Good day, ladies and gentlemen and thank you for standing by. (Operator Instructions) Now I would like to turn the meeting over to Mr. John Morphy, Senior Vice President and Chief Financial Officer. Sir, you may begin.

Thank you for joining us for our fiscal 2009 year-end earnings release. We will begin today with a review of our fiscal 2009 financial results, including guidance for fiscal 2010, and then John Judge, our President and CEO, will provide you with an overview and we will end with a Q&A session. Yesterday afternoon, after the market closed, we released our financial results for the year ended May 31, 2009 and filed our Form 8-K, which provides additional discussion and analysis of the results for the year. These are available by accessing our investor relations page at www.paychex.com. We expect to file our Form 10-K by the end of July. In addition, this teleconference is being broadcast over the Internet and will be archived and available on our website for approximately one month. Overview of fiscal 2009 -- fiscal 2009 was one of the most challenging years in Paychex's history. We were faced with the weakest economic conditions we have ever experienced. These included a severe credit crisis which inhibited new business formation and made it more difficult for existing businesses to survive, and extremely low interest rates of return on our funds held for clients. Despite this, our team responded well to the challenge by delivering a record level of operating income net of certain items. Our operating income net of certain items was $730 million, an increase of 5% over the prior year. We leveraged our resources generating operating income net of certain items as a percentage of service revenue of 36.4%. Our served payroll client base declined 3.1% to just over 554,000 clients. It was difficult to watch our client losses due to companies going out of business or having no employees rise by 17% over the prior year. At the same time, our new client sales…

Thanks, John. Good morning, all. I want to add some comments on our fiscal 2009 performance and then reflect on 2010 and beyond. Let’s start with 2009 -- there are very few companies I suspect that are satisfied with their financial results of the past year. That’s certainly true of us. 2009 was not a normal Paychex year. Instead of setting yet again more records, we watched our streak of 18 consecutive record-setting performances end due to the weakest economic conditions in the history of our company. John took you through the details of our financial performance and we would all agree those were not normal Paychex numbers. We are clearly not satisfied with them but with that said, we are proud of how our team fought through the adversities of 2009’s economic crisis and produced results that while not up to Paychex standards, were better than most if not all players in our industry and most public companies in the United States. We did increase our revenues. We did expand our margins and achieve the highest expense-to-revenue ratio in our history. We did create over $800 million of profit in the worst economy in 75 years. We did create almost $700 million of cash flow and paid out almost $450 million in dividends to our shareholders. There are also some important non-financial accomplishments that will benefit our future. Despite very difficult selling conditions, we were able to sell almost the same new annualized revenue as last year. Our major markets division had a very strong year with a 20% increase in sales year over year -- in some respects, almost a normal year for our MMS team. We continued to invest in our future, in areas such as sales reps in our healthcare business, as well as new product…

(Operator Instructions) Our first question comes from David Grossman of Thomas Weisel. You may ask your question.

Good morning. Thanks very much. You talked about the margin outlook being impacted by both cyclical factors as well as the investments you are making in the sales force and healthcare. Can you provide a little more color around the incremental investments that you are making? And maybe give us a sense of just how much you are actually spending on these initiatives?

Well, I don’t know we would give defined numbers but obviously the checks per client affects the margins because of the fact that last check is the most profitable check. We’ve talked before about the fact that when checks per client get much over 4%, it really starts to inhibit our ability to increase margins. The client decline affects it somewhat too, but we’ve been able to offset most of that. When you talk about the other investments though, the healthcare thing, initiative, we’re processing the sales force growth, which you saw in the thing. We’re increasing sales force in both the core and the MMS and some of that is really to take advantage when hopefully this economy turns around because the other thing is we don’t want to cut our sales force because to do that would allow us to have a short-term earnings pick-up but in the long run, it would hurt us in the future.

Okay. And just in terms of the client growth, I know that it’s a bad year to compare this, your guidance as well as kind of what’s happened in the last 12 months. I mean, I think client growth has been trending around a 3% to 4% range prior to the economic downturn. Is that a number that we should think about going forward in terms of what’s a realistic target?

Well, the thing I would tell you is on the client, the new client growth, the biggest single issue that we had in that was the lack of new business formation due to the credit crisis, so to the extent that the credit crisis abates and new business formation returns to a normal rate, there is nothing that we see in any of our numbers that would tell us that anything other than going back to normal would happen. In other words, we don’t see any losses that are due to a better mousetrap or somebody providing better services. Our issues on the new client growth really come from the new business formation, which as I mentioned in my comments was about 90% of the miss that we had to a normal sales year, even though we still had pretty decent year going flat versus most people down 10% to 20%. And then the second thing would be losses -- you know, an increase in client losses that are, that have been directly caused by the economy, things like businesses going out of business or getting down to either so few clients or so troubled a business economic scenario that they stop processing. Those two things were the ones that affected us, and so when you think about when we go back to normal, there’s nothing that we can see that would tell us that we would not go completely back to normal as soon as the economy changes. To the extent that the credit crisis remains, to the extent that the economy stays bad and business failures continue at these unprecedented rates, it will be a slower return than normal. To the extent that the economy turns, we’ll turn with it.

Thanks, John, so does that 3% to 4% sound like a more normalized number to think about in normal economic times?

Yes.

Okay. And one last question, just really on the skew of EPS. I know you don’t really talk about that in your guidance but given the current, kind of where we are economically, does it make sense to think about the EPS skew kind of building momentum throughout the year as opposed to kind of your typical year, which would see kind of flattish sequential growth in EPS?

Normally, you’re right, it would be almost -- well, actually the four quarters are almost always identical, or there might be a penny difference. So there will be some skewing. It won’t be staggering and the best way for you to calculate the skewing is really look at the investment income difference which we disclosed in the press release and the filing with the SEC by quarter. If you run that through, it would also recognize in the checks per client will come back. As comparisons get easier, you can pretty much figure out what the skewing would be and I think you can come up with a pretty good estimate of it.

Okay. And just one other thing in terms of your guidance -- I think if I heard you guys right, that you talked about checks per client being down 3% and that you’ve got your price increase of 3% to 4% in for the new fiscal year. Did I hear that right?

Yes. Now, the checks per client for the year is down 2.9%. And when you go next year, and we’re hoping it’s going to stabilize right where it is, when you do that, you kind of get the -- you get 2.9% to 3% again, but it just happens in different places, meaning that the decrease is toward the end of the year and the bigger hurt is in the beginning.

All right, got it. All right, thanks very much and good luck.

Our next question comes from Christopher Mammone of Deutsche Bank.

I appreciate your comments about the guidance and the growth rates improving throughout the year in fiscal ’10. Do you expect though on a quarterly basis that payroll will remain in negative territory for all four quarters, or is there a possibility it could return positive by the latter part of the year?

Well, it’s certainly going to start off negative it the beginning and I think where it will wind up at the end is going to depend what the economy does. I can’t remember if we were negative in the fourth quarter but for it to get positive where it would be meaningful, you’d have to see some improvement.

Okay, some improvement in the economy?

Now, a lot of that, you get to a constant environment, I would not expect payroll revenue growth to be negative the following year. If checks per client were to hang in there and client growth stays around flat, we would get the positive revenue growth.

Okay. And then could you give us anymore granularity on the more recent I guess trends in checks? I know you did a good job in the last quarter of sort of talking about the past six weeks. Any color like that to --

Well, basically I was hoping it wouldn’t have gotten to 5, but things aren’t dropping off as significantly as they were. We are seeing some stabilization. We look at the June numbers, which are really early to look at them but we think we are going to make our revenue number for the first time in our forecast in quite a while, so that’s hopeful but you know, two or three weeks isn’t enough to indicate what’s really going to happen. So right now we are hoping it’s going to stay there. Things were deteriorating in the fourth quarter but at a much slower rate than they were and my belief, it’s a personal belief, is that if we could get the world to be a little more optimistic, which sometimes you can be so pessimistic you create your own problem, not that we don’t have a few but that could be just enough to get this thing maybe from slightly negative to slightly positive, but only time will tell.

Okay. Great, I guess a final question, as far as the sales force additions, if you were to -- I guess instead of [inaudible], we’re going to add sort of 5% to the core payroll sales headcount. If you were to keep that sales force flat, would that change what your -- I guess payroll revenue growth expectation would be for 2010?

It wouldn’t affect 2010 too much but it would definitely affect 2011, because as we’ve talked before, in the year the sales force makes the sales, that’s not the biggest impact on revenue but the following year it sure is.

Great, that’s helpful. All right, thanks, guys.

Our next question comes from Julio Quinteros from Goldman Sachs.

Great, thanks, guys. Real quickly, John, if you were to go back to the comments I think you made one or two quarters ago about the drivers of the SMB segment, in particular credit card usage and things like mortgage equity withdrawals, just your sense on what your clients are doing to drive growth from here, assuming that those two sort of sources of funding aren’t there, what are the alternatives for some of your SMB clients at this point in terms of being able to drive both growth and expansion and obviously payrolls to feed their growth at this point?

Well, basically we know -- we have to guess [why we are getting their money], they don’t tell us how they are getting the money but I think what you’ve got to realize is how much difficulties in the world, everything doesn’t stop and people are going to find ways to move forward. And it isn’t like everybody lost all the money they had. It might feel that way sometimes. Sometimes I think the world lost more than it had but that’s not really what happens and they have to find ways. Now, there’s pressure in America that big is moving towards small, so eventually these people know they have to find a job, they have to do something and I think what happened is that some of these jobs, or some of this business formation doesn’t require a lot of capital. So the thing that I feel good about, I don’t maybe like the number exactly but we did sell over 110,000 new clients. That’s a staggering number in an environment like this one, so granted you are down maybe 5% to 10% but the other 90%, they find a way to do something and hopefully that will continue and hopefully it will move more towards the 100% level.

Got it. That’s great. And then just on the trade-offs between the investments to drive future growth versus continued pressure on the top line, at what point, and I know you guys are trying to balance longer term growth opportunities, et cetera, but at what point do you look at the plans to invest incrementally, et cetera, and say we really shouldn’t be doing this, or is this just something that you guys are going to do no matter what because it’s important for longer term growth anyway?

We aren’t going to stop for investments in healthcare. The ones that matter, we made two big things we’ve been doing over the last six months and then John will add some things -- one, we continued our investment in our core platform, which has now been put in service and we are in great shape on that, and the other one is healthcare. And we believe that we have a great future in front of us and we believe to curtail those investments means we will have to accept lower results in the future. Right now, everybody has got results they don’t like. We want to make sure when things are good, we get ones we do like.

I guess I would add is that we have got -- we are sort of blessed with a financial stability that very few companies have. We don’t have any debt, we don’t use debt. You know, we’ve got a rock solid balance sheet and we clearly understand where we are in our business relative to the economy and what part of our issues that we’re dealing with are caused by competitive pressures versus what part are caused by the economy. And since the majority of our issues are caused by the economy, then the wise course to take is to make sure that you stay positioned for the future. Now, relative to your question, I’m not sure exactly what you are trying to get at, but the point that I would hold up as sort of the poster child of the conservative nature with which we manage this business is you look at 2009, one of the toughest economies in the history of the United States, and we expanded our margins. So we have sort of a history in this company of we are going to make the investments but to a certain extent, we are going to self-fund those investments by stopping non-critical or non-essential things to be able to fund the things that we needed to make our business stronger in the future.

Got it. Okay. And then just lastly, on the market share gains, is there any percentages or any ranges that you guys could think about in terms of sizing how much market share gains you guys you think have made in the marketplace? And then on new sales, what’s the pricing environment there? I think the plus 3% was on existing clients, or is that also on new clients?

Well, I’ll start with the first question you have on market share -- market share is a difficult thing in this industry because there aren’t a lot of numbers published but the part that makes it a little easier is the fact that it’s an industry dominated by two big players and then it fragments down to a bunch of smaller players. And so if you kind of get a feel for what’s happening with the two big players, and we know what’s happening with the smaller regional players, it makes it easier for us to see. But things that we look at that tell us, you know, kind of give us a clue as to where we are relative to share gain is the number of clients that we take from our biggest competitor versus the number that they take from us. We’ve been positive on that [journal] for a very long time and we were positive again last year. And then we look at things like what kind of discounting is being done, particularly as it relates to newer clients and we can see very clearly where they are and where we are and so -- for example, you know that we’ve just told you that on a year-to-year comparison, that we sold roughly the same amount of annualized revenue in 2009 as we did in 2008. I don’t think there’s anybody else in the industry that can say that. Most of them, as I mentioned, were down 10% to 20% on a year-to-year basis. So those are two pretty significant indicators that would tell you where the share thing is moving. There are other things that we look at but they are proprietary, things that we don’t talk about publicly.

Great. Thanks, guys.

Our next question comes from Kartik Mehta of Northcoast Research.

Thank you. John, you talked a little bit about your flowed income and I was wondering, what’s the best thing to look at as to when you think you might be able to invest some short-term funds in other securities that get a little bit of a higher yield? I know you’ve always wanted to stay conservative but is there anything we could look at that says you feel comfortable moving a little bit up into other securities?

I think basically it’s when the federal funds rate starts to move up, and this would happen inside a quarter, and I think we would disclose it pretty quickly when it would happen because we do it in the next press release. I don’t think we’d make a special press release for this factor but when the federal funds rate starts to move and the bank starts to work a little better, we’ll move back towards variable rate demand notes.

If you look at fiscal 2010, is checks per client the biggest impact to revenue, either up or down as we move through the year?

No, it’s one factor. There’s -- you know, the other factor is obviously negative client growth, so the biggest three things you have going is pricing, negative client growth, and checks and then losses -- it’s losses and [inaudible] sales. So those are the factors but one that’s tough on revenue per check is not that it has any bigger revenue impact; it’s just that the one that reeks the most havoc on what you are trying to do with your margins. It’s just the most profitable check that peels off and you can’t take much cost out because that check is handled pretty easily.

And then both of you gentlemen talked about dividends and [safety] and your desire to continue to pay or the board’s desire to continue to pay it -- John, is there some kind of a stress where you say gosh, it might be time to look at the dividend again, or are you in a situation where the dividend, at least for the foreseeable future, is in pretty good shape?

I would say more the latter but we always tell you that this is a board decision, not a management decision. We obviously have an opinion on it. We make recommendations to the board but the board makes those decisions. What I would tell you from the conversations that we’ve had over dividends on the board is that we believe that it’s one of the hallmarks of our financial stability and our financial model and it’s something that we definitely want to maintain, so I’ll start with that. From the standpoint of stress, I mean, if we ever got ourselves into a position where our financial model was stressed and we needed to make a change to the dividend, I’m sure there would be a lot of discussion about that. But if you think about our capital structure, I mean, the fact that we have no debt, that we have a fairly large amount of cash on our balance sheet, that we are cash flow positive and we’ll remain cash flow positive, it’s sort of hard for me to see a time anytime soon where we’d even be having that discussion. So I don’t -- there’s nothing in the near-term that would tell me that we are going to be stressed to the point where we would have to start considering things such as decreasing our dividend. So that’s sort of where we are but again, it’s a decision that’s always one that’s held to the purview of the board, but I think I’ve given you some insight in terms of where they are, about how they feel about the dividend and certainly how the management team feels about it.

And then a last question was I think last quarter we talked a little bit about discounting and what was happening in terms of new sales -- has the environment changed at all, or has it remained about the same for new sales?

Over what time period?

I guess in the last three, four months, have you seen a change in how your competitors are discounting their product? Have they gotten more aggressive? Has it been relatively the same or do you think it’s gotten a little bit better?

It’s gotten a little bit better but I mean, part of that you have to be careful with because in our business, particularly as it relates to core, the majority -- not the majority but 25% roughly of a year is in a couple of months, you know, November/December, December/January, and so during that period is when you tend to -- if you are going to see any kind of significant moves in discounting from competitors, you tend to see in that period. We did see it this year. We’ve talked about that already, whether that’s in just hard discounts on the dollar basis or whether it’s in giveaways in terms of free service for three months in the front-end and three months in the back-end of the year, or commitments over long-term price freezes or price movements that are restricted. And all of that stuff we saw during the selling season, you know, there’s still some of it that we’ll see from time to time but it’s nowhere near as severe as it was during the selling season but that would also be normal. This year was not normal -- there was more of it than we’ve ever seen before and it was more national than we’ve ever seen it before. But that’s when we typically would see it, and so it’s natural that it would taper down once you walk out of those important months.

Thank you very much.

Our next question comes from Jason Kupferberg of UBS. Your line is open.

Thanks. I wanted to ask a little bit of a longer term question, I guess. Do you think you get back to your traditional financial target model of 12%, 15% kind of thing, with 15% being the operating income excluding float? I mean, can you get back to that on any kind of sustainable basis? I mean, once the whole cyclical downturn is over, what are your thoughts there?

Well, I will give you mine and I’ll let John give you his. If you listen to what we told you about what drove us off of our normal environment and our normal environment is a 12, 15 environment, they were all issues that were around impacts from the economy, so if the economy goes back to where it was then there’s nothing that I could see that would tell us that we wouldn’t go back to where we were. Now there’s always, you know, each year it gets a little bit harder, right? You know, we’re not a baby company. We’re a pretty large company and so each year as you get more penetration, it gets a little bit harder but we’ve gone a lot longer than I think anybody thought was possible for a company of our size, a top line of 12 and a bottom line of 15, and the model that we have that gets us there is still a realistic model. So from my vantage point, if we were back in a normal economy, we wouldn’t be having the tone of this conversation that we are having nor would you be having it with all the other companies in the United States. It would be a much different environment versus, you know, if there was a major shift in buying patterns in the United States or somebody created a better mousetrap and they were stealing share from us, then you would have a different scenario.

Yeah, I would add I don’t think the economic conditions we are experiencing today are what puts that model in jeopardy, and the biggest issue on the model I think as we get larger, it gets harder but I think people have to recognize 12 -- and it really isn’t the 12 to 15 that’s the hard part. The hard part is getting the 12. If you get the 12, the 15 will happen and you can probably get to the 15 [a little less than the 12] but the real question is going to be as we cross over this $2 billion mark and you get a little better idea on what’s going to happen in some of these other areas, you know, as revenue growth somewhere between 10 and 12 and right now, I think we feel pretty good that it can be definitely double-digits and how high you go, who knows.

So the key really becomes to expand your whole set of ancillary offerings and things like insurance, et cetera? I mean, it sounds like that is what you would need to do because arguably in core payroll, things are a lot more mature than they were years ago and there is still some incremental growth with new business creation, right? But not a huge secular trend, arguably. Would you agree with that?

That’s right but it’s also been our model for a fairly long period of time now. I mean, core payroll has been growing in single digits for a fairly long time and we have -- you know, our model at the 12 and 15 assumes that a part of our business will grow at one level and then we’ll get other parts of our business that will grow at much greater levels than that, albeit they are smaller businesses and we’ll continue to add things. So for example, in the last two or three years, we’ve decided to get into the health insurance business and that business is now a $20 million business on its way to a $100 million business. What we have to do is keep finding those types of things that will help keep moving the needle, you know, the combination of the different revenue mixes to keep us at the double-digit level and that’s what we work on every day. So you can call it ancillary because I guess in some respects, it is ancillary but when you have a business as large and as successful as our core payroll business, the only thing that keeps the whole company from growing at that level is that we continue to push other services and put new products in place and continue to grab share and so on and that’s essentially our model.

And just two questions on fiscal ’10 assumptions -- one, what are you assuming in terms of new sales growth? And two, are you assuming that the full 3% to 4% price increase, if all of that actually sticks throughout the year?

Well, the price increase, most of it will stick. I mean, basically you get some resistance in some areas but once the price increase goes in and it pretty much sticks on existing client base and is the discount that took place and new sales comes up, we recover a fair amount of discounting each year, so I don’t see that as an issue. What was the other --

In terms of new sales growth, I guess you were down slightly year over year --

New sales growth, we think will be slightly better but that’s because we added sales reps. We’re not looking for anything dramatic to change.

Okay. And just last question, MMS, I mean, over time, I mean, how big could that get as a percent of your revenue?

Well, it’s going to keep growing faster than core, simply because this is an opportunity that we’ve probably only been able to take full advantage of for five years. We are growing well before that but the part of the market that we weren’t in until the late 90s and today we have products that compete very well and we are aggressively pursuing making them better. You know, if you noticed, most of the acquisitions we have made either relate to the human resource side or improving MMS and we are seeing some really great results as the result of adding these full service elements, whether it’s expense things or health things, et cetera. So we are very viable, a very good competitor and fortunately our share of the market isn’t as -- it’s getting bigger but it’s not that big.

Okay. I’ll leave it there. Thanks, guys.

Our next question comes from Rod [Bouget] of Bernstein. Your line is open.

I hope this is more than semantic question, or maybe it’s a semantic question that should really matter but I think you noted that the deterioration in your key metrics in the May quarter was a slower amount of deterioration than what you were seeing earlier. But when I look at the payroll revenue growth, it looks like it went from plus 1.9% in February down to negative 4.8% in May, which is a pretty big turn in that core business, so is there -- how do we think about the key metrics are declining at a less rapid rate but the payroll revenue growth kind of dropped off at an unprecedented sort of pace?

Because the selling season is so big in the February quarter, so the real impact of that selling season and losses became full force in the fourth quarter.

Got it. All right, so that explains it -- and so what that would imply is that there’s no way you are going to see a similar amount of fallout in payroll revenue growth in the next couple of quarters because you’ve already digested the impact of the weak selling season?

Yes, I don’t think it gets significantly worse than it was. I can’t remember by quarter but a lot of the quarterly impact relates to investment income in checks, with investment income [getting a good chunk].

Okay, great. And it looks like one of the metrics that’s been troubling of late is client churn going up and I assume that the increase in client churn is mostly because of bankruptcies but can you quantify how much of the increase in churn is due to bankruptcies and kind of out-of-business activity versus competitive factors that might also be playing a role?

Well basically, 60% to 70% of our churn is in this bankruptcy out of business and that hasn’t changed too much. You see a little bit more on price but that’s -- sometimes that’s somebody not wanting to tell you they just can’t afford it anymore. The competitive factor though is one that we think we are gaining share, so when people want to look at this and think are we giving up share to hold price, that’s not the circumstance and John can talk a little bit here about how we work with the sales people and what they are doing but we know we’re the price leader but it isn’t like we will never bend. We do what we need to do but we think we’re okay.

Okay. Are you in some cases giving up price to sort of gain share or is that not necessary because your product set is sufficient to drive the share gains?

No, we’re not -- we don’t lead with price. I’ll use core as an example. Core price position to market, we are comfortable selling normally somewhere in the 20% to 25% higher than competition, mainly because our offering is that much better than competition and gaining share as we do that. So we don’t lead with price. What we will do though is if we are confronted with price, then in most cases unless it’s just a crazy eddie kind of a thing, in most cases we’ll meet competition but we don’t lead with trying to drive the price down. So we won’t allow share to be taken from us with price as the issue but we won’t use price to gain share, or we haven’t used price to gain share. We use our service and our feature functionality and our people to be the thing that differentiates us in the market and it’s been pretty successful for a pretty long period of time.

All right, that’s helpful. And if you think about pricing with existing clients, just to ask a scenario here, if your client retention were to struggle further with your existing clients, would you consider more aggressive pricing as a way to counteract the impact of the weaker client retention?

Okay, first off, what’s unique in this business is very few clients switch over price. They usually switch because they are dissatisfied with the service. A price differential on what this costs doesn’t drive that much switching. Now, when a client gets in a situation where they may talk to us about this, we are responsive. It doesn’t mean when an existing client calls up with a pricing concern, we ignore them. We listen to them, we do what we need to do, we do what is right for us and them, and we work it out but it’s not as conflictive as you might think.

No, it makes sense because a lot of the clients aren’t really [inaudible] price because it’s not a big item.

Well, remember the numbers, the thing that people often forget -- I’m not suggesting you are, Rod, but what people often forget when you are dealing with small and medium-sized clients and in our case the majority of our clients are small clients, is that if you look at percentages, it tells you one story. If you look at the actual number itself, it tells you another. So for example, if we are selling at $2,500 and a competitor is selling at $2,000, you know, you might say that’s a 20% difference but $500 spread over 26 pay periods becomes -- you know, spread over X 14 employees per pay period, it becomes a very small number. It’s not typically the thing that will drive a client one way or another. It’s much more about the service they are receiving, the experience that they are getting and quite frankly, the piece of mind and the guarantees that come from a company like ours which if there ever was a mistake made that generated any type of penalty, we pay it flat out, no discussion. So it’s really -- it doesn’t get to be that big a deal.

All right, that makes sense. But that said, I mean, it’s pretty clear that discounting activity with existing clients has increased in the last year. Is there a way to quantify how much discounting has actually changed in the last year with existing clients?

I’ll let John answer that if he chooses to but before he does, there’s an important notion that I want to make sure you understand. The increase in discounting was not originated in Rochester.

I understand that too.

We react to it.

Now, you also have to realize that the discounting pressure is like 95% on new business as opposed to existing.

It’s probably higher than 95.

Okay. In terms of the economic consequences, or in terms of the percentage of the --

No, the activity.

Okay.

The activity is almost exclusively on the point of sale of new clients. It’s not existing clients.

Okay.

To give you a better perspective, and we talked about this before so I’m not saying anything we haven’t talked about, we know who the other big guy is. We know how many clients we lose to them a year and we know how many we get from them. And there isn’t appreciable change in those numbers.

Well, more importantly the number that we take is larger than the number we lose.

Got it, and that is also true in the mid-market segment? I mean --

No, in the mid-market, we take -- we don’t even -- I think we track that. I haven’t looked at it. We get way more from them [than they get from us].

Right.

They [have more].

All right, guys, thank you for your help on that.

Our next question comes from Jim McDonald of First Analysis.

Can we talk about what seems to be more of a bright spot, the HR area, where it looks like your employee growth bounced back a bit this quarter and could you talk about where that came from, that re-increase and maybe why there was a decrease last quarter?

Well, the last quarter was just small business really reacting in that January timeframe. Now you get back to where there’s a little more seasonal employment as you head into the summer, so we’ll see if it continues but it was a bit of a bright spot but we are cautious on bright spots right now but we’ll take what we can get.

But was it -- since this could cover a lot of different areas, was this all in Florida or was it in --

No, it probably was spread everywhere.

And was it in the comprehensive [PEO] business or was it in other kind of ancillary services that are in the HR sector?

No, it would be pretty much in the premier, I think.

Pretty much in the premier -- and what about -- could you talk about [Cobra] outsourcing impact in the quarter?

Too small to us to matter.

Thanks very much.

Our next question is from Gary Bisbee at Barclays.

Good morning. You know, I guess the first question, I just want to be clear on what’s baked into your guidance in terms of the economy. When you -- you made a comment that checks per client seemed like it was maybe stabilizing or bottomed I guess is the word you said. So does the guidance assume that it stays at the current level and thus the year-over-year comparisons ease as you get through the rest of the year, or do you have some sense baked in there that we’ll continue to see job losses on a monthly basis?

No, basically what we bake in is we look at where we are and we take the trends that are happening -- we don’t make trends get better and we probably don’t make them get worse, so we take checks per client, it’s a very good one. We forecast the next year based upon the fact that checks per client are bottomed out around five. Now, [could it be] slightly worse? Maybe, but it wouldn’t have made it much better either. Now, we continue to get further deterioration from this point, obviously it affects us. If we get what we hope is improvement, it will affect us positively. And the reason we do that is we have no way of totally forecasting what’s going to happen, so if I make a guess, then you’ve got to try and guess what my guess is before you put your guess on it because you are going to probably spin it somewhat, which is okay. So basically we are trying to give you a basis of where we are so you can determine what you think is the right or wrong answer? Now, you also have to recognize that a slight change in this stuff doesn’t affect us too much. So basically we’ve got a plan and we work around our expense controls and if we missed a little bit of revenue, we’ll find it but sometimes the water coming over the dam is just too much that you can’t do much about it. But that’s kind of what happened this year eventually but we’re hopeful next year that things will stay stable enough that we’ll manage the business and we’ll be right on the guidance we gave you.

Okay, and then the guidance seems to indicate that the interest rate you earn on the float is going to continue to ease somewhat sequentially as we move into the second half of the year. Is that just the --

It only eases because my interest rates dropped like a rock after basically September and they kept dropping. So while that’s not any easing, that improvement in interest -- on our interest thing is baked in. It will happen unless rates go lower, and I don’t know how they can go any lower. I mean, zero is zero.

And I know it’s not big deal in the grand scheme of the revenue guidance but you mentioned a quarter ago that $60 million was likely the floor, the float income. It looks like the guidance is at least $5 million below that.

Rates got a little lower. I didn’t think they could go lower but they did.

Okay. And then just two clean-up questions, if I could -- the $20.9 million in health insurance revenue, that was the full-year number, right? Or was that just the --

Yeah, full-year.

So a quarter ago -- yeah, so a quarter ago when you said $14.8 million, that would have been the year-to-date through nine months?

Yes.

Okay, and then the last one, the $12.4 million of revenue in HRS from the plan restatements, retirement plan restatements, is this more of a one-time thing? Is that why you pointed that out or was there some the prior year and is there going to be some of that this coming year too?

Totally one-time.

Okay, so that’s a big reason why the guidance for revenue growth there would be much lower -- you had a benefit the last couple of quarters from that, that’s pretty much it?

Absolutely.

Okay, thanks a lot.

Our next question comes from Mark Marcon of Robert W. Baird.

Good morning. I just wanted to follow-up on the HRS side. Can you talk a little bit more about the guidance in terms of the 3% to 6% growth? And also what your plans are for the sales force there and is there anything that’s happening aside from the macro environment that might lead you to believe that things are going to slow down relative to the growth that you’ve experienced all along the HRS side?

I’ll take the guidance and Jon can talk about the sales force. Basically the guidance is our best estimate right now of what we think is going to happen. We have not put out aggressive goals. When you look at the sales targets, we’ve not made this belief that all of a sudden this is all going to bounce back. You know, obviously in the 401K market where we are the leader, that market is under some duress now because people aren’t quite sure what’s going on but we still do sell 401K plans. So the HRS revenue guidelines are what we think are reasonable and realistic in the environment we’re in and they are all toned down from what would be normal and we probably tone them down a little bit more from what I would have said six months because the HRS revenues kind of lag what happens in payroll. So right now we think we’ve been realistic, not too conservative, not too aggressive and we’ll see what happens. On the sales force though, I’ll let Jon talk about that.

Well, the HRS is kind of a tough one to follow unless you are watching it over multiple number of years. We have made very aggressive investments in sales on the HRS side of the house and so it’s normal that in some cases, you’d take a pause but if you look at all the different aspects of HRS, we are going to continue to increase and in some cases significantly increase the sales people that we are putting against the significant growth areas there, health being one of them. So that number will go up. And retirement services, there will be a slight decrease there. In HRS outsourcing, a slight decrease there. In some cases, it’s reflective of what’s happening with our ability to bring on clients. You know, that sales force sells into the client base and it sells into the new clients we are bringing on board. So to the extent that we bring on less clients than would be in a normal case, then you would expect that you would have less opportunity to sell against those clients since the overwhelming majority of the products that we sell go to Paychex payroll clients. So that’s really what’s happening there. There’s nothing significant. There’s nothing that’s gone on that tells us the world is any less optimistic. In fact, there’s some things going on in healthcare that we think could be very good for us, so depending on where this legislation comes out, the only thing that could happen on legislation that could be harmful to us would be if they decided that they were going to go a national healthcare system that was basically piggy-backing off of Medicare or Medicaid. But -- and that would hurt us but I don’t think we need to worry about that too much because that would destroy the health insurance business and you would need another whole surplus program just to bail those guys out. So I think it’s unlikely that that will happen. Anything else that happens that causes more healthcare plans in the United States, given how we are positioned against healthcare, would be very good for our business. Some of the things that they are looking at relative to retirement services and the importance of retirement services to citizens, lifetime financial planning, and anymore pressure put on that obviously would be good for us, so there are some things there that would be helpful but in general, what’s happening in HRS is we’ve been adding lots of people to HRS over the years. This year we are going to add more people into MMS because it’s quite hot right now and in the core and in parts of HRS but not in all of HRS.

Okay. Just normally there’s a bigger spread between the growth rate in HRS versus core and if you come in at the lower end of the guidance, that would be a pretty significant narrowing and I was just trying to understand -- is it more on the retirement services side because of the change in asset values that’s driving that? Is that the area that you expect to be the slowest?

Yes, 401K is the [inaudible] -- you’ve got decline in asset values, you’ve got decline in participants, you’ve got some declines in plans but we’re still selling. The other thing, if you go back you are going to see several years ago we increased the HRS 401K sales force, after we were a pretty good size by 25%. We got a little bit ahead of ourselves and we have been working that off and this year we decided to finally set the level where it’s at. So it’s not about any lack of commitment or belief in the future in 401K. It’s just about being realistic with what are reasonable expectations to sell and putting the resources in the right place.

Okay. How about in terms of things like time and attendance and workers’ comp? I mean, how is that selling through and how is that penetration?

Well, time and attendance is like very low penetration, doing quite well. We’ve got two markets there. We’ve got the upper end market, which really isn’t where our client base is. That’s probably just doing okay. It’s not the highest priority. The lower end though on time and attendance, we’re definitely over 25 million, I’ll say we’re below 50 in an area that we probably had very little some time ago. So we are feeling very good about that and time and attendance, along with some of those other products, is why we are doing so well in MMS, so we feel real good about those things. Workers’ comp in this marketplace is not a big growth item but not a negative growth item and that’s an area we keep moving but it’s not again so material to our revenues.

And then on Premier, it sounds like you had a little bit of a bounce back this past quarter -- shouldn’t that -- that should continue to track on a positive manner, shouldn’t it? Or is it possible that you are going to have a decline in terms of number of employees per client and therefore a much lower-than-normal growth rate?

Well, think about Premier and what it is, right? Premier in one respect should follow what happens with the economy. I mean, that is essentially the packaging of all of our products at a bundled price, so when the economy gets difficult and people start to batten down the hatches, then you would expect that the sales in Premier would get harder. And when the economy lightens up a little bit, you would expect that they would get stronger because there’s clearly great value in the offering. So it’s probably more tied to the economy than anything else. You know, an average client, for example, that we bring on that was an average payroll client might be $2,500. On Premier, that could go as high as somewhere between $9,000 and $11,000.

Right. I mean, it’s just always, even during the last recession it did well so I’m just trying to --

Well, you’ve got to be careful -- in the last recession, we had just started this product.

Sure.

So it’s in what I call the infancy stage. You know, my belief is the way you avoid recessions is you’ve got a product that’s totally brand new or one where the market share is so low or you have some new gizmo that just sells anyway. That’s kind of what we had back in the last recession with Premier.

Okay. And just -- there were lots of questions about pricing. I mean, at the end of the day, what sort of price increase did you pass through?

Between 3% and 4%.

3% and 4%?

Yes.

And that stuck?

It stuck. It was done in May and it was -- I would say that the reaction to it was very similar to the last five years that I’ve been here, which is very little reaction.

Okay. And then with regard to -- there was also discussion about new mouse traps and you are basically making the point that you are not seeing anything out there that’s a better mouse trap or a substitute. As you look at your -- what gives you the confidence in terms of saying that? And when you look at your closing rates in terms of the number of new businesses that you approached, are those similar to what you have seen in the past and you just -- your sense is just because of the credit contraction, there’s just fewer new business formations?

It’s pretty easy. You look at your losses and why you lost and you look at your wins and why you won. So when I looked at why I am losing businesses, the companies that are existing clients and we lose them --

Right.

If we were losing them because somebody else had a better mouse trap, had better feature functionality, had a better way of doing it, had a dramatically cheaper way of achieving the same service levels -- you know, that would cause you to be concerned. We don’t see any of that. When I look at when we win and when we lose on new sales, you know, to what extent is that happening because people are going to a different type of offering and not seeing that. So that’s why I say what I say. When we look at our numbers and we looked at how we performed this year relative to how we would perform in a normal economic environment and we look at the difference and then we go back and look at it, I mean, we know when we bring on new clients, as an example, we categorize every new client we bring on in many ways. But one of the ways we categorize them is prior method and one of the prior methods is it’s a new business. There was no prior method because there wasn’t a business. It was a business that was formed in that year. And then we can take a look at what percentage of our sales come from businesses that were formed in that year, and this year versus all the prior years. That’s the point I made earlier. That makes up something in the neighborhood of 90% of the difference between a normal year and the year that we just had was the lack of new businesses. We confirmed that also. We do surveys of our CPAs and we confirmed it in one of our CPA surveys by looking at what their new businesses were like and they had exactly the same issue that we had, and that is they didn’t have very many new clients either, or new business and it was pretty clear to them that when they look at their differences in their world, they have fewer new clients come into the CPA firms and of the clients that did come in, there was a dramatic difference in the numbers that were actually the formation of the -- of the new business formation. So it’s those types of things, those types of metrics that we look at that tell us that.

Very helpful. Thank you.

Our next question comes from Kelly Flynn of Credit Suisse.

This is [Diri Christian] for Kelly Flynn. Just a question on the health and benefits product. It’s obviously seen good growth over the last couple of years and I know in the past you’ve talked about this as maybe being a $100 million opportunity or so. What I’m wondering is outside of maybe enhancing the sales force or increasing the sales force here, are there any things you feel you need to do to get there, either in terms of enhancing the product or any change in strategy there at all?

Well, we are an insurance agency as it relates to health and benefits, right? So we represent carriers and we carry their products to our employees. So we are sales agents, if you will, or insurance agents, if you will. And so a big part of it is not necessarily creating new offerings but it has a lot to do with the relationships you have with the carriers, the number of insurance agents that you have in the field, but more importantly your ability to get to the end user. And we have an extraordinary ability of being able to get to the end user because we have almost 600,000 installed clients and we talk to in a normal year north of 300,000 prospective clients, and so to the extent that they need health insurance and to the extent that we have relationships and carry products from a large number of insured -- not large number of carriers, we are sort of in an advantaged position. So it’s more about that than anything else. It’s helped by the fact that small business is not an attractive target for independent agents. If they can make five calls today, they are going to call on the five company prospects that they have that have the largest number of employees. I mean, their view is that it’s just as much work to do a 500-person firm as a 50-person firm, or a five-person firm, and so they don’t want to do the five-person firm. They want to use their time to do a 500 or a 100 person firm, and so they tend to ignore the low-end, which is not unusual for small businesses. They largely get ignored by most players. We have made our business out of taking care of those clients and so it’s almost a perfect storm for us. It’s a very natural situation for us.

Okay, that was helpful. And then, is there any way to quantify, and I don’t if this was covered before, what was the change in the number of clients that moved to [inaudible] status?

We don’t disclose that.

Okay. Yeah, that was all. Thank you.

Our next question is from Tien-Tsin Huang of J.P. Morgan.

Thanks. Just a few quick follow-ups, just on the $12.4 million in the retirement services billings, is that all profit and is this just isolated to the fourth quarter, John?

No, no, those billings were all year. I don’t think any quarter was any bigger -- I would say if you said it was even all through the four quarters, you wouldn’t be far off. It was probably about an 80% margin.

80% margin, okay, helpful. And then the health and benefit service revenues, how profitable is that now, from a margin standpoint?

We haven’t disclosed that. We are still -- actually, I’ll tell you -- it’s not a high priority to focus on that too much right now. The focus is to grow the revenue, get the product to be as good as we can get it.

Understood. And then just lastly on management sort of incentive compensation, I think in the past you guys have -- I think it was pegged to the 15% operating income growth [inaudible] metric, so what metrics are you now benchmarking against for incentive comp, given the economy?

Well, last year was not benched exactly to that, so it’s something we keep looking at. I’ll let Jon tell --

Are you talking about the officers?

Yes, the executive management team.

The officers comp plan has not yet been approved by the board. That’s going to be at the July board meeting so that might be a better question to ask the next time we talk.

Okay. Very good. Thanks.

Our last question comes from James [Casane] of Banc of America. Your line is open.

Thank you very much. John, what is the timeframe for achieving the $100 million in the healthcare business? And maybe what your margin objectives in the healthcare business are?

Well, let me take a shot at both and then John can talk as well. When we first started out, I said that this was a business that I felt like we had a shot at maybe growing into $100 million in five years. It turns out what’s happened in the last year with the economy, that’s probably not going to happen but from all of the modeling that we’ve done and how the business has grown, we are still on the path to making that a $100 million business and I feel very confident that we’ll get there. It won’t happen in five years. Maybe it will be six, maybe it will be seven, but we’ll get there. On the margin piece, the part to under -- I’m not going to tell you what the margin, John can if he’d like. But what I will tell you that is important to understand is the way this business works and why it is so important to continue to invest in it the way we are is that we are paid a margin, we are paid a percentage of the premium each year and so we get it in the first year when we capture it and we get it every year thereafter as long as the client stays with us and stays with the carrier. You know from our business that we have an extraordinary ability to retain clients and so we feel pretty comfortable with that. All of our costs associated with that business are in the first year of capturing the client. After that, all of the commission payments that we get from the carriers are pure profit. So the way that this business works is you try and build up your sales force to get as many sales as you can in a year and in the first year that you capture the sale, you are not going to make much money on it. And every year after that on each individual sale basis, you are making almost 100% profit from what the commission of those are. So the trick in this business is to build up a book, if you will, to drive the out years and the numbers become amazing in the out years. So we are in the early stages of this business and so as John said earlier, you know, we don’t really look at the profit thing at this point because what we are looking at is building the book of business and building our capabilities, both with sales people and back office processing capability.

I haven’t seen anything in this part that tells me margins are appreciably higher or lower than typical HRS products, which actually have margins a little bit higher than payroll. So it’s got all the attributes of a 401K. It doesn’t have the basis point fee, so we expect it will be profitable and I’d be surprised if you are on the phone someday saying that margins went down because healthcare margins weren’t the same. I don’t know of anything that would cause that at the moment.

Good, and one last question, just your appetite for acquisitions, especially maybe bigger deals in adjacent markets?

Very strong. It has been strong. Our financial capability to do the acquisitions is extraordinary. The trick is finding the right ones.

And how about just managing or balancing with the dividend -- is that --

Relevant to the acquisition?

Yeah.

None. Remember, we have a very strong stock capability and we have no debt, so we have always done acquisitions using cash but in terms -- if the right one came along, then the right thing to do is to either use stock or use debt, we have an enormous capability from that vantage point and we are sitting on just shy of $600 million on our balance sheet, so we are in pretty good shape from that standpoint and our dividend is less than what we make each year, so it obviously would be a consideration if it was a mega deal but I don’t personally think it would be an issue.

Okay. Thanks, Jon.

We have no other questions at this time.

Okay, well again, we thank you for joining us today and your interest in Paychex and we all look forward to when times are better but in the meantime, we think we are doing as good as we can do and we’ll keep moving forward, so thanks a lot.

This does conclude our conference for the day. You may disconnect at this time.