Paychex F1Q08 (Qtr End 8/31/07) Earnings Call Transcript

| About: Paychex, Inc. (PAYX)
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Paychex, Inc. (NASDAQ:PAYX) F1Q08 Earnings Call September 27, 2007 10:30 AM ET

TRANSCRIPT SPONSOR
Wall Street Breakfast

Executives

John M. Morphy - Chief Financial Officer, Senior Vice President, Secretary

Jonathan J. Judge - President, Chief Executive Officer, Director

Analysts

James Kissane - Bear Stearns

Rod Bourgeois - Sanford Bernstein

Kartik Mehta - FTN Midwest

Elizabeth Grausam - Goldman Sachs

T.C. Robillard - Banc of America Securities

Adam Frisch - UBS

Tinjan Wong - J.P. Morgan

Charlie Murphy - Morgan Stanley

Mark Marcon - Robert W. Baird

Gary Bisbee - Lehman Brothers

Tim Willi - A.G. Edwards

Brandt Sakakeeny - Deutsche Bank

Glenn Greene - CIBC World Markets

Sunil Daptadar - Sentinel Management

Operator

Good morning and thank you for standing by. (Operator Instructions) I would like to turn the call over to Mr. John Morphy, Senior Vice President and Chief Financial Officer of Paychex. Sir, you may begin.

John M. Morphy

Thank you. Thank you for joining us today for our first quarter earnings release. Also joining us is Jon Judge, our President and CEO. The teleconference call will be comprised of three sections: a review of first quarter 2008 financial results, including comments and updated guidance for the full fiscal year 2008; an overview from Jon; and lastly, a Q&A session.

Yesterday afternoon after the market closed, we released our financial results for the first quarter ended August 31, 2007. This press release can be obtained by accessing our investor relations page at www.paychex.com. We have also filed our Form 10-Q with the SEC, which provides additional discussion and analysis for the results for the quarter. This filing is also available on our website.

In addition, this teleconference is being broadcast over the Internet and will be archived and available on our website until October 29, 2007. Please access our website for all recent news releases, current financial information, SEC filings, and our investor relations presentation that will be updated in the next week or so.

Fiscal 2008 is off to a very good start. We are on track to achieving our 18th consecutive year of record revenue and earnings. We achieved record net income of $151.1 million, or $0.40 diluted earnings per share in the first quarter and look forward to continuing this streak well into the future.

Total revenue increased 10%, generated by payroll service revenue growth of 8%, human resource services revenue growth of 20%, and interest on funds held for clients growth of 8%. Service revenue growth of 11% was right in line with our fiscal 2008 first quarter expectations. At this point in time, we have not seen anything definitive with respect to new business starts, bankruptcies, or checks per client that would indicate there has been any significant change in economic conditions inside the businesses that we serve. Operating income excluding interest on funds held for clients increased 14%.

For some time, we have been evaluating the best means to share our exceptional ability to generate cash returns with our shareholders. Our cash balance is well in excess of $1 billion and on July 12, 2007, we announced two significant actions.

The first was to commence a $1 billion stock repurchase plan that would quickly reduce our hefty cash position. To date, we have repurchased $500 million, with $400 million, or 8.9 million shares, accomplished during the first quarter of fiscal 2008. The stock repurchase plan will reduce net income while more importantly slightly increasing diluted earnings per share as the lower net income resulting from the repurchase program is more than offset by the decrease in average common shares outstanding.

The second was to reduce the future accumulation of cash by increasing our dividend 43% to an annual rate of $1.20, providing a dividend yield in the 2.5%-plus range. This results in an anticipated dividend payout ratio in excess of 70% for fiscal 2008. For those of you who like to ask how high can it go, we have no established maximum payout ratio and we’ll continually evaluate the best means to share our cash generation capability with shareholders.

We will now refer to the consolidated income statement. Payroll service revenue increased 8% for the first quarter to $361.5 million. This growth was again driven primarily by client-based growth, higher check volume, price increases, and growth in utilization of our ancillary payroll services. As of August 31, 2007, 93% of all clients utilized our payroll tax administration services and nearly all of our new clients purchase these services. Employee payment service utilization was 72% and more than 80% of new clients select a form of employee payment services.

Human resource services revenue increased 20% for the first quarter to $113.3 million. This growth was generated from the following: retirement services client base increased 18% to 45,000 clients. The year-over-year growth was enhanced by the acquisition of a small record keeper in fiscal 2007.

Comprehensive human resource outsourcing clients’ employees increased 22% to 381,000 client employees served, and our workers’ compensation insurance client base increased 19% to 65,000 clients. Additionally, the asset value of retirement services client employees funds increased 30% to $8.5 billion.

Interest on funds held for clients increased 8% for the first quarter to $32.3 million. The increase in interest on funds held for clients was due to higher average interest rates earned and higher average investment balances.

The higher average portfolio balances for the first quarter 2008 were driven by client-based growth, wage inflation, check volume growth within our current client base, and increased utilization of our payroll tax administration services and employee payment services. The average interest rate earned on funds held for clients increased to 4.2% from 4.0% a year ago.

The recent federal funds rate reduction of 50 basis points on September 18, 2007, will negatively impact our interest on funds held for clients for the remainder of fiscal 2008. We have estimated a 50 basis point reduction will reduce income or the revenue in this area by approximately $5 million. There will be another approximately $1 million to $1.5 million change on corporate investment income. Please refer to our Form 10-Q for further information on the affect of changing interest rates on interest on funds held for clients and corporate investment income.

Consolidated operating and selling, general and administrative expenses increased 9% during this quarter. This increase was the result of our continued investment in personnel related to selling new clients, retaining clients, and promoting new services.

As of August 31, 2007, our number of employees increased 6% to 11,900 employees, compared with approximately 11,200 employees as of August 31, 2006.

Operating income increased 13% for the first quarter to $210.6 million. Operating income excluding interest on funds held for clients increased 14% to $178.3 million, and improved as a percent of service revenues to 38% from 36% for the same period last year.

Investment income net increased 30% for the first quarter. This was due to higher average interest rates earned and higher average portfolio balances resulting from investment of cash generated from our ongoing operations.

Future investment income will also be adversely affected by our stock repurchase program and the recent federal funds rate reduction of 50 basis points, which we have already talked about.

Our effective income tax rate was 32.2% for the first quarter ended August 31, 2007, compared with 31.0% in the prior year period. The increase in our effective income tax rate was primarily the result of lower levels of tax exempt income, derived primarily from municipal debt securities and our corporate investment portfolios due to the funding of the stock repurchase program. The rate was also increased slightly as a result of adopting new accounting guidance related to uncertain tax positions, or namely FIN-48.

We’ll now move to a discussion of the balance sheet. Cash and total corporate investments were $959.7 million as of August 31, 2007. Our cash flows from operations were again strong at $253.2 million for the first quarter of fiscal 2008, an increase of 27% over $199.9 million from the same period a year ago.

Our total available for sale investments, including corporate investments and funds held for clients, reflected a net unrealized loss position of $6.3 million as of August 31, 2007, compared with a net unrealized loss position of $14.9 million as of May 31, 2007. The three-year triple A municipal securities yield decreased to 3.64% at August 31, 2007, from 3.71% at May 31, 2007.

Our net property and equipment balance activity during the first quarter reflected capital expenditures of approximately $21 million and depreciation expense of approximately $15 million.

Client fund deposits as of the end of the quarter decreased to $3.5 billion from $4.0 billion due to the calendar timing of the end of the quarter. Client fund deposits vary widely on a day-to-day basis and they averaged $3.1 billion during the first quarter, representing a 4% increase over the prior year. Client fund deposit balances are growing at a lower rate due to continued wage inflation accompanied by no indexed changes in the federal deposit rule since 1993, which means more and more clients are required to pay their taxes weekly versus monthly.

The fund balances benefit from ready checks was not as great as in prior years, as the growth of this product is now much closer to that of direct deposit. Ready checks is a service whereby we pay client employees with checks drawn on Paychex bank accounts.

Total stockholders equity decreased to $1.6 billion as of August 31, 2007, with $115 million in dividends paid during the quarter and $400 million in stock repurchases. Our return on equity for the past 12 months was a strong 28%.

Moving on now to guidance; as we have mentioned before, one of the benefits of our filing our Form 10-Q the night of the press release is that it provides you time to do a thorough review of our release information and then, through your analyst reports, you provide us with an early indicator of where your questions will be focused and/or areas that may need further explanation.

It was no surprise that many of you focused on lower-than-Wall Street expected payroll service revenue growth. I say Wall Street because first quarter service revenues were right in line with our fiscal 2008 financial plan projections.

We would like to reiterate: our guidance is annual guidance and quarter-by-quarter results may not always be in line with our annual guidance. The guidance is based upon our best knowledge at the time and it does not anticipate future ups or downs in the economy and/or interest rate changes. Without factual evidence, these are much too difficult to predict with any accuracy.

We have a track record of being extremely close to our guidance numbers and a track record of revising them when it becomes apparent we need to do so. We believe our guidance ranges are extremely narrow.

For example, the revenue range on payroll is only $13 million, or 1% of payroll revenue. If we believe our best estimate for fiscal 2008 payroll revenue is still within the guidance range, we do not change the guidance until we believe otherwise.

A question was raised as to why we did not change total revenue guidance for the recent 50 basis points reduction in the federal funds rate. We have talked about the affect in many of the documents but to put this in perspective, the 50 basis point reduction affected projected total revenues by less than three-tenths of a percent.

Regarding diluted earnings per share, the affects of the stock repurchase program, 50 basis point reduction to the federal funds rate, and the adoption of FIN-48 related to effective income taxes, has complicated things a bit. The simplest way to look at these changes is the stock repurchase program is slightly accretive to diluted earnings per share as the reduction in net income related to funding the stock repurchase program is more than offset by the benefit of fewer common shares outstanding.

The 50 basis point reduction in the feds funds rate and our adoption of FIN-48 each reduced diluted earnings per share approximately $0.01 or approximately $0.02 in total from our guidance of July 2007. Our guidance in July 2007 on net income did not include any of the affects of the stock repurchase program because we had not yet implemented it.

So based on those comments, and the fact that our revised guidance estimates are based on current economic and interest rate conditions continuing with no significant changes, our guidance is as follows: payroll service revenue growth is projected to be in the range of 9% to 10%; human resource services revenue growth is projected to be in the range of 20% to 23%; total service revenue growth is projected to be in the range of 11% to 13%; interest on funds held for clients is expected to be relatively flat year over year; total revenue growth is projected to be in the range of 11% to 13%; corporate investment income is projected to be decreasing by approximately 35% to 40%; the effective income tax rate is projected to be approximately 32.5%; and net income growth is projected to be in the range of 12% to 14%. Obviously the net income growth has been affected by the stock repurchase program and that affect will sit there until we get out another year and the earnings per share remains relatively the same, which is the more important statistic.

Purchase of property and equipment in fiscal 2008 are expected to be in the range of $80 million to $85 million, and fiscal 2008 depreciation expense is projected to be approximately $65 million, and we project amortization of intangible assets to be approximately $17 million.

You should be aware that certain written and oral statements made by management constitute forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements should be evaluated in light of certain risk factors which could cause actual results to differ materially from anticipated results. Please review our Safe Harbor statements on page three of the press release for a discussion of forward-looking statements and related risk factors.

I will now turn the meeting over to Jon, who will provide his comments on the quarter before we open for questions.

Jonathan J. Judge

Thanks, John. Good morning, everyone. You can tell from John’s comments and our press release that we are pleased with the first quarter results and our solid start to the year. As you know, we were coming off an exceptional fiscal year that ended in May ’07, a year that resulted in our 17th consecutive year of revenue, record revenue and profits, as well as new all-time highs for both client retention and client satisfaction.

Obviously we immediately made plans to make fiscal ’08 our 18th year in a row of record-breaking revenue and profit, and as John mentioned at the close of the first quarter, we are well on our way.

First quarter results were both very solid and very much in line with our expectations and our full-year plans and guidance. Total revenue increased 10% to $507 million, the first time in our history that we surpassed the $500 million per quarter run-rate and set up the fiscal ’08 as the year that will break through the $2 billion mark for the first time.

Service revenue grew 11%, consisting of 8% payroll revenue growth and 20% HRS revenue growth and was right in line with our first quarter plan.

Operating income excluding float was also strong for a first quarter at $178 million, a 14% increase and a 2% improvement, margin improvement from 36% to 38% revenue, and earnings per share hit 40%, also a 14% improvement and a full penny better than street consensus.

So the financials came in right in line with our expectations and we’re obviously happy about that.

Operationally, the quarter’s results were also very solid and I would like to share a few observations on that. Our sales units, core, MMS, HRS, Stromberg in Germany, are all fully engaged with the territory staff and kick-off meetings well behind us. Our sales teams are off to a good start and turned in a very solid record performance.

Our operations teams, both field ops and HRS ops, continued their excellent service delivery results, chasing yet again new records in client SAC and client retention, and finally, our strategic investments are all on track and generating lots of excitement, be it our insurance offerings, the new 401K offerings, what we are doing in Germany, Stromberg, or our latest acquisition, BeneTrac.

If you put it all together, as we exit the first quarter feeling pretty good about our start and reconfirming our guidance with minor adjustments primarily relating to the 50 basis point reduction in the fed funds rate.

I would like to touch on two other areas very briefly and then we’ll open the lines to your questions. The first has to do with the economy and what we are seeing. There’s been lots of commentary in the news and trade press about the economy and I think rightly so. There’s obvious concern over new job creation stats, fed fund rate moves, the whole sub-prime debt debacle, and the supply/demand imbalances in the real estate markets, to name just a few.

So how is all this affecting our business? Well, we are watching our key indicators very closely and we’ll continue to do so, but so far, as John alluded to earlier in his comments, we don’t see anything in our universe that we’d classify as a definitive economic downturn, other than the impact that the 50 basis point decrease has on our liquidity investments.

Our business, and primarily because we are focused on small and medium-sized clients, tends to be reasonably resistant to the effects of economic downturns. We were relatively unaffected when the oil prices rose precipitously and so far we remain relatively unaffected by the current economic conditions.

The last thing I wanted to comment on was perhaps the best news that occurred in our first quarter, for shareholders, at least, and that’s the exciting news about our significant increase to our dividend and the announcement of a $1 billion stock repurchase. I know you guys are all very familiar with both of these announcements, but that’s not the point of my comments.

I bring it up again only to say thank you to a large number of people that are on this call that helped us think through our options concerning the capital structure and the best uses of our cash. Your experience and your opinions are very valuable to us and I see this as just one example where your engagement with our company has helped us manage Paychex to what we believe is the best possible outcomes for our shareholders, so sincerely, I wanted to thank all of you that helped us think that through and do that publicly.

With that, John and I would be now happy to take your questions and comments.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from James Kissane, Bear Stearns.

James Kissane - Bear Stearns

Thanks. John, could you just elaborate a little bit on why you expect core payroll revenue growth to accelerate over the balance of the year? I know it is lumpy quarter to quarter, but just --

John M. Morphy

You talk about acceleration. We don’t even think that way. The payroll number, if you talk about being off what you guys had is $2 million or $3 million on $150 million. That’s too close for me to call.

Obviously we would like to have been a little bit better but it still was within the guidance. It was right on what we expected in our financial plan and only time will tell.

You could sit here in the macro world and you can get all worried but I have to say; we spent -- obviously we knew people would be asking us about the economy -- we spent countless hours and I drove a few of my people absolutely crazy with statistics looking at this economy from all angles. And at the end of the day, we came to the conclusion we haven’t seen anything definitive to say anything about anything that is worth saying.

We’ll keep pushing our payroll revenue but when you get down to a couple million, it’s hard for me to sit there and say that’s a trend or something.

James Kissane - Bear Stearns

I don’t want to read into the term definitive, which you used a few times.

John M. Morphy

We haven’t seen anything.

James Kissane - Bear Stearns

Is there a change in tone of your customers or anything?

John M. Morphy

No.

James Kissane - Bear Stearns

Okay, and I guess Jon Judge, just comment on the progress towards the 5% net new client growth target.

Jonathan J. Judge

The 5% is in our model, right? It’s when we talk about the makeup of the 12% revenue growth. In the model, we say five. We are quite happy if we get anywhere near four. Obviously we would love to be 10 but we feel like we are in pretty good shape.

As John said, we looked at the quarter. We read a lot of the comments that came out last night after the announcement and I guess my comment to your earlier question would be that we are once again in one of those positions where our model and your model may be a little bit out of sync. If we felt like we had a problem, we’d clearly tell you but we don’t think we have a problem.

Your question about where does it -- there’s lots of places to gain improvements in our revenue streams, whether it’s more new clients, larger new clients, better job on loss, on our client loss world, better ancillary penetration. I mean, there’s plenty of things that we are working on and plenty of things that will get us where we want to be. So we feel pretty good on where we are.

James Kissane - Bear Stearns

Great. Thanks.

Operator

Our next question comes from Rod Bourgeois, Bernstein.

Rod Bourgeois - Sanford Bernstein

I wanted to -- I know you were going to keep harping on this economic question, but your guidance doesn’t assume any change in the economy. Can you give us some updated guidelines on what are the main things you are watching and what type of a swing could occur if you were to start seeing certain of those factors turn to the downside?

John M. Morphy

Well, we are basically watching our CPA business. We watch new business starts. We look at checks per client. We look at pricing, how good the price increase went in, which it went in very well. We look at all the statistics that we have. Okay, now we don’t look at too much by geographic part of the country and most of the country seems to be pretty consistent, and we don’t look at [SIC] codes.

Now, if something happens and the first thing you usually see change is checks, and if checks start to go down, you watch that. Now, the impact on us on checks is that the last check you lose, the first check you lose is the lowest revenue check but obviously it’s a high profit check. Now, in the recession back in the early 2000s, checks per client dropped kind of precipitously over a three- or four-month period of about 4%.

I want to be careful when I say that because Golisano was in this business a lot longer than I’ve been in it and he would say that was the most precipitous decline he ever saw, so I think each one of these -- whatever you want to call them, cycles -- is different and there is always something a little bit different in each one, so I don’t think you just look at the last one and say that’s what’s going to happen again.

But that’s what we would start to see and the things that normally show the thing is starting to go south, we haven’t seen them yet. That doesn’t mean it couldn’t happen. You look at the macro part and it kind of is alarming but at the same token, we don’t see them.

Now, we have another connection. I’m not going to say what it is but it’s in a different business than ours and they have verified the same thing we’re seeing -- in other words, they think maybe it happened but they haven’t seen anything yet.

Rod Bourgeois - Sanford Bernstein

Okay, and let’s say something like checks per client started to taper off, what levers do you have in the business to offset that? Is it just a net negative when that happens or do you pull the margin expansion lever harder in order to offset it? I mean, you clearly had good margin expansion in the current quarter. Could you pull that lever harder if you started to see a downturn in checks per client?

Jonathan J. Judge

There’s the obvious answer, which is checks per client is one piece. What’s your average revenue per check? What happens with your frequency with the clients you have? What’s happening with the clients that you are losing? Are you losing smaller clients? Are you losing larger clients?

I mean, it’s why we look at lots of different indicators, not just one. But in the spirit of your question, if we started to see checks decline, I mean, you’d obviously have to look at things like going after, figuring out ways to get more clients in. I am sure our sales guys would tell us, as they are looking at that every day trying to figure out how to get the maximum number in. We have different levers that we can pull relative to either price increases or different charges that we could do relative to W2 processing and get a better or different focus on our MMS business, if this was a core problem.

There’s lots of different things we could do but I think the main thing is what John was telling you, is when we look at our indicators, and one of them that’s kind of an interesting one is we look at what would -- what would you describe it as? You’d call it the new job creation inside of our existing clients because we do all of the compliance reporting to the federal government on new hires. When we look at those numbers on a year-to-year basis, they are absolutely flat out flat. When you look at the labor statistics, they show you the first decline that they’ve seen in four years.

Now those two answers are materially different and the only thing that I would tell you, and it’s why some of the people on this call have called us out in the past, why we tend to be relatively resilient to economic downturns, what happens in the small business environment is not the same that happens in the economy in general.

Rod Bourgeois - Sanford Bernstein

Right, and just to pick up on something you mentioned, the ability to dig harder on sales if there were a slowdown in the economy, how is the sales force positioned here in the first quarter of the fiscal year? Did you get off to a good start in terms of sales force growth and productivity trends?

Jonathan J. Judge

We got off to a very good start in all of those and the thing that I sort of tend to watch the most is where are we on open territories. The two things that I think one is more of a short-term issue, one is more of a medium to long-term issue, but the two things that we tend to watch are how are we on staffing our territories and time in territories for the existing people, and then the second thing is how are we doing on attrition because that really has to do with the tenure of the people in the field and how well they are doing.

As I mentioned in my earlier comments, our sales teams got off across the board, by the way, because we have multiple sales teams, got off to a very solid start. We are happy with where they are. We obviously always push them harder but we are pretty happy with where they are and it’s what in large part is what gives us confidence on the year.

Now remember, the sales piece in our world, once you are in flow in the current year really only affects between probably 12% and 15% of our P&L. The impact that the sales team has is most largely noted in the following year.

Rod Bourgeois - Sanford Bernstein

Got it. Thank you, guys.

Operator

Our next question comes from Kartik Mehta, FTN Midwest.

Kartik Mehta - FTN Midwest

Thank you. Good morning. John, I had a question for you; you talked a little bit about pricing and I wanted to get your thoughts on maybe during the last recession, was it hard to get your normal price increases or was this a business that you really didn’t have a difficult time achieving those price increases?

John M. Morphy

Pricing is not a problem. It wasn’t a problem last time. Now, one thing, we are positioned better today on the pricing because we used to put the price increases in and we didn’t really train our payroll specialists as well to deal with making sure the client understood the value proposition. We are much better at that, so actually some discounting levels, discount levels on renewing business are actually better than they were, or ever been. So I think the pricing still stays okay.

Kartik Mehta - FTN Midwest

And then, you are going to be done with your share repurchase here in calendar 2007. Is this something you’d consider doing, extending because the business generates so much cash and it doesn’t sound like there’s large acquisition opportunities out there?

John M. Morphy

Let me say it a different way; first off, all the board has had discussed with it was the $1 billion and the dividend increase. We do realize a balance is required and we had a very good discussion at the board meeting and the recommendation that was implemented is exactly what management recommended. We had good discussion on both sides of the case. There was good discussion. It doesn’t mean anybody felt one way or the other, just it was good discussion.

Looking forward, I think we will be looking and talking to them about what do we do about stock option dilution and how do we continue a balance of the dividend and repurchase? Now obviously you’re not going to see us buy another billion. I don’t think you’ll see us take on debt to repurchase stock but right now, we are off to a great start. We had two good announcements and you’ll see us continue to evaluate capital structures, but what we’ll do exactly will depend on discussions with the board and their feelings, and right now I can’t predict them but you can anticipate that we have made some changes that would be ongoing.

Kartik Mehta - FTN Midwest

And last question, John, considering the fed funds rates are coming down and that’s going to have a negative impact on your client fund interest income, would you consider using maybe a line of credit, having debt for a few days to help increase the amount of income you get out of the flows?

John M. Morphy

We’re doing that already. That’s a new change that came out of a capital structure change. For example, when we are raising the billion, we decided we would not basically liquidate all our long-term positions. We would put some of the long-term positions in different places, so we will take on debt periodically. Not frequent, but we do know we can maximize returns by borrowing less than 20 days a year.

Kartik Mehta - FTN Midwest

Thank you very much.

Operator

Our next question comes from Liz Grausam with Goldman Sachs.

Elizabeth Grausam - Goldman Sachs

Great. Thanks. Considering how much disruption we saw in August, certainly in the equity markets and the credit markets, was there anything you saw in your business as you moved month-to-month through the quarter, and potentially any change from August to September moving into the current quarter, in business conditions and potentially new business creation surrounding what was happening in the credit markets?

John M. Morphy

Absolutely none and the thing that is interesting is that it’s the same thing happened when you saw the precipitous rise in the oil prices and there was a lot of concern about the impact that was going to have on the economy and there were a lot of theories about how it was going to impact expense and gasoline charges for sales forces and blah, blah, blah. We watched it pretty closely and we literally did not have a single blip on our radar screen, and as the whole sub-prime market unfolded and then there was a lot of talk that it was going to bleed into the money center banks and so on, again, it’s not an issue that appears to affect small business America in the least amount.

The only significant impact that we saw relative to sub-prime is that one of the large sub-primes that went bankrupt was one of our clients, so we lost a client. But relative to the 570,000 installed base that we have, we saw absolutely nothing that would indicate to us that it was going to bleed into our business.

Elizabeth Grausam - Goldman Sachs

Great, and I know you mentioned, John Morphy, that you don’t really look at your client base maybe by industry sector, but just in general when you think about your business mix by industry, and we’ve certainly seen payroll growth most dramatically hit in housing and construction markets, somewhat in financial services, are those areas just by nature of the employment trends in those businesses that you are particularly underweight, would you think?

John M. Morphy

No. Basically, I think when you look at us, and as we sit here on the phone, we think small to medium-sized businesses. What you really have to get focused, our average client only has 17 employees and 40% of the clients have less than five, so I think some of those industries that get hit are in larger segments of employees, so we are not fully representative in them. But I do say that when you take small business America and measure it as I just stated, we have a pretty uniform distribution. The only thing that tends to be away from something is if the accounting is complicated and there’s a lot of inventory accounting, we tend to not be in those areas because our supporting stuff isn’t good enough to solve all those issues.

But for the most part, we are in the simple part of America and pretty representative across the board.

Elizabeth Grausam - Goldman Sachs

Great. Thanks a lot, guys.

Operator

Our next question comes from T.C. Robillard, Banc of America Securities.

T.C. Robillard - Banc of America Securities

Great. Thank you. Just two questions; on the client balance growth of 4%, if I remember correctly I think the thought process was kind of 6% to 7% growth for that. Is this just a function of a seasonal pattern or how should we be thinking about the growth in client fund balances?

John M. Morphy

This is the third weakest quarter you get. The next quarter is the weakest. The strongest is our third and our fourth is the next best.

The 4%, as we got this phenomenon going on that hasn’t been increasing as much as we thought it would. It’s where the balance averages are but we’ve got to look at the whole year. We are hoping for six to nine, probably close to six. We’ll just have to wait and see what happens. And again, this is an area we don’t control.

I don’t think this is a sign of anything but remember, what we charge people is all based on transactions. How much money people get, we’d like to charge on that basis but we really can’t, but we’ll see. But the real period that’s going to be indicative on that is going to be the bonus season, which will be in our third quarter.

T.C. Robillard - Banc of America Securities

Okay, so at this stage, fair to say that that’s not necessarily a red flag from your standpoint?

John M. Morphy

No, I wouldn’t read anything into it at this time and I think there will be some indicators that come off this bonus season and what it looks like. A year ago, the bonus season stayed strong, so when you look at the bonus season, it will give you an idea of how good people really did in calendar 2007.

T.C. Robillard - Banc of America Securities

Okay, and then just separately, obviously continued strength and improvement on your operating margins, ex float about 37.5% in the quarter. That continues to trend up. Is this a situation as your mix continues to improve, as you continue to get, as you’ve highlighted on past calls, kind of higher revenue or higher quality kind of new customer adds, can that go to 40%? Is that achievable or are we starting to kind of bump our heads up against where that number could go?

John M. Morphy

I wouldn’t say we are bumping up against it. I mean, obviously I tell the joke, when it gets to be, we get 100% profit, so we get the money and don’t do anything, I mean, obviously you can’t get any higher than that. But I think there is still room in this. We talk about our formula at 12 and 15. The 12 is very important. The 15 is extremely important and our people are focused on knowing we want to keep working towards the 15 and we look at what we have to invest and we look at the balancing act and you might get a mulligan on this in the revenue slightly because you can live without that, but you aren’t going to get any mulligan on missing the 15, so we knew in the quarter we wanted to watch expenses. We had a budget. We started off cautious and people did a very good job across the whole Paychex universe of not spending money they didn’t need to spend but spending the investments we needed to make. So we got to the end of the quarter, we felt very good about what our people accomplished.

T.C. Robillard - Banc of America Securities

Okay, and then maybe just drill down a little bit more on that; what’s a bigger driver to the incremental margin there? Is it simply just scale in terms of on the payroll side or are you getting more of a bump from increased ancillary services?

Jonathan J. Judge

It has more to do really with the investments that we make. If you wanted to just look at the business from one standpoint, if our business stayed static, then it is very conceivable that we could continue to drive that margin higher and higher. You wouldn’t, as John said, you wouldn’t drive it past the point where your investments are zero because that sort of a strategy that gets you to one last quarter before you turn the lights out because you stopped investing in your business.

But the main thing that affects us or will affect that margin is where our investments, either in our infrastructure, investments in our people, if we go into new businesses building new sales forces and so on. We constantly make those trade-offs watching the impact that they will have on our P&L.

There was a comment made earlier by Kartik I think about the use of our cash and that there aren’t a lot of big acquisitions out there. The issue is not that there aren’t a lot of big acquisitions out there. We are very interested in acquisitions but we have such a high pretax profit and such a strong P&L that it’s unlikely that we are about to go jump into some business that’s got half the profit margin and is going to drag our profit margins down, so part of it is we are pretty careful about what we look at in terms of bringing companies in but we are clearly interested in continuing the M&A side of it.

The thing that I think drives it mostly is the mix that we have in the expense structure in the investment of our business.

T.C. Robillard - Banc of America Securities

Thanks, Jon.

Operator

Our next question comes from Adam Frisch, UBS.

Adam Frisch - UBS

Thanks. Good morning, guys. A quick question for you, John Morphy, on the payroll stuff. I don’t want to get my head bitten off here but since you were asked the first couple of questions, the stock has come down so maybe I’m reading into it a little bit too much, but maybe the questions weren’t answered as well as people wanted them to be. The payroll growth the last three quarters now are a little bit below the 9%, which is causing people to think why doesn’t it come back. So if you could just kind of go through the puts and takes in a given quarter of why it might be up and down a little bit. I totally agree with you. It’s a $6 million difference between 7% and 9% growth, so it’s really not that big of a deal but it is having an impact on your stock and it will be the thing that people discuss going forward. So maybe you can address why you think the growth is going to be better in the next several quarters. Are there things you are doing now like bringing more customers on board, or sales are accelerating, or anything like that that would suggest that?

John M. Morphy

Well, we keep pushing all the envelopes. Again, when I look at the year, and first off, you look at the revenue difference in the first quarter; that was your revenue difference. It wasn’t mine, okay? We hit the number I thought we would hit based on what the plan was, okay?

I know people can look at this and I also know that we are in a world right now where everybody is looking for anything that can signal bad, okay? That’s what they are looking for, and so if I look at that number, I would look and say yes, I wish it was a little bit better. I do, but I can’t go get all alarmed over a couple million dollars on $150 million.

Would I like it to have been better? Yes, so I look forward to what we’re doing. I talk to Walter and the commitment the sales people are making. Some of the adjustments we made to have a better sales year this year and they are optimistic. They keep pushing. We haven’t seen anything that says that things have changed and we are going to keep going on that basis until we reach the point where it’s got to be something different, and you’ve got to believe -- we’ve got a long track record of being very good about guidance, and we’ve got a track record of changing it when we needed to change it. We don’t sit here and say we won’t tell them because that doesn’t do me any good. I’ve got a lot of employees so the whole thing needs to be in the right place, but the same token, we don’t give up easily either, so we are optimistic.

We understand there’s some macro-environment issues there, that somebody might say well, I don’t know, but we are running the business the best we can. Whether a recession is coming, I don’t know, and we are going to keep doing the best we can and even if a recession does happen, we are going to manage this the best way possible and we think we will be one of the better performing companies in that environment than somebody else, so we are going to keep plugging.

Adam Frisch - UBS

Okay, I think that pretty much says it. Jon Judge, one of the comments that you made I thought was real interesting, that small businesses aren’t an exact proxy for the economy. So if I take the bear case and I look at Paychex or some of your peers, you are in employment and you’re exposed to rates and so forth -- not necessarily a great place to be right now but that’s completely overlooking the business model and the durability of it and everything you’ve done in the past.

So maybe you could just outline for us why you think the small business might not be a great proxy for the economy and why you think that the business will perform better than maybe what the bears are thinking right now?

Jonathan J. Judge

Purely history. I mean, just go take the time, if you’re interested in it, and watch what happened to our company when there were different turns in the economy and you’ll see that -- and now would probably be as good a time as any. Of the bears that are sitting out there and you hear the same thing -- actually, you’ve been saying it and we hear the same things and people talking about sub-prime and people talking about selected, at least selected parts of the United States and housing starts and real estate sales, and you’ve got retailers now that are apparently calling for a warning on their sales and a potential problem in the holiday season and so.

There’s a lot of people right now with labor statistics who are down the first time in four years, and so the bears are out with their claws. And I just say, I look at our company and I look at what’s happening in our business and we are not having any of those issues and then I go back and look back to, I mentioned the oil crisis that was not too long ago -- not a blip on the radar screen. Lots of people forecasting it was going to cause all kinds of problems and it just appears to be a fact of life that in our business, we tend to be much more resilient to these economic downturns than the rest of the economy.

Adam Frisch - UBS

Okay, that’s great. Last question I wanted to ask you about was the -- I know you didn’t mention any of the 401K and healthcare in the release. I know we are still a little ways away from them becoming more material but can you provide an update on their progress and when we might see them highlighted as a standalone initiative?

Jonathan J. Judge

First of all, I don’t think I would be the one that would tell you that they are not material. We just don’t happen to break them out for you. The 401K business is --

Adam Frisch - UBS

Last we checked, I think they were in the $5 million to $10 million range or so.

John M. Morphy

Healthcare but not 401K.

Adam Frisch - UBS

Healthcare, correct.

John M. Morphy

401K is over $100 million.

Adam Frisch - UBS

Right.

Jonathan J. Judge

So you just threw healthcare out as an example -- you specifically want to hear about healthcare?

Adam Frisch - UBS

Yes, healthcare and then the 401K, the expansion that you are doing there with more plans and how that’s ramping up.

Jonathan J. Judge

We’ll start with the healthcare. The healthcare is going at least as well as we expected and if we looked at the results that we got in the first quarter, then we would say that it’s going better than we expected because it is ahead of plan. We remain very bullish on healthcare. We spent a lot of time talking about it, why we think it’s close to a perfect storm for our coverage model, our distribution model, our experience in the agency business in the past. So we remain very bullish on that and things are going quite well and as I said in earlier calls, we’re sort of accelerating that as fast as we believe that we can in terms of growth and staying under control, so it’s all good news about healthcare.

401K, we announced a whole new series of offerings last year. I think we mentioned in prior calls we actually sold significantly more in the guided choice and the open architecture offerings than we expected to sell last year. We remain strong in those this year. We are also having a very good year with the original offerings that we had in the 401K, more of the fixed fund offerings, so that’s in part what caused the HRS to rebound back into the 20% range. So in both of those areas, we are feeling pretty good about where we are.

Adam Frisch - UBS

Great. Thanks, guys, and just keep doing what you’re doing and we should be okay.

Operator

Our next question comes from [Tinjan] Wong with J.P. Morgan.

Tinjan Wong - J.P. Morgan

Thanks. Most of my questions have been answered but just a few follow-ups; so client fund balances, any way to I guess isolate the impact on slowed balance growth due to the more weekly payments than before?

John M. Morphy

No, but we know it’s got to be 3% or 4%.

Tinjan Wong - J.P. Morgan

Has this played out and could the timing of these payments continue to contract over time? I’m just curious about the longer term dynamics of that.

John M. Morphy

Well, we’ve said flowed income is going to grow slower than the rest of our business. I don’t know how fast it contracts but obviously it is going to have some impact on us.

Tinjan Wong - J.P. Morgan

Okay, and then on the higher tax rate, I heard the explanation there; any way to also quantify the impact from the lower expected yields versus the FIN-48?

John M. Morphy

We talked about taking about $6.5 million. Figure, I’m rounding, that 20% is taxable and 80% is not and you have a statutory tax rate of about, federal and state for us is about 36%, 37%, you can run the numbers.

Tinjan Wong - J.P. Morgan

And then, Jon Judge, just lastly, sales force retention, hiring, relative to expectations, any update there?

Jonathan J. Judge

No, things are going fine there. The main thing, as I mentioned earlier, was making sure that we had the right number of sales people on board, trained and in the field at the start of the year. We did very well in that this year and the attrition numbers are, as I’ve mentioned in the past, that is something that I am never going to stop harping on, so we’ve made good progress. We’ve got lots more to do.

Tinjan Wong - J.P. Morgan

Great. Thanks for all the details.

Operator

Our next question comes from David Grossman.

David Grossman

Thanks. My questions have been answered.

Operator

Charlie Murphy with Morgan Stanley, you may ask your question.

Charlie Murphy - Morgan Stanley

Thanks. I wanted to ask how much revenue came from BeneTrac in the quarter and how much you expect for FY08.

John M. Morphy

Minimal, it was less than $10 million.

Charlie Murphy - Morgan Stanley

Okay, and then excluding PEO, what would HRS revenue growth have been in the quarter?

John M. Morphy

I didn’t calculate it so I don’t know. Obviously better.

Charlie Murphy - Morgan Stanley

Okay. Thanks.

Operator

Our next question comes from Mark Marcon, R.W. Baird.

Mark Marcon - Robert W. Baird

Good morning. I was wondering; could you remind us what the price increase was that went through?

John M. Morphy

About 4%.

Mark Marcon - Robert W. Baird

And then, in terms of the core payroll growth, you mentioned that there are certain things you can do. I’m assuming that you would expect a pick-up with regards to new clients added, based on what you were saying about your sales force commitments? Is that an accurate characterization?

Jonathan J. Judge

I hope so. You have to go out and sell it and you have to remember, our selling season, while every quarter is important, the season is December, January, February. When you talk about making the year or not making the year, that’s pretty crucial.

Mark Marcon - Robert W. Baird

And looking at that, you would say that your sales force is probably more, because of the improved retention, is probably in better shape this year going into that December, January, February period than it has been in the past. Is that a correct assumption?

Jonathan J. Judge

I think so.

Mark Marcon - Robert W. Baird

Okay, so part of what could potentially increase the growth rate from 8% to 9% or 10% on the core payroll would be improved sales?

Jonathan J. Judge

Yes, but look, I don’t want to get off of this point that John made earlier; this problem is in your mind, not in ours. We are exactly where we thought we were going to be in the first quarter.

Mark Marcon - Robert W. Baird

No, your revenue was exactly in line with my estimates, so --

Jonathan J. Judge

Not you, I meant in general, but we are not feeling a problem.

Mark Marcon - Robert W. Baird

Yes, I’m not saying there is a problem. I’m just trying to clarify certain things. And then, the incremental margins on your fee businesses were 48% this last quarter. It looks like what you are basically saying is you accelerated your operating, your fee income growth to 14% and if I go through the guidance, it seems to imply that we are going to get to 15% for the year, maybe even a little bit more than that. We did 14% in the first quarter, so that would imply a little bit of acceleration. Is that a correct assumption?

John M. Morphy

It’s the way the timing of investments fall. If I go back five or six years ago, we used to get very significant margin improvement in the first quarter and actually gave some of it away in the next three quarters. We’ve gotten to the point now where we get pretty good margin improvement but don’t give away much in the next three quarters. Actually, we keep getting a little bit but it’s just the timing of expenses and our investments have really changed. They are a little more in the sales forces. You’ve got the healthcare thing where the investments wind up a little more in the front end of the year than they did in the past when they would’ve been in software or something else.

We keep watching it. The goal is to get to 15. I don’t know that we get way above 15 but the management team is highly motivated to get to 15.

Mark Marcon - Robert W. Baird

And then last question on the HRS side; you obviously had acceleration with regard to the growth there. What was the area that you were most pleased with?

John M. Morphy

Well, see, this is -- we’re going to go right back to the same subject. You guys talk about acceleration. I don’t look at anything quarter to quarter because this business has some things that are a little bit seasonal to it. I look at what I’m expecting and so again, just as my payroll number was close to what I expected, my HR number was better than your number. It was better than your number but it wasn’t better than my number. It was -- the end of the quarter, you take all this money -- we were within hundreds of thousands of dollars on both revenue categories. I’m sitting there, we rerun the base and we expect to be that close and it’s just -- but I understand what you are looking for and it’s kind of frustrating, probably, on both of our sides, but I know you are trying to find to look at and now we’re looking at numbers that are really miniscule and --

Mark Marcon - Robert W. Baird

No, I was just asking what you were most pleased with, John, in terms of --

John M. Morphy

I know but all I’m saying is you’re looking at something, what did I walk away pleased from. I walked away, I was right where I thought I would be.

Mark Marcon - Robert W. Baird

So you were essentially equally pleased with all elements?

John M. Morphy

Yes. I mean, let’s face it; you know we would like payroll revenue growth to be better but it is kind of what it is and we are okay with it and we plan for it accordingly.

Mark Marcon - Robert W. Baird

Okay, great. Thanks.

Operator

Our next question comes from Gary Bisbee, Lehman Brothers.

Gary Bisbee - Lehman Brothers

Good morning. Just a couple housekeeping questions; it looked like in the 10-Q last night you may have adjusted slightly the mix or the targeted mix of your floats balance more towards bonds and a little less towards short-term, from what you said a couple of months ago in the 10-K.

John M. Morphy

Yes, that’s true and it’s the direct result of the stock repurchase program.

Gary Bisbee - Lehman Brothers

Okay, all right, so that more would have been on --

John M. Morphy

We thought originally we were going to have to basically sell off all long-term and we found a way, by borrowing -- I don’t think it’s -- it’s less than 20 days, might even be less than five -- by borrowing a few days a year. Not yet; they are primarily more in the, our third quarter that we can shift more of that and keep it at long term with better rates.

Gary Bisbee - Lehman Brothers

So it’s more due to the corporate portion of that than the client flow portion?

John M. Morphy

Absolutely.

Gary Bisbee - Lehman Brothers

Okay, I also saw in there, it looks like your liability for claim in the PEO business is actually moving up this year to $1 million from 750. I guess wondering, I know that’s not a big deal, but why, given your risk aversion historically around this business?

John M. Morphy

Because actually, I’m risk adverse but the way the insurance company works, it’s in my favor to take that little bit of extra risk. That wouldn’t wind up being a very material number.

Gary Bisbee - Lehman Brothers

Okay, and then on the recent BeneTrac deal, is this going to be something that you just move into the business as an existing add-on, or are you going to aggressively try to sell this separately like you did a couple of years ago with the time and attendance acquisition?

John M. Morphy

It will be both. We’ll continue with the sales that are currently being done by BeneTrac and then we will integrate it into our products and drive it into our, primarily our MMS business, so it will be both.

Gary Bisbee - Lehman Brothers

Okay, and then I also saw that Germany, I think you said in the 10-Q was less than 1% at this point. Is that -- I realize you’ve only been there for a while but is it safe to assume that that is growing much faster than the U.S. business, and then if we look out a couple of years, at some point that will begin to be a more significant piece of the mix, or is the growth similar to what you are doing here?

John M. Morphy

The growth is faster than the -- what would be the average, or even above average growth of a new city that we would open in the U.S., so that part has all been great. And clearly, it is our hope that it will become material in the future or we wouldn’t have made the investment in the first place.

Gary Bisbee - Lehman Brothers

Okay. Thanks for all the color.

Operator

Our next question comes from Tim Willi with A.G. Edwards.

Tim Willi - A.G. Edwards

Thank you. I wanted to ask a question around the issue of capital structure and management. I definitely appreciate that earnings growth is very important to the story and shareholder value, as is dividends, payouts and growth. I was just curious if you could also discuss within the capital decision-making process where returns on capital sort of rank in those discussions with the board. You clearly have an enviable level there, and just sort of -- is that an important part of the discussion that we don’t really want these returns to come down, so we’re very careful about making sure we are not retaining any more capital than we need and we’ll make sure that we’re dispersing that one way or the other? Could you just throw a little color on that topic?

John M. Morphy

It wasn’t as sophisticated as that, although there were some opinions amongst the analyst community that we should have spent time on that analysis. That is, that the cash sitting on the balance sheet is growing slower than any other part of our business and is there a strategy to reduce the cash, or even reduce all the cash and take on debt? I think that was from a firm that was selling -- but the way that it worked with the board really was what is the right amount of cash that we need on the balance sheet to responsibly run our business, have available for acquisitions and so on. And then, once we got to that point or some general consensus -- and that’s an art, it’s not a science -- what do we want to do with the excess cash?

Once we got ourselves to the point that we went north of $1 billion, I would say that it was largely John and myself who started the discussions about the fact that we now are in a position where we had probably more cash on the balance sheet than we needed. We started to do the modeling on the cash flow into the future and it became very obvious that if we didn’t do something, we would soon have $2 billion on the balance sheet, and then continue on from there.

And so that naturally started the discussions and what we ended up doing is we ended up coming to the conclusions that we came to, largely by eliminating the options that were not attractive to us and then modeling the ones that were left and picking the ones that we felt were most attractive, and that’s what you ended up seeing us roll out.

So it wasn’t really anymore sophisticated than that.

Tim Willi - A.G. Edwards

Do you think at some point in the future there might be more focus around that topic, in conjunction with earnings growth and dividend payouts that we want to try to make sure that the capital we’ve still got in this business is generating returns of X amount, and if we think that those returns would be under pressure, then that falls into that discussion about giving back more capital to keep those returns at an appropriate level?

John M. Morphy

I actually think that you do what we do, the return on capital number kind of takes care of itself.

Tim Willi - A.G. Edwards

Fair enough. Thank you.

Operator

Our next question comes from Brandt Sakakeeny with Deutsche Bank.

Brandt Sakakeeny - Deutsche Bank

Thanks. I just have a quick question to clarify what you said earlier. John, did I hear you right when you said that you were getting no growth from your checks per client this quarter? And would you happen to have that number in the year-ago period?

John M. Morphy

I didn’t say that.

Brandt Sakakeeny - Deutsche Bank

Okay. I thought you said it was flat.

John M. Morphy

No, we said we looked at the economy and it’s flat, and we looked at checks, looked at lots of statistics. We reach the point we think it’s time to give checks per client data again, we’ll do it and we don’t think it’s reached that time because the reason we stopped is the reaction to minor changes in checks was overreacted to, to the point where your reaction was greater than what I could calculate it to.

Now, at the same time I say that, and we have not made a discussion of this, or detailed decision, is I do believe we try to give you people the best information we can give you and if it happened, I haven’t seen it yet, that discussing checks per client was relevant to you understanding our business, we will then seriously consider disclosing it again. But again, I believe it would be for the period of time it was deemed necessary and not a permanent thing.

Brandt Sakakeeny - Deutsche Bank

Okay, fine, and just on the PEO side, there was and has been some volatility, just around the [inference] of reserves. Should that be more stable this year? Is the -- are you getting quarterly checks on that?

John M. Morphy

It already got more stable. Some of the impact that we were worried about in the first quarter was minimized. It wasn’t as bad as I thought it would be, but if Florida keeps lowering rates, it’s going to keep affecting us, which the tendency is they lower them for too long and then they eventually put them back up. They have lots of stuff going on in Florida with real estate, et cetera, so lots of combating desires, so we’ll see what happens. We’ll just keep watching it and fortunately for us, the PEO is not that significant to me, so this winds up being more of a nuisance than a big headache.

Brandt Sakakeeny - Deutsche Bank

Okay, great. Thank you.

Operator

Our next question comes from Glenn Greene, CIBC World Markets.

Glenn Greene - CIBC World Markets

Thank you. Good morning. Just a quick question for John Morphy; on the expense side, the expense growth was 8.6%, which was kind of the slowest in at least a couple of years, or in a long time and obviously sort of ties in with the margin ramp that you have from 4Q to 1Q, which was really strong. Was there any timing of investments that we should be aware of that sort of picks up in the back half of the year, or any just color on your thinking on how the expenses came out relative to your expectations?

John M. Morphy

We didn’t -- right now, we don’t have anything that I think is a significant ramp. One thing we did though, we made a change here to some of our incentive programs about two years ago and they are working extremely well in really motivating the whole team to do certain things, and we looked at the first quarter and said we’ve got to look at the budget and we’ve got to watch expenses and we probably have to watch them really hard all year.

Because let’s be realistic; three years ago, the surprise up was revenue up. Now, if I said here well, I’m very optimistic, I think you’d think I was crazy if I told you I am looking for a very optimistic surprise on revenue. So we are in this zone, we’re watching our stuff and people have all got identified expenses that can go if we need to have them go, and people are very watchful, just like you guys are on your businesses.

So we are doing what we need to do and I wouldn’t say it’s anything unusual. The good news is this is really becoming a real part of the Paychex culture to watch this.

Glenn Greene - CIBC World Markets

Okay. Thank you.

Operator

Our next question comes from Sunil [Daptadar], Sentinel Management.

Sunil Daptadar - Sentinel Management

Just a clarification on the human resources services revenue for the first quarter, you reclassified a portion of that revenue into HR services. It’s a modest reclassification. I just wanted to know, what was the reclassification and are we going to see for the reclassified revenues for the second quarter or third quarter or fourth quarter of last year?

John M. Morphy

No, we are not changing -- the numbers are what they are. I think we changed one modestly but again, the number is pretty small.

Sunil Daptadar - Sentinel Management

Yes, the numbers were small but why was the reclassification done now and what was the type of reclassification?

John M. Morphy

It was done a year ago. It was done in the second quarter. We had some HR revenue that was in payroll that we thought was better in HR than payroll, a minor amount of money.

Sunil Daptadar - Sentinel Management

I see.

John M. Morphy

Companies have reclasses all the time, minor ones, trying to make sure the reporting is as good as we can possibly make it.

Sunil Daptadar - Sentinel Management

Okay, because had the reclassification not done, the HR, the payroll services revenue growth would have been just 7.1% versus 7.8% reported.

John M. Morphy

Actually, it would go the other way. The payroll revenue growth would have been slightly larger and the HR growth would have been slightly lower.

Sunil Daptadar - Sentinel Management

Okay.

Operator

Our last question comes from Rod Bourgeois, Bernstein.

Rod Bourgeois - Sanford Bernstein

John Morphy, just a quick follow-up; was there any payroll days issued in the quarter where there was a mismatch in payroll days this quarter versus the year-ago period?

John M. Morphy

No, not that I know of. My people would have brought that up. No, I think the days were the same. I think we can have that issue and trust me, if I knew that issue was the issue, I would -- no, we didn’t have any day issues.

Rod Bourgeois - Sanford Bernstein

All right. Thanks for addressing all the questions, guys.

John M. Morphy

No problem. Thanks for asking. I mean, we sit here and we are not always going to agree on everything and that’s okay, but I really do appreciate the openness and we believe our 10-Q process has greatly enhanced our understanding and I hope you see us as reacting to what your concerns are. We actually changed some of our disclosure a little bit on this call because we knew there were a couple of things that were a bit complicated, namely the earnings per share.

So we are trying to be as responsive as possible and we really appreciate your interest in Paychex.

Operator

At this time, there are no further questions.

John M. Morphy

Well, that was a great place to end. Thanks a lot. We thought we had another great quarter and we’ll see what happens and we look forward to talking to you guys again in three months, so take care and enjoy.

Operator

Thank you for joining today’s conference call. All parties may disconnect at this time.

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