Welcome and thank you for standing by. At this time, all participants are in a listen-only mode. After the presentation, we will conduct a question-and-answer session. (Operator instructions). Today’s conference is being recorded. If you have any objections, you may disconnect at this time. Now I’ll turn over the meeting to Mr. John Morphy, Senior Vice President and Chief Financial Officer of Paychex. Sir, you may begin.

Thank you for joining us today for our fiscal 2010 year-end earnings release. We’ll begin today with a view of fiscal 2010 financial results, including guidance for fiscal 2011; then Jon Judge, our President and CEO, will provide you an overview and we will end with a Q&A session. Yesterday afternoon, after the market closed, we released our financial results for the fiscal year-ended May 31, 2010 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, and 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. Early in fiscal 2010, we slightly decreased our service revenue guidance while maintaining our operating income and net income guidance. Our actual fiscal 2010 results were very consistent with that guidance as the year for the most part played out as we foresaw in late last summer. Our operating income, net of certain items as a percent of service revenue, was 35.4% for fiscal 2010. The poor economic conditions of 2009 and 2010 impeded our revenue growth as they have contributed to declines in new client sales, client retention and checks per client. Despite this we ended the year encouraged by the modest improvement in some of our key indicators, and most importantly, checks per client. We will talk more about that later. Our served payroll client base declined 3.2% to approximately 536,000 clients. Our client retention was 77% of our beginning of the year client base, slightly better than the prior year. We have begun to see signs of improvement as lost clients decreased 6%, compared to fiscal…

Thanks, John, and thank you to everyone on the phone for taking the time out of your day to spend with us to talk about Paychex. John gave you a good summary of our year. It was a challenging year for us and most everyone else. For the second year in a row, we fought our way through a very difficult U.S. economy, plagued with high unemployment, high business failures, difficult credit conditions, very low investment income rates and depressed new business formation, all of which had a direct impact on our business. And while the battle wasn’t a particularly fund one to fight, I am very proud of how our team responded to these challenges and how the year played out. I make no mistake about it. I’d much prefer a report like the one we gave you at the end of fiscal year ‘08 where the majority of the U.S. was well into the recession and we reported our 18th consecutive year of record-breaking revenue and profit. But given what we had to deal with, our team managed what they could manage and delivered a set of results consistent with our plan and with our guidance. Amongst the strengths of the year’s performance was very high customer satisfaction which continued at the highest levels in the industry, excellent expense and cost management, strong positive cash flow generation, excellent profit margins and an impressive dividend payout for our shareholders. Also improving were most of the key economic indicators that affect our business, especially in the second half of fiscal ‘10 and specifically in the fourth quarter. Let me give you some examples. Checks per client, as John mentioned, went positive in the fourth quarter, and I expect it will stay positive through fiscal ‘11, and potentially it was the…

(Operator instructions). The first question is from Adam Frisch of Morgan Stanley. Adam Frisch – Morgan Stanley: Thanks. Good morning, guys. The lower selling season that we had in the past couple of quarters obviously had an impact on the F’11 outlook. So, two questions here. One, is there material upside or downside potential to your outlook? And then two, what would drive any delta there?

Adam, I think one thing. We went into the recession a year later than everybody else. And when we went into it, our results were not very volatile. And it’s my belief it’s been this way for a long time that our results never change rapidly. I can’t remember them ever changing surprisingly. So you want to talk about any significant upside or downside, it would have to relate to either some very significant change in interest rates or some very significant change in the economy. Without that, those things happening, we can predict what revenue is going to be within 1% probably 95% of the time. Adam Frisch – Morgan Stanley: Okay. So then there were a lot of data points in the fourth quarter that shows material improvement and the guidance is a little tepid. So what’s kind of holding you back a little bit at this point? Is it the sale season that you already had which determines next year’s rise? Is that the major driver here?

Adam, this is Jon Judge. So that’s part of it. I mean part of what John was trying to get across is that when you have a business model like ours, it has a very high recurring revenues. When changes that happen in the economy, they take a while to work them their way through us getting affected by at least. You remember, in the fiscal year ‘08, we had a record year when the rest of the world was already into the recession. And so we went into it in ‘09 and now ‘10. So you’ll start to see all these economic indicators went positive for us and that’s fantastic news. But as John said, if the interest rate jumped to 4%, tomorrow you’d see an immediate difference in us and it’d be very sizable. When the interest rate went from 4.5% to basically 25 basis points or less that caused us $70 million on a top line and bottom line. So something like that coming back quickly would help us. If the losses change dramatically, that’s obviously a huge help to us because all those losses that happened over the year, we’d end up having that revenue for the whole year. On the sales side, it’s what you said. Sales typically in a year will only affect our top line somewhere in the neighborhood of 10% to 12%. And that would be at probably the maximum level. So we could go crazy selling and unless it all happened in the early months of the year, then it would have a modest help to us in the ‘11 and would have obviously a much bigger help to us in ‘12. Adam Frisch – Morgan Stanley: Okay. Thanks, Jon for that color. Last question. Good to see you still investing in the sales force. I know it’s only 2%, but at least you’re still trying to grow that boding well for the future. Sorry for the obligatory question, but how is the pricing environment progressing here? Are you still seeing aggressive tactics from your largest competitor?

No, that’s a very fair question given the environment that we’ve been in. What we are seeing is that it is starting to calm down. Sort of the crazy season appears to be over. I can’t tell you what’s causing it. I just don’t know. Obviously, we don’t manage the other side. We only manage our side and our philosophy has not changed. We’ve talked about it openly on the last several calls and we’re not going to let anybody take business away from us, but we have zero interest in getting aggressive in discounting side. So as it starts to abate from the other forces, then it will clearly abate from our side. Adam Frisch – Morgan Stanley: Okay. Thanks, guys. Good luck to you.

The next question is from Jason Kupferberg of UBS. Jason Kupferberg – UBS: Thanks. Good morning, guys. Just wanted to come back to the pricing a little bit, can you quantify what the price increase was that you did just put in?

We’ve put in 3%. Payroll revenue is around $1.4 billion. Jason Kupferberg – UBS: Okay. And then if we come back to the four factors, Jon Judge, I guess that you reviewed that you need to really improve in order to get back to the “Normal Paychex.” Can you kind of rank order for us the importance of those four factors and just confirm whether or not you still consider the “Normal Paychex” to be 12% top line, 15% operating income growth that we were accustomed to in the past? I know we’ve been talking about a lot on that for the last couple of quarters, but I wanted to see if that’s still your comfort level there?

To start with, the four that I mentioned, all four of those have differing effects for us, but they are all important. I mean, as I mentioned, the interest rate environment going from where it was, from a normal interest rate environment to basically zero. That has about a $65 million to $75 million impact on us. So, that one’s pretty easier to quantify if you just look at our prior years. New biz starts. It was good to see what happened in the fourth quarter. When we looked at the new business environment, what we have seen is that our share of new businesses that originate in a year has not changed due to recession. So, said differently, that’s something that’s been a fairly significant hit to us in terms of the sales that we did not get or normally would get. So when that starts to return to normal, obviously, that’s a help for us. The fact that we didn’t lose share of the market through the recession says the issue is that there just aren’t enough of them right now. It’s not that something else is changing like buyer behavior. So, that part is that’s important to us. Losses, from what we reported today, we’re may be a little bit stronger than a point better than we were at the height of losses. And as business failures continue to come under control, as losses due to price value continue to abate, the net number gets better. I mentioned to you that we’re going to try and drive that number a point or more better in ‘11 than we did in ‘10. So my view on that is we’ve got a lot of years of history that say the normal level for this environment, the sector that we…

It’s not significant, because we’ll get here anyway. When you talk about the margin environment, I know some people will go, how can that be, but we have about 15 million plus some, we’ve made an assumption on the 401(k) math, which is probably going to be pretty close to. So I don’t see much risk, but I’m not going to disclose what it is, as we haven’t discussed that with our employees yet or the Board. But anyway, if you put what that affect is in, the margin percent would be an all-time high, because it doesn’t take much to move it. So some of the margins is under pressure, because we have to put the costs back in, which includes basically the 401(k) match, the wage freeze, but also some selling costs assuming that we’re going to get back to a normal year. So when I look at the margin, which is not far off record years in this environment to be at that level, we feel very good about it. So we’re definitely getting productivity. We’re getting productivity out of the new system, but these things are just like I talked about before. The beauty of Paychex is nothing changes dramatically quickly, but it goes all ways, where the whole thing is. So you really can forecast for the fair amount of degree of certainty and you can get some upside, and I think we hope in this world there is more chance for upside than downside, but who knows, but nothing is going to change a whole lot overnight, but we’re going to keep pushing those things.

There are a couple other points so on the system that are important to mention. One, we will replace the system that was 20 years or 25 years old, something in that neighborhood. And so it had all of the issues that anyone who is dealt with 15, 20, 25 year old legacy systems had that we don’t have those issues anymore. So as a consequence, it’s going to be a lot of easier to put new service offerings on top of this platform where in the past it was brutally hard. And the other piece is just the newness in the system. So we’ve got an environment now where we’ve got all new technology, all new architecture and that will keep us in good stead for some 15 years to 25 years hence. So even I’d just say it’s a big potential problem behind us, it’s a lot of stability, it will help us with our existing clients and it will give us a platform to add new additional offerings on in a much more easy and implementable way that will drive future revenues. Jason Kupferberg – UBS: Understood. My last one, just new sales trends, any notable differences among various geographic regions within the U.S. and new sales expectations for fiscal ‘11?

Well, there’s obviously new sales expectations for fiscal ‘11, but in terms of trends I would say in the last quarter, there’s nothing really significant to point out. We had a pretty strong May, but I’m not so sure there are things that could be affecting that like qualifying for recognition events and so on. But I would say, in general, there’s nothing significant in trends that I would point out. But there’s clearly our expectations for the New Year are clearly up and they have to do with some of the things I mentioned about new approaches and new tactics that we’re using to dramatically improve some of the activity based side of the selling process and I’m actually pretty excited about it. Jason Kupferberg – UBS: Great. Well, thanks for the comment.

The next question is from Gary Bisbee of Barclays Capital. Gary Bisbee – Barclays Capital: Hi, guys. Good morning. I guess first question, can you give us a sense how the various operating metrics have trended sequentially? I think we understand that year-over-year comps easier and that’s part of the improvement, but has the new business starts, checks per client and some of these other metrics gotten better this quarter versus last quarter or versus the quarter before?

I would say that there was gradual improvement throughout the year. I won’t say every quarter had improvement in it, nothing got worse in the fourth and everything had slight improvements. The most noteworthy is checks per client to put that in perspective. I don’t think in the history of the Company, we’ve ever seen a 1% improvement in that for a year. We don’t even have many quarters to see improvement. So I’ve been pretty steadfast about saying I think that’s flat, flat, flat. But we got 1% in the fourth quarter and we do think that’s going to hold because we’re seeing great stability in the clients we have. It doesn’t mean there isn’t a part of America struggling, there is, but small business products that we seem to have now, the bankruptcies are down, they’re doing some hiring, they’re not letting as many people go. So, we think that’s the best indicator we have, it’s not like it’s taken off, but it’s 1%, I’ll take at any day. Gary Bisbee – Barclays Capital: And I guess just thinking back historically, I think you’ve commented that the new sales are much more important than that in terms of the ability to really drive the revenue growth. So is that one seeing much improvement? I guess just that 10% number you threw out for new business starts, is that all just about the fourth quarter last year was awful, or is that one that’s also seeing some sequential improvement?

I don’t know how to answer that. I mean whenever you look at that either sequentially year-to-year, I mean it’s a comparison. Was it an easy compare or a hard compare, is that your point? Gary Bisbee – Barclays Capital: I mean the fourth quarter was tough and so if the fourth quarter last year was worse than the third quarter last year, optically things look easier, when I look at a growth rate this quarter versus last, it’s just the comps, you know what I mean –

We’re not seeing any dramatic change. You look at these comps. I don’t like some of the quarterly ones, that one I don’t, because that didn’t happen during our peak selling season. We just got to wait and see and we’ll see what happens. But I wouldn’t draw too much into that one. The good news here I think is we stabilized, nothing is diminishing, we’re putting our cost back in, we got our earnings flat, I don’t like flat but I wish it was up, but we’re ready to go in the right direction. Gary Bisbee – Barclays Capital: Every couple of years, I think you’ve told us how large the average client is. You talked about MMS having done well. Has that number moved up meaningfully or is it still in the 17 range?

It’s not up meaningful and it’s down from 17 some, but it hasn’t changed dramatically. Gary Bisbee – Barclays Capital: Okay. And then just one last question. I know you’ve said for a long time now that share repurchases are not high in the list of priorities. I guess, at what point you have so much cash on the books that you consider some of these secondary strategies, particularly, if you can’t find suitable M&A?

Well, we talk about that almost in every Board meeting. We will be in a point where we would consider that we’ve got too much cash and we need to do something immediately until that number gets north of $1 billion. But I would say that the sentiment would be much more strongly in favor, it’s certainly my sentiment, and I believe it would accurate to say that the Board’s much more favorable for M&A than a share repurchase, but as we’ve said in the past, if we get to a position where we’ve got more cash on the books than we think is prudent, and we don’t have an imminent M&A in front of us, we probably would execute either an increase in dividend or a share repurchase. The last time we studied in detail were the two most acceptable strategies and the other ones that people frequently talk about were not acceptable to us. One-time special dividend is not something I would expect you to ever see come out of Paychex. So that’s kind of where we are. But we’re not in a position yet where we feel like we’ve got so much cash in the books, we have to do something tomorrow. Gary Bisbee – Barclays Capital: Thank you.

The next question is from David Grossman of Thomas Weisel. David Grossman – Thomas Weisel: Thanks. Jon and John, I think you gave some metrics about your assumptions for next year, retention I think getting a little better, pricing up 3% and if you’re guiding to flat revenue growth, I believe that implies client growth will be down again in fiscal ‘11, which would be –

No, I wouldn’t agree with that. The problem you got to realize is that we have headwinds going in. In other words, the negative client growth of 3.2% is a negative revenue growth next year of 2%. You’ve got some discounts and carryover. You’ve got 3% price increase. I’m not going to say a monstrous client growth built in there, but it isn’t negative. David Grossman – Thomas Weisel: So how does that trend compared to the prior cycles when you’re looking at the downturn you had back in the ‘01, ‘02 timeframe? I don’t know if they are that comparable, but –

Problem with prior cycles is in the prior cycle; first off, we never went negative. ADP did. Okay? We also took advantage in that cycle and spent $800 million on two acquisitions in the Payroll business that helped us to generate some revenue and not see some of the issues that we have to deal with in this situation, which is far worse than any that I have seen. The other thing is that, in the last cycle, I’m not even sure small business was in it to any large extent they had some, because we had a 4% drop in checks in one year.

It was on credit crisis.

Credit crisis. To me to compare this to anything here, going back to 1990, at that time Paychex was so small that recession didn’t affect in the same way.

Let’s say in general though, it’s acting similar to prior recessions, but remember this recession, if you look at the raw numbers on the recession, this is unmatched probably going back to 2009. So it’s going to be a little bit different from that standpoint. And then the other point is what I mentioned, the fact that there was no credit crisis and the other recessions and you didn’t necessarily have the same impact on new business formation that you had in this one. David Grossman – Thomas Weisel: So as you look at kind of the metrics, I guess Jon that you laid out about kind of a recovery to a more normalized environment for Paychex, are we kind of looking to the first calendar quarter of 2011 during the big selling season where we get a better indication of whether or not we return to kind of a more normalized client growth environment, or is this something that you get to see as the year progresses based on retention and other kind of sales metrics that you look at?

The things that we can control, we’re going to do everything in our power to control. So there are things that we’re trying to do to drive top-line growth that will help us. There are things that we’re doing to try and improve retention even though we’re the best at the game. So the things we can control, we will control. But the tough part is if the Fed’s can’t, with the economists they have when these things are going to turn back to normal, it’d be really hard for us to do that. So I mean I can’t tell you when the interest rates are going to go back to normal. I can’t tell you when the unemployment numbers are going to go back to normal. I know they will. I just don’t know when. David Grossman – Thomas Weisel: Okay. Let me ask John Morphy a question on the expenses. I think you kicked this partially a few minutes ago. But as you start to ramp, and let’s say, the top line does start to recover a bit, are there any other expenses here now that I think you mentioned you obviously had a pretty tight control over expenses last year, putting the wage increase back in this year, you haven’t really decided about the 401(k). But, is there anything else we should think about, about expenses if in fact revenues do start to accelerate with improving metrics?

The only unusual thing that you get in the downturn that are significant actually you can argue for is first one is the wage freeze, those things you put in place for those two. That’s the only two we had that were significant. We have watched all the spending, I don’t think there is anything in there, we would say, we don’t need to put it back. The other two is you get sales selling costs and I’ll be thrilled to be on this phone and talk about my cost being too high because I sold too much. It would be a great day. You add that one and the last one, you can have some executive bonus things, where a year ago, we didn’t pay very much in executive bonuses. This year, we’re not paying any target, but we’re better and we think we’ve stayed close to the plan. We did stay very close to the plan, but we actually were way down the plan off revenue some. So, basically I don’t see any others that are going to do that and you just got to work your way through it. So, I don’t think we got any expense challenges coming. As soon as things get better, I think, you’ll see us back to margin expansion. The margin expansion in this year’s plan, but you don’t have to stick those two things back in, would be as good as any we’ve ever had, so we’re doing all the things we normally do, we’ll keep doing them, but sometimes you got a little wind in your face.

It’s a good question and we get it in a lot of conferences and one of the ways that I answer it is that, you can’t be a 40% pre-tax company if you don’t have focus on expense at all time. So, we’re pretty proud about the fact that we spend money easily and willingly on things that we think will drive our top line and our bottom line, and we’re very critical of expenses that we don’t believe are necessary. The easiest way to look at that is, even in the normal environment, we’re running a 40% pre-tax margin and our nearest competitor in the industry is running about at 25%. So, I mean, we’re just not going to ever let that erode. And our Board wouldn’t let it happen even if we thought we wanted to. So, it’s kind of baked in our culture and management systems. David Grossman – Thomas Weisel: Great. Thanks very much. Good luck.

The next question is from Julio Quinteros of Goldman Sachs. Julio Quinteros – Goldman Sachs: Great. Quick question for John. Just to go back to the comment that I think you made about productivity improvements and it sounded like you were alluding to jobless recovery and what that could actually mean for you guys. Can you just maybe just dive in a little bit there? I mean if we are looking at a jobless recovery type of situation, then obviously the other three or so of the factors here would end up having to make this slack? Is there enough new business formation, I guess interest rates and other drivers to really get us back to the historical levels there if we really are staring at a few years of potential jobless recovery?

I may have mischaracterized what I was talking about. What I mentioned on that was that if you look at some of the data that’s published by the Federal Reserve, what they would tell you is that, part of what they are noticing, as the GDP is improving, that the unemployment rates are not. And their view of the reason why the unemployment rates are lagging things like the GDP, which they expect to be up about 3.5% in ‘10 and more so in ‘11, is two things. One, it’s the fact that they believe that they’ve seen indications that there are productivity improvements, driven by companies who have either figured out how to do more with less or have implemented tools that allow them to do more with less. And my comments that I made was that that may be something, that maybe a large enterprise, more of a large enterprise discussion in that, because as you know, the majority of the data that’s in the Department of Labor Unemployment is large enterprise data, not small business data. So that was that piece. The second piece that they talked to, not quite as detailed, is the fact that the base numbers that they are looking at, that determine the unemployment rates, the people that are not looking for work are not in those numbers, and so there’s a natural phenomenon that’s happening that as the economic indicator start to get better and people start to feel that there is more of an opportunity to get a job, they enter into the labor pool. And so, part of that is, until that slack is taken up, you’re probably going to continue to see the unemployment number stay in the high mid 9s or something like that. As it relates to small business, I don’t know that it does. So I would not. The conclusion that you made from my comments was that therefore it’s going to be a jobless recovery and the unemployment is going to hurt us. We’ve already seen an increase in the checks per client in the fourth quarter and we think that it’s going to be a positive, may be as much as 1% for all of next year. And if that happens, and obviously that would say that, in the small business environment that the jobless recovery is not something that you would conclude, you would conclude the opposite. Julio Quinteros – Goldman Sachs: Perfect. That sounds great. And then, Morphy, a couple of quarters back, you talked about the new business formation being (inaudible) by lack of credit and people are not having access to things like their home equity lines to start up new businesses. Any update or any views around how some of that environmental stuff might be changing, if you guys have any sense there at all?

No. My sense is that the banks are loaning to small business, but primarily to the small business they already knew or had relationships with. I think the credit being issued to a company that’s starting up I don’t think that’s quite started yet. Also when you talk about these things, we still sold about a 100,000 clients this year. So it’s not like nothing is going on out there. Julio Quinteros – Goldman Sachs: All right. Great. And then just a quick check on the margin guidance that you have does it or does it not include the assumption here for the 401(k) match, just wanted to make sure I am clear on that?

We have an assumption we think what’s going to happen. I’m not going to disclose it. But we believe it’s covered. Board still has to approve it, but now that’s why I added a comment, I don’t expect. Whatever we do, will not have a material impact than what we told you.

I’d tell you this from our discussions with the Board. The Board is, I would say, if you’re trying to handicap this, they will either do what we recommend or something that will have a lower expense impact not a higher. So said differently, the number that’s in the plan I believe is either right on or conservative. There’s no way that will have a problem. Julio Quinteros – Goldman Sachs: Got it. But it is in the 34 to 35 range (inaudible)?

Yes. It is. Both of the expenses, the salary returned to merit increases and the 401(k) is in the numbers that we released.

Philosophically, if you understand how this process works, it’s one of the best things about Sarbanes. When you get the guidance and we have to do this every quarter and clearly, now you have to have a Board meeting or I mean an audit committee meeting and we show the forecast of it during the year, and we show the plans to the audit committee, and the guidance that we provide has to be consistent with those plans and forecasts and with that something we require. So when you look at that, we would never give guidance on something that we knew could happen or high likely that would change the guidance especially downward, so it wouldn’t happen. Julio Quinteros – Goldman Sachs: Great. Thanks, guys.

The next question is from Rod Bourgeois of Bernstein. Rod Bourgeois – Bernstein: Great. Hey, guys. Back on the margin front, do you get any meaningful operating leverage in the business, if Payroll revenues are flat, and then beyond Payroll revenue show some decent growth consistent with your guidance?

Yes. We’re getting it this year. As I said before, we didn’t have to put those as expenses. Those expenses are cost and it’s almost 200 points to 300 points of margins. So no, we would get it. Rod Bourgeois – Bernstein: So you don’t really need the Payroll business to have kind of mid single-digit growth to get some substantial operating leverage? I mean it’s sufficient to have the beyond payroll stuff positive to get the leverage?

I wouldn’t say flat makes it harder, but I don’t need five to do it too. Rod Bourgeois – Bernstein: All right. Great. You mentioned that new business starts a bit little better, I’m wondering of what metric you’re using to track that? And then if you could quantify how much better new business starts got?

Well, the number that I gave was in the quarter and it was sales from companies that were formed in that fiscal year. So that’s the number that we look at and so it’s our own metric. Rod Bourgeois – Bernstein: Right, but you don’t have an outside metric to track what’s happening in the broader account?

We do, but the trouble with it is, you have to triangulate to get to it. There is no government source that reports new business formation. Rod Bourgeois – Bernstein: Exactly. (inaudible) with that. And then just a question on –

Just compare notes, Rod, if you’re going after it, our belief is that, that number is somewhere in the neighborhood of a million. So if you have a substantially different number, I’d appreciate if you call me and tell me what you’re looking at. Rod Bourgeois – Bernstein: Yes, I’ll call Morphy about it, because the numbers are always dicey on that front though and they tend to be too lagging to be that useful as well. On the strategic priority front, how are you prioritizing investing to drive new sales in the very small client segment versus in the mid-market? So I guess what I am specifically looking for is, should you perhaps be shifting your weighting of investments in favor of the mid market, given that there is more cross selling potential there for ancillary products and also given that the very small client segment may see economic challenges for a while?

We’re in both, we’re in more than just that, but the process that we use, I mean it’s natural for us to look at it by the way we’re organized. So we do look at our sales forces by Core Payroll, MMS Payroll and then the HRS, and the HRS’s broken in to PEO and Premier, Insurance, and so on. So we do look at the separate sale forces and make decisions independently about where we place our bets. The same thing is true by the way when we look at investments that we make on either build and buy decisions for orders of new products. So it’s not so much, it’s an exclusion, I mean we do, you could get to a point where you would say that, I just can’t make all these investments and so, I have to go and prioritize. And typically, we would prioritize based on short-term, medium-term and long-term returns on that investment. And you can have a case where a long-term return is compelling enough to trump a short-term return and an example of that would be the monies that we put forward to start up the Insurance business. But I would say that in general, when we go through our investment strategies we do have a bias towards investments that will get us short-term and near-term returns. Rod Bourgeois – Bernstein: Right. When you deploy sales force and you have a priority in a normal year, where you are balancing, the sales force targeting the very smallest clients versus the mid-market, are you incrementally shifting that in this environment towards the mid-market or is your balance of sales force prioritization a normal balance between small versus mid?

It’s not so much shifting from one to the other. We look at each of them. The very small client by the way is a fairly large part of our business, and so some of it also gated by the fact that one might be 70% of our business and the other might be 20% or 15% of our business. But we look at both of them and if we think that we can continue to grow by adding sales people and adding territories in a specific market, we will do that. If we think we can grow better by consolidating territories and driving higher productivity from our existing sales forces we’ll do that. Rod Bourgeois – Bernstein: Right now, no big change on that front. The priority hasn’t shifted in any meaningful way for next year?

We like them both and we’re investing in both. Rod Bourgeois – Bernstein: Got it. All right. Thanks, guys.

The next question is from Tien-Tsin Huang of JPMorgan Chase. Tien-Tsin Huang – JPMorgan Chase: Hey, thanks. It’s Tien-Tsin. Couple of quick questions, just first on the retirement services, it sounds like it rebounded a little bit in the fourth quarter. I’m curious is this a good leading indicator for us or is demand picking up in new sales where I’m just trying to look back and I think how that could be a predictive –?

Really it is, that was a struggle in all year and I don’t want to make too much of a judgment of one quarter. We put some things in place to help retention. Some of that improvement is not just what the economy got better. It’s what we did get better. Tien-Tsin Huang – JPMorgan Chase: Would you expect the client number on the retirement side to grow at a premium to what you’re looking for in terms of HRS revenue growth?

No. Tien-Tsin Huang – JPMorgan Chase: Still go at a discount?

No. What will be the three major revenue producers; I would call health care, 401(k) and premier. Health care and premier will grow faster than 401(k). Tien-Tsin Huang – JPMorgan Chase: Okay. We’ll be watching that. My last question then is just kind of related it’s just in terms of these new sales of ancillary products, I’m curious are you seeing any change at all in the rate of clients dropping services or whatever taking services in-house? I’m just curious is there any contribution there?

It’s actually the opposite. I mean the tax pay numbers are now up in the 94% range from 93%, so the tax pay is a little bit stronger. Direct deposit is a little bit stronger. So initially in the year, we thought we were seeing things where there were clients taking payroll without tax pay, which is kind of unusual, because we’ve got to a point where something like 99% of clients who took payroll to tax pay. When the year finished, the tax pay numbers were actually up, the direct deposit numbers were up. So it continues to defy gravity in my opinion. Tien-Tsin Huang – JPMorgan Chase: Great. Thank you.

The next question is from Tim McHugh of William Blair & Co. Tim McHugh – William Blair & Co.: Yes. I just have one question left here. I was going to ask about the sales force, you mentioned 2% growth, but I believe in the MD&A last night, you commented that most of that will be in kind of the HRS areas. What are you going to do with the core Payroll business? Are you looking to grow that this year, and related to that, would you be slower to grow at I guess given the productivity improvements you might hope to have given the changes you made?

I would say that we obviously are hoping to grow that. I mean it’s the biggest part of our business and I would say it’s one of the most important parts of our business relative to getting back to the normal Paychex. So we’re clearly trying to grow it. The thing that I would say in this particular year, in core Payroll, it’s more the productivity of the existing sales force, as well as the growth is going to come from rather than adding new sales people. We will add sales people in the other sales forces, but in core it’s some of the things that I talked about with driving activity, driving management, management systems and driving some of our referral channels to higher levels of productivity and production.

But we would expect I think to probably add to the core sales force in the year. This year, we’re focused and I think Jon has just talked about, we got a new guy tops who’d be watching environment closely, but I think we’re back to adding people in the year.

I would agree with that. Tim McHugh – William Blair & Co.: Okay, thank you.

The next question is from Chris Mammone of Deutsche Bank. Chris Mammone – Deutsche Bank: Hi, thanks. Sorry, if I missed it. I think you said that you expect the client base to grow in 2011. Did you give a number?

No. Chris Mammone – Deutsche Bank: Can you give us any color around the magnitude?

I don’t believe it’s acceptable to plan for negatives we never have nor will we. It isn’t a big number. So it doesn’t matter what I tell you the number is. It’s not like four or five, but we got to work hard in getting the sales force productivity where we want to be. Hope the economy picks a little bit up and we think losses are going to get better. So, hopefully well beyond this call, you’ll hear from us saying we have client growth of X and that will be good.

But Chris, we told you that we expect the losses to be less and we expect to get improvements out of Core, which as I said earlier, is one of the biggest parts of our business. So, the easiest way to think about it is its combination of less losses and more sales. Chris Mammone – Deutsche Bank: And then just as a follow-up. I guess, on your comments on maintaining the current dividend level, I know it’s a Board decision at the end of the day, but we do assume unlikely to raise the dividend this summer given the current payout ratio?

Well, it’s up to them. The dividend is very important to us as evidenced by our behavior for a long time. I can’t say what they’re going to do. Nobody is alarmed by where it is, especially the cash balance and the outlook that things are going to get better, the earnings aren’t dropping. And we know we have some margin because of interest rates getting near normal this 94% goes for a lower number. Now, as far as raising the dividend, some people ask, would you have to get back to 75% hike? I think you have watched the game get played. We’ll see what happens. You know that our Board favors dividends, and if it makes sense to raise it, they will do it. Chris Mammone – Deutsche Bank: Great, thanks.

The next question is from James Kissane of Bank of America-Merrill Lynch. George Nicolaus – Bank of America-Merrill Lynch: Hey, guys. It’s actually George Nicolaus [ph] filling in for Jim. Just had a question around retention. As you guys continue to see strong growth in MMS, do you think there is a chance, longer term, that you can push retention levels higher than that 80% given that, that segment should be more stable?

There isn’t. Number of clients in MMS, isn’t quite enough to move that needle when you measure it by clients. Do I think someday we’ll get under 20%? Yes. We were under 20% once. So, if I had the ops guy here, Mr. Mucci, I would say, Marty you’re going do that? And he would look at me, smile and say, no problem John. George Nicolaus – Bank of America-Merrill Lynch: Just last question, just to make sure on your guidance, the outlook that you guys have from a checks per client perspective, is that about plus 1%?

Approximately. George Nicolaus – Bank of America-Merrill Lynch: Thanks.

The next question is from Glenn Greene of Oppenheimer. Glenn Greene – Oppenheimer: Thanks. Good morning. Just wanted to drill down a little bit on the attrition trends, the 23% or so that you sort of realized the last couple of years, could you sort of talk about the composition of that attrition? Historically, I remember bankruptcy was 12 points to 13 points of that. I don’t know if that’s meaningfully changed, but just looking for a little bit color on the 23% attrition, bankruptcy versus competitive?

Well, the 12% to 13% is little bit high, but it’s in the ballpark. But you have some percentage, call it, 12% to 13% of clients that went out of business, is another pointer to clients that had lost the ability to pay. So, we took them off the service or they got so small that they stopped using, they stopped processing and those two numbers would normally be in the 1% to 2% range. You have some number of clients who leave for either they need a feature or functionality that we don’t have, or they are unhappy with something or other, that number normally is in the 5% to 6% range. So those were the basic numbers. The history would tell us and a lot of years of history would tell us that when you deal in the marketplace of small and medium business, you’re going to lose about 20% of your clients if you’re a well run company, driven by those factors. Glenn Greene – Oppenheimer: The factors that are sort of leading you to think that the attrition rate is going to pick up, at least, a point or improve a point or so next year in ’11?

The two major drivers of that are less companies going out of business and less of an issue from clients with the price value consideration. Glenn Greene – Oppenheimer: And then on the HRS side, is it right to sort of conclude that the growth is really being driven by really I guess expansion into the new states or is it more than that?

No. That’s part of it. I mean the PEO has had good growth, but it’s not a huge number compared to the total. So it’s pretty much across the board. We had a very strong year with the combination of Premier and PEO, so that clearly is a driver. The PEO piece you mentioned is helping. I think the 401(k) is going to continue to get better and insurance is, because it’s a relatively small and relatively new business, it’s growing at pretty high rates. Glenn Greene – Oppenheimer: And then just finally on I guess from a sales perspective organizationally, with the new head of sales, what sort have been done that sort of changed the, it’s going to help drive productivity, have incentive plans changed at all, territorial, realignment, just a little bit more color on the sales force sort of organizationally?

Yes, it’s somewhat what I talked to about earlier. I mean it’s a very aggressive approach to activity. And particularly, in our core business, sales person’s success is going to be driven almost entirely by activity. I’d say differently in that world, you don’t have the opportunity to land a whale and have your eel made. The only way that you can drive success in that world is you got to show up every day and you got to work hard every day and you got to work on the right things and on the right channels. Our various channels, CPA referrals, current client referrals, bank referrals, leads that come out of our national sale support system, leads that are generated through Google and other methods are similar to that, they all have much different levels of close rates and much different levels of success, and so you not only have to work your channels, but you have to work your channels but you have to work the right channels. And so it’s all about activity, and we’ve just gotten a lot more aggressive on our execution, and on managing the activity of the sales force to begin with. Secondly, it’s got a lot to do with the way that he is approaching training in specific areas; sales people that are having difficulty closing are going to go into special courses that would develop to help them improve their closing rates. There’s a little bit more mentoring going on in the past and there’s a whole series of things that all add up to adjust that much more heightened focus on execution, and better sales collateral, and better lead generation techniques that we feel pretty comfortable, based on the last four months to six months of the time that he has been with us, we feel pretty comfortable, he’s going to drive higher levels of performance. Glenn Greene – Oppenheimer: All right. Great. Thanks a lot.

The next question is from Tim Willi of Wells Fargo. Tim Willi – Wells Fargo: Thank you. Good morning. Just a quick, I guess, add-on to one’s prior question about sales. Has there been any notable change or at least appreciable change in how you think about recruiting and adding to the sales force and sort of calling out maybe the bottom performers to overtime, have a shift, and if you will, sort of the culture of the sales force as opposed to what it had been just, any thoughts you might have around that?

Well, I would say yes on one and no on the other. I’ve always been a high believer of that. When you have attrition in the 25% to 35% range, which is about where it is with most of our sales force is, that there are two issues that are probably at play. One is you are hiring the right people, because in our world, the majority of our attrition happens in the first 18 months to two years of a person’s employment. And so what is it that makes one person stay for their career or get to the point where they would want to stay or get allowed to stay versus another. And I would argue with you that some of it has to do with who you hire and some of it has to do with the relationship between the first line manager and the employee. We’re working on both of those things. So that would give me reason to believe that if we work on it, that we should see some level of improvement. What was another point that you mentioned that just slipped my mind? Timothy Willi – Wells Fargo: I think second part of my question was just how you ask or retain who needs to be sort of called out of –?

And the reason I say no on that is, if you just looked at it from 20,000 feet, you might conclude that we have been Olympic level performers at calling out people who aren’t performing well. I’m more interested in getting people to perform well, not figuring out who is not and shooting them. I think that we probably have done better on that score than we should have and I think there is a lot better opportunity for improvement by hiring the right people and then doing what has to be done to get them trained and get them the skills and the experience and the coaching to be successful. Tim Willi – Wells Fargo: Great. Thank you very much.

Pleasure.

The next question is from Giri Krishnan of Credit Suisse. Giri Krishnan – Credit Suisse: Hi. Thank you. Just had a couple of quick questions or clarifications. I think in your prepared comments you may have said that discounting, did that moderate a bit and was that a comment specifically addressing ADP or just broad a industry tenant and if so what’s driving that?

I made the comment. It’s Jon Judge. And what I said was that it was quieting down a bit, I mean it had gotten pretty aggressive for a while and it seems to be quieting down. And our biggest competitor is, obviously, ADP. We compete with the regionals as well, but we compete normally in a different footing with the regionals. They tend to discounts severely and have forever, so the discounting issue really was not something that was materially different with the regionals, it was more with the nationals and we’ll see how it plays out. I am just sort of reporting the news as we see, it’s not terribly scientific, so I’ll tell you that upfront, but it’s quieted down some. We’re also doing something in the business to try and make sure that there aren’t discounts that are occurring just because somebody thinks there is an issue, and so there is a little bit more discipline that we’ve put in our own system just to make sure that we are managing as appropriately as we can. And again, as I mentioned, we’ve created some bundles that are helping us both with simplifying the sales process and also helping us get control on some of the discount, and just because we don’t allow discounts and bundles to go beyond a certain levels. So, we’ll see how it all plays out, but in general my feeling is that things are getting better on that front. Giri Krishnan – Credit Suisse: How have your win rates against ADP trended in the last quarter?

How has what? Giri Krishnan – Credit Suisse: Your win rates?

I don’t have a great answer for you on that. I know the number of accounts each year that we lose to them and ones we take from them. We are still positive on that front, so that’s a good thing. And reporting from our field sales people on competition against the various competitors, we continue to do well on those measurements. So I am always little bit suspecting those measurements, because they are self-reported, but there is nothing there that I see, I would comment anything has changed. Giri Krishnan – Credit Suisse: Okay. Just looking at client fund balances, given your guidance, is it fair to assume that with no marked changes in the economy that you could see that increase at the rates that you saw in Q4 or at or above the same rate?

Probably. Giri Krishnan – Credit Suisse: Okay. That was all. Thanks.

The next question is from Jim Macdonald of First Analysis. Jim Macdonald – First Analysis: Just a couple of quick follow-up guys related to the Payroll guidance. How soon is you’re thinking that you could possibly sequentially return to positive client growth? Could that happen next quarter?

Well, last year or it could happen next quarter, but that might not be a good indicator. Because what basically has happened in the last two years is Payroll client growth has been flat in first six months, all of the down happened in the next six months. So I take the time to know where the Payroll revenue growth or Payroll client growth can get positive coming out of the third quarter February 28th. Jim Macdonald – First Analysis: That’s helpful. And then do you look at all at the national jobs data and did that sort of plateauing last month’s book you at all in your Payroll guidance?

I don’t look at it, because I think most of what’s in there is large companies. You have to remember that 40% of our client base has four or less employees, and we are paying about 10 million people in a market, that’s probably 30 million, but we’re on the bottom of the pool or the top, I don’t know how you want to look at it.

I think then also you’re going to have to wait. You’re talking about the large amount of census workers that were in that and there were actually something only like a positive 40,000. Jim Macdonald – First Analysis: Yes, that’s what I’m talking about.

Yes, I think that one to me looked a little strange, and you know if you actually had the DoL data, every once in a while you’ll see something strange in two or three months, you’ll find out that somebody didn’t report or something funny is going on with the data, that one, who knows, maybe there will be something funny there. But as Jon said, the Department of Labor data and IRR data with small businesses don’t normally, I mean, trend wise you could argue that there is some correlation, but they don’t normally on actual specific data point basis, they don’t normally trend together. Jim Macdonald – First Analysis: Thanks very much.

The next question is from Mark Marcon of R.W. Baird. Mark Marcon – R.W. Baird: Just wondering if you could talk a little bit about the health care initiative just in terms of how you would think that that’s going to progress over the course of the year and looking out even a little bit further?

Basically, we’re off to a good start. We’re pretty close to our goals, any little miss we have we think is totally economy related. We are aggressively adding to the sales force again this year. We think we have the right products. We don’t think the health care bill is probably slightly positive thus. Not a big deal. So we’re kind of on the same truck we’ve been on and we learn more and we’ve got more and more people getting experience in the industry, and we get more some marketing. It’s just moving right along. It’s about consistent with what we thought. And like everything else in Paychex, you’d sit here and like it to grow faster, but you got to be patient here. That’s what you’ve got to do. Mark Marcon – R.W. Baird: I mean at what point do you think we could – when we look out over two, three years, are there certain point you would expect that it could get to a $100 million or so or –?

We will get to $100 million within a reasonable period of time. I can’t tell when that is. It’s not 10 years from now though. It’s shorter, hopefully it’s somewhere between three and five, but to say exactly when that point is, I don’t know. In the next 12 months, would probably be a better indicator to that, because if you’re small, you get a growth velocity and you get a lot to pick from. If it gets a little harder, then the growth velocity either maintains or it slows down. But do I have any concern this won’t be $100 million business? No, this will be a $100 million, just a matter of when.

Mark, the problem with the delivery mechanism in the industries is not going to go away. The independent agents do not want to deal with small clients. And this is one of those things that is somewhat of a perfect storm for us, and that we’re already talking to these clients, we have very broad distribution capability. We talk to quite a few clients, potential clients every year. The business is going to be there and it’s hard for me to imagine that anybody else could go after that business in the way that we’re going after it, given how we approach the market for other purposes. So, I mean it’s not going to be the independent agents to be sure. So, I think that business is going to continue to grow, as John said, and I’m absolutely with him a 100% that we’ll get to the 100, it’s just a matter of win. Mark Marcon – R.W. Baird: And then with regards to the margin guidance, I appreciate all the color on the expenses. Is there anything else that’s being factored in?

No. Mark Marcon – R.W. Baird: So, it’s just that there’s nothing above and beyond that?

No, we are realistic. We haven’t changed anything and how we do it and…

It sounds like a leading question, Mark. Do you have some suggestions that you’d like to make? Mark Marcon – R.W. Baird: No. I was just wondering, in prior calls, we’ve talked about pricing a number of times, it sounds like it’s quieted down. I was just wondering to what extent that may be a factor or whether it’s the 100% just the new expenses that we are adding in?

No. It’s pretty much the same old, except for those three things, bonuses, the commissions, and the two wage factors, there is nothing more than that. Unfortunately in Payroll when the darn number goes negative, it doesn’t go positive right away, and you remember it. It doesn’t sound like much. The Payroll revenue is almost minus 6% this year. S, getting back to flat, isn’t like it didn’t move at all, with an environment that’s not exactly red hot. Mark Marcon – R.W. Baird: You’re basically expecting client growth that’s going be somewhere in the 1%?

You guys keep me asking for an answer, I said, I wasn’t going to give. Mark Marcon – R.W. Baird: All right. Thanks, John.

The next question is from Joseph Foresi of Janney Montgomery Scott. Joseph Foresi – Janney Montgomery Scott: Yes, guys. I wonder if you guys could talk about what you are seeing on the small business front. Is there a possibility that there might be some pent up demand, just because those small businesses aren’t getting started due to a lack of capital? Could there be a possibility that things improved quickly should that capital become available to smaller businesses?

Logically, I would say, yes. Joseph Foresi – Janney Montgomery Scott: I know that makes sense logically, but I was wondering if maybe you’ve heard anything from your client base that would lead you to move it, back up your logic?

I haven’t. Joseph Foresi – Janney Montgomery Scott: No? Okay.

No and it doesn’t back it up either. We have so many clients. It’s not like John and I are in touch with client base. I was just saying, if I took my average client to play golf at my country club, I blow the margin for two years. Joseph Foresi – Janney Montgomery Scott: And then just what’s more important to the business? Is it really the business starts at the small business level or is it adding employees? And which do you think would improve first?

Its business starts. Adding employees, we’ve talked about it in other calls. Really, we are in an unusual environment here. Well, adding employees is benefiting us, usually it doesn’t stabilize. So, it’s definitely health of the economy and business starts. Joseph Foresi – Janney Montgomery Scott: And then just lastly, I know you talked little bit about acquisitions, but maybe just your thoughts on that going forward, and just where would temporary, if you do have any thoughts on it, that you’d be looking to target?

I can only touch in general terms and that is that, I would say, it’s one of our highest priorities. We would love to find something to add to the organic growth of the business. Obviously, when we think about that, we buy payroll companies and so we’ll continue to buy payroll companies. We will buy them for amounts of money that would guarantee that they would be profitable for life. I mean we have to find the right ones, but so that will always happen. But in general, the things that we look for are, we look for companies that offer a solution that is inside of our relationship with our clients, if clients needed something that’s natural for us to sell through our existing sales forces, or we can add sales forces if required, but you obviously would like to get the leverage off of your existing infrastructure. So examples of that, we bought time and attendance company it was a natural thing for us to do. We bought a time and attendance company. We then developed the whole series of time and attendance offerings that would gear towards small and medium-sized businesses. The basic company that we bought was actually geared towards larger-sized companies. And once we’ve completed the whole new offering set and learning what we needed to learn about time and attendance offerings and so on, the piece that was left just didn’t make a lot of sense because they were interested in clients who were far larger than clients that we were interested in and so that’s why we sold off Stromberg at the end. Those types of things are natural where you can find the business that has an offering that we can leverage with our infrastructure and it’s something that’s nearby our clients. Joseph Foresi – Janney Montgomery Scott: And the focus is remaining on the small business level?

Absolutely. All medium-sized businesses are clearly our focus. Joseph Foresi – Janney Montgomery Scott: Okay. Great, thanks.

The next question is from Thomas Rippl of Schaper, Benz & Wise. Thomas Rippl – Schaper, Benz & Wise: Hi, it’s Tom Rippl of Schaper, Benz & Wise. Thanks for taking the question. I’m just wondering on the 536,000 payroll clients that you’re reporting would be down about 18,000 from the last fiscal year and 36,000 from the fiscal ‘08, and I’m wondering if you could break that down by those clients that went bankrupt or out of business, those that took Payroll in-house, maybe a competitive loss or some other reason that I don’t have here?

Basically, about half of them would be bankruptcies, maybe 10% would have some type of service issue, and the others would be really a direct result of first off, they just don’t want to spend that amount of money anymore or they try a smaller solution. We know some of them will go back to do it on a sheet of paper.

Well, those are just losses, right, so roughly half would be from losses and half would be from sales that we didn’t get that would be normal for us to get. And on the half that are from sales that we would normally get, better than half of that is caused by a business formation being down. Probably, that would be the biggest. So roughly you could think about it, and we don’t normally go to this granularity, but about half of it from clients we didn’t get to, we would normally get in about half of it from clients that we lost. And as John said on the lost side, the biggest part of those is bankruptcies, and clients not processing. Thomas Rippl – Schaper, Benz & Wise: Do you think you’re losing clients to people who want to do and how can you – you’re just using software in the (inaudible)?

Well, that’s always been there. The people that are interested in doing self-service, they have always been there and they always will be there. The market that we serve is not that market. The market that we serve is the market that wants to fully outsource. It’s the people who come to us, because they want to use their critical resources on things that are revenue generating, not back-office operations and they choose not to go and try and keep up with all of the rate changes that happen every year. And if you don’t subscribe to them fully or comply with them fully, you end up paying large penalties. But there are people out there that are perfectly willing to do it themselves. They’ve always been there. They always will be there. The two rarely crossed boundaries. It’s very unusual for someone who is fully outsourced client who decide to do it themselves, and it’s rare for someone who likes to do it themselves to outsource, there are some minor movements that will happen back and forth, but it’s not anything insignificant. Thomas Rippl – Schaper, Benz & Wise: Thanks, Jon.

There are no further questions at this time.

Okay. Well, we thank you very much for your interest in Paychex. I thought it was a good call and hopefully got everything answered. If not, you know where to find me. And I wish you all a great summer. So, thanks a lot. Bye.