed and the government are all doing the right things, this delay kind of concerns me because I don’t think they got all day to do this, but Congress moves at the pace they move. But we just have to keep watching it. I hope we get a little more yield, but we have to have liquidity.

[Operator:]

Your final question is a follow-up from the line of Glenn Greene - Oppenheimer & Co.

[Glenn Greene:]

As you move out of these variable rate demand notes, have you sacrificed some yield?

[John Morphy:]

Yes. We have.

[Jonathan Judge:]

But the strategy of principal protection over yield if you have to rank those in rank order, principal protection ranks over yield and liquidity is king.

[Glenn Greene:]

So how is it you’re able to--?

[John Morphy:]

We’re better all the way. These things that have happened in the last week we’re hoping are not going to stay this way. Our yields were better in the first quarter then what we anticipated.

[Glenn Greene:]

And that’s the major reason that you’ve changed the outlook for the year?

[John Morphy:]

Yes it was based on actual occurrences and where the portfolio was. Now whether that’s going to change because of what’s going on over this week, that’s why I said we’re only temporarily out of the variable rate demand notes. If we have to stay out of those forever, that’s not going to bode well for anything. I don’t believe that will happen. We want to really thank everybody for participating today. We at Paychex, we wish life was better right now too and we’re pretty proud of the accomplishments of our people in these difficult times and we look at the first quarter results just like everybody else does with most things. They wish they were better but we’re pretty glad they were what they were. So thanks again and we look forward to talking with you in the future.