John Morphy – SVP, CFO and Secretary Tom Golisano - Chairman of the Board

Julio Quinteros – Goldman Sachs Tim McCue – William Blair Company Gary Bisbee – Barclays Capital Giri Krishnan – Credit Suisse Jim Macdonald – First Analysis David Grossman – Stifel Nicolaus Jim Kissane – Merrilly Lynch Jason Kupferberg – UBS –: Adam Frisch – Morgan Stanley Joseph Foresi – Janney Montgomery Scott Rod Bourgeois – Bernstein Ashwin Shirvaikar – Citi Chris Mammone – Deutsche Bank Glenn Greene – Oppenheimer Mark Marcon – R.W. Baird Tien-Tsin Huang – JPMorgan Chase David Parker - Lazard Capital Markets Thomas Rippl – Schaper, Benz & Wise

Good morning and thank you for standing by. [Operator instructions.] I would like to introduce your host for today's conference, Mr. John Morphy, senior vice president and chief financial officer, and Tom Golisano, chairman of the board. You may begin.

Thank you for joining us today for our first quarter earnings release, during which we will review our first quarter 2011 financial results, guidance for the full year fiscal 2011, followed by a Q&A session. Also with us today is B. Thomas Golisano, our founder and chairman of the board. He will provide some comments also, before the Q&A. Yesterday afternoon, after the market closed, we released our financial results for the first quarter, ended August 21, 2010, and filed our Form 10-Q, which provides additional discussion and analysis of the results for the quarter. These are available by accessing our investor relations page at www.paychex.com. In addition, this teleconference is being broadcast over the Internet and will be archived and available on our website for approximately one month. Our financial results for the first quarter were better than expected. We are pleased to note many of our key indicators continued to show modest improvements. Year-over-year checks per client improved steadily throughout fiscal 2010, increased slightly over 1% in the fourth quarter of fiscal 2010, and we saw the trend continue into fiscal 2011 as checks per client improved 1.2% in the first quarter of fiscal 2011. Checks per client is one of our most important indicators in evaluating current business conditions. Our client base in the first quarter benefitted from better client retention, as our client losses for the first quarter were 12% lower than for the same quarter a year ago. Year-over-year the client base is down due to client losses exceeding client sales, basically in the last half of fiscal 2010. Sales of new units remained a little bit difficult, and were down slightly for the first quarter compared to a year ago. We are implementing changes to our sales process that we expect will improve new unit sales and Tom Golisano will refer briefly to them during his opening comments. While the trends in our indicators and our financial results are very encouraging, we remain cautious and/or conservative when forecasting expectations for the remainder of the year. The economic recovery is moving slowly, and we will wait and see how things evolve before adjusting our guidance for fiscal 2011. I will discuss our guidance for 2011 in a few moments. In summary, payroll service revenue is better than anticipated, as checks per client improved slightly. Continuing the trend initiated during the fourth quarter of fiscal 2010, we implemented a 3% price increase that was also accompanied by slight improvements in discounting. The August 31, 2010 client base was off approximately 3%, compared to August 31, 2009. Again, all of that drop took place in the last half of fiscal 2010. HRS service revenues were very close to plan, and in addition we continue to aggressively control our costs and were able to generate operating income that of certain items had 37.3% of service revenue for the first quarter, compared to 36.2% a year ago. I'll now move on to the consolidated income statement. Payroll service revenue increased 2% for the first quarter, to $361 million, largely attributable to a 1.2% increase in checks per client and annual price increases. Human resource services revenue increased 10% for the first quarter to $146 million, excluding revenue from Stromberg time and attendance operations, which was sold in October 2009. HRS revenue would have increased a strong 13%. We'll give you a better look at HRS service revenue in a few moments. Combined interest on funds held for clients and investment income decreased 7% for the first quarter. Yields available on high quality securities continue to remain low. Expenses increased only 2%, due to costs related to continued investment in our sales force, customer service and technological infrastructure, improvements in productivity within operations, with related lower head count that offset this increase somewhat. Our sales representatives are in line with our expected 2% growth for fiscal 2011. Operating income net of certain items, which excludes interest on funds held for clients, increased 7% to $189 million for the first quarter. We continue to manage expenses, which is reflected in the increase in operating income net of certain items as a percentage of total service revenue. Net income increased 7% to $132 million and diluted earnings per share increased 6% to $0.36 per share. HRS revenue growth reflects modest improvements in economic conditions, coupled with annual price increases. Some additional highlights are as follows. Paychex HR Solutions client employees served increased 13% to 522,000 employees as of August 31, 2010. We continue to see positive results from expanding our PEO offering throughout the country. Insurance services clients increased 7% to 94,000 clients as of August 31, 2010. We continue to focus on the expansion of our insurance services nationwide. Health and benefits service revenue grew 41% to $10 million for the quarter, driven by a 35% increase in the number of applicants. The asset value of retirement services client employees funds increased 20% to over $11 billion, influenced by recovery in the financial markets and more larger plans converting to Paychex. High quality investments continue to earn very low yields. During the first quarter of fiscal 2010, our primary short-term investments vehicle was U.S. Agency discount notes. Starting in November 2009, we began to invest in select A-1 P-1 rated variable rate demand notes, or VRDNs. We have gradually increased our investment in VRDNs to $606 million as of August 31, 2010, from $226 million as of May 31, 2010. During the first quarter we earned an after-tax rate of approximately 0.22% on VRDNs, compared to approximately 0.08% with U.S. Agency discount notes. Our long term portfolio was also invested predominantly in municipal bonds, general obligation bonds, pre-refunded bonds, which are secured by a U.S. government escrow, and essential services revenue bonds. We have maintained our conservative investment strategy, and have not recognized or realized any impairment losses on our investments. Our investments are high credit quality securities with AAA and AA ratings, and short term securities with A-1/P-1 ratings, with more than 95% rated AA or better. We limit the amounts that can be invested in any single issuer or geographic area. Our priority has been, and will be, towards liquidity, as to ensure we can meet all of our cash commitments to clients that took place as we transferred cash balances from their accounts to ours. The implementation also of the new platform for core payroll continues to go well, and customer satisfaction levels are at historical high levels. Taking a look at our financial position, our liquidity position remains strong, with cash and total corporate investments of $716 million as of August 31, 2010, and no debt. Our cash flows from operations were $194 million for the first quarter of 2011, up 4% from a year ago as a result of higher net income. Funds held for clients as of the end of the first quarter were $3.3 billion, compared to $3.5 billion as of May 31, 2010. Funds held for clients varied widely on a day to day basis, and they averaged $2.9 billion for the first quarter, a year-over-year increase of 1%. The average investment balances increased slightly due to an increase in state unemployment insurance rates for the 2010 calendar year, offset partially by lingering effects of the difficult economic conditions on our client base. Our total available-for-sale investments, including corporate investments and funds held for clients, reflected net unrealized gains of $85 million as of August 31, 2010, compared with net unrealized gains of $67 million as of May 31, 2010. The three-year AAA municipal securities yield decreased to 48 basis points as of August 31, 2010, from 99 points as of May 31, 2010. We had no securities in an unrealized loss position at the end of the first quarter. As of September 22, 2010 the total investment portfolio contained net unrealized gains of approximately $77 million. Total stock [unintelligible] equity was $1.4 billion as of August 31, 2010, and return on equity for the past 12 months was a strong 34%. Guidance. Our guidance philosophy has been in place for a long time, and that has been to provide guidance based upon what we are experiencing in financial terms and quantifying our expectations for the current fiscal year. Our current outlook for fiscal 2011 is based upon current economic and interest rate conditions continuing with no significant changes. Consistent with our policy regarding guidance, our projections do not anticipate or speculate on future changes to interest rates. As previously mentioned, although our first quarter results were better than anticipated, we remain cautiously optimistic/conservative about the economic recovery and we'll watch how fiscal 2011 evolves before determining if we should revise our guidance for the year. Our guidance as previously provided is as follows. We project payroll service revenue to be flat compared to fiscal 2010. Human resource services revenue growth is expected to be in the range of 10% to 13%. Interest on funds held for clients is expected to decrease by 12% to 17%, while investment income is projected to increase by 24% to 27%. Operating income net of certain items as a percentage of service revenue is expected to range between 34% and 35% for fiscal 2011. Effective income tax rate is expected to approximate 35% for fiscal 2011 and net income is expected to improve slightly over fiscal 2010. Purchases of property and equipment in fiscal 2011 revised for infrastructure investments are expected to be in the range of $90 million to $95 million as we continue to invest in technology and infrastructure. Fiscal 2011 depreciation expense is projected to be in the range of $65 million to $70 million and amortization of intangible assets for fiscal 2011 is expected to be approximately $20 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 in the press release for our discussion of forward looking statements and related risk factors. At this time I'll turn the meeting over to our founder and chairman, B. Thomas Golisano.

Thank you John. It's been about six years since I've done one of these conference calls, and I must say I'm doing it with mixed emotions, but I'm certainly happy to be doing it. I'm going to talk about a couple things today, primarily, first, is the search that is going on for a chief executive officer of Paychex. We are at a stage where it could be days or it still could be months. In other words, we have solicited a number of candidates that have reached the board interview level. We're very happy with the selection of the candidates we have this time. Six years ago, because it was not as public an event as it has been this year, we seem to have attracted a lot more good quality candidates for this position. That's about all I can say about it at this time. Coming into the company on a daily basis over the last few months, I have some observations I'd like to share with you. Generally, the condition of the company is very solid. For example, our branch operations, our centralized processing things like tax pay, and 401K administration, accounting, treasury, human resources, and information technology all seem to be very solid these days. The one weak area is in the sales of our core payroll product, and I'm going to be talking about that. First of all, I think everybody knows that we serve a very large marketplace. There are over 11 million businesses in the markets that we serve. With all the payroll processes added up together there's about a 15% penetration rate by our industry. So you can say it's a wide-open environment still today, and should continue for probably decades. As far as Paychex goes individually, though, from a sales perspective, the one dramatic thing that's happened over the last several years is the closing ratio of our presentations that turn into sales has deteriorated significantly. Now we think there's a number of reasons for this, but I think it would be important that you know what we are doing to overcome the situation. First of all, we all know that sales - there's nothing really new in the sales world, except maybe the Internet, which we think we're doing well \with. So when things deteriorate, such as our closing ratio, it's usually something that we're doing wrong, or we have an issue relative to our product or pricing. So let me go over with the things that we are looking at and working on with a high intensity. First of all, we are modifying our product offering and its pricing relationships. What that means is that the bundling of our products and what we offer at a single price point is going to be modified and that price points are probably going to be modified. There are going to be some announcements coming out in the next seven days that I think when the general marketplace sees it they're going to be very pleased and I think if any of you folks see it you're going to understand exactly what Paychex is doing. The other thing that we've had to look at, and I know there's going to be some changes in - our compensation plans have evolved into not being incentivized enough for both our sales reps and our sales management. So we're going to be making some changes there. Sales training at field and corporate level, always a high priority at Paychex, we're going to be making some modifications there too to be more current with the current environment. Another thing that probably seems small to you, but it's important to us because we have so many sales people - we have over 2,200 of them - we've got to do a better job of territory and quota assignment. We've been weak in this area and we've allowed some follies to go on far too long and we're going to be taking care of those. Our national sales manager, Del Humenik, who has now been with the company a year, has been really focused on CPA programs and our general activity level in the field as far as the sales processes are concerned. So I can tell you right now we're very cautiously optimistic. We think the things that we are doing are the right things. It's going to be very interesting to watch our progress over the next 3-6 months to see how this evolves, but I can tell you that our goal is to get our closing rate back to where it was traditionally, and if we are able to do that, it will allow us to get back to the general growth rate that the investment community and the shareholders have been expecting over the last decade. Obviously it hasn't been accomplished during the last 4 or 5 years. The economy has had something to do with it, but we think that's just a part of it. The intensity here is pretty strong, and so, we'll see. At this point I think we'll take questions if anybody would like to ask us some.

[Operator instructions.] And our first question comes from Julio Quinteros of Goldman Sachs. Julio Quinteros – Goldman Sachs: Just real quickly on the compensation plans comments, Tom, can you just go back through that on the expectation for modifications there? Just a little bit more detail in terms of what you're thinking about there with regards to the overall compensation approach?

Well, I think what happened to Paychex, and it's very understandable why it happened, in our effort to increase retention of sales people we leaned a little too high towards base pay and not enough on the incentive side of the equation. We want our sales people to be productive. We want them to make money, and we want them to make more money than they've been making, but in order for us to do that, we have to change the equation between base pay and incentives, and that's what we're going to be doing.

Next question is from Tim McCue of William Blair Company. Tim McCue – William Blair Company: I wanted to first ask about the closing rates. Can you give us some color? Was there any differential between the closing rates as you were pitching to new businesses or businesses that did it in house or were you pitching versus competitors that you saw a differential in how those closing rates have trended the last few years?

No, it's actually been pretty broad-based, and I don't think I could responsibly give you a breakdown of where our closing ratios have been lower or higher compared to, say, history. So it's pretty broad-based. The one thing that did occur of course during the bad economic times is number of small businesses being started diminished somewhat and that probably had an effect. But other than that it's pretty broad-based.

Next question is from Gary Bisbee of Barclay's Capital. Gary Bisbee – Barclays Capital: I guess, Tom, how much of this is you getting involved again here in the last couple of months relative to the plan that's come together under the new sales leadership over the past year? And is this something that you're just telling us about now but you've been working on for a while? Or is this really a host of changes that have come together in a short period of time recently?

More the latter than the former. When I came in the door about two or three months ago, it was real obvious as a board member and chairman and to the individual people in the management team on sales that we had some issues. I think if I contributed anything I contributed an impetus for change, which there seemed to be a reluctance for. And we spent a lot of time over the last 60 days contemplating the measures we were going to take and the efforts we were going to put forth. So it's sort of culminated and we had our national sales conference last week and a lot of this information is starting to be disseminated to the field. But it's been more of a culmination of efforts, and it's been myself combined with Del and some of his folks.

Okay, and then can you give us any more of a preview of the changes you referred to in product and or pricing? Are we talking reducing price to do more volume on some of these, or what types of issues exactly are you looking to do?

It depends on the product area, and quite candid with you, I'm not going to give you too much information because understandably our competition is probably listening to this call. We don't want to give them any advance information. But I can tell you it's pretty broad-based in the core payroll area. We're at this time doing very little with HRS or MMS, mainly because their success rate has been much higher than in our core payroll area. So it's pretty broad-based, and it's a combination of product offering and price. That's about as far as I can go.

And then I guess I'll finish with one financial question. Despite the rebound in revenue this quarter, operating costs were down 2% year-over-year. Should we think about there being some delay in timing of the expense rebound happening after revenue? Or is there some efficiency gains that you're still able to get in a positive revenue environment as we look to the next few quarters?

We believe we can always get positive cost controls in a positive revenue environment. That's been a Paychex tradition for years. To walk in and expect to get expense growth equal with revenue growth just isn't going to happen unless you're in something unusual. Basically, the first quarter is historically our best margin quarter. The price increase goes in, the price increase went in pretty good. Discounting has stabilized some, probably improved slightly, and at the same time when you're in these times our operating people are very conservative on spending money. I probably wish they would tell me a little bit better what they weren't going to spend, but it's more important that they do what they've done. They've watched the client base, the core advance system is off to a real good start now. It's really stabilized, settled down, customer sat's back to the highest levels. So things are working very well. Now I think as the year goes on, you'll see a little bit - I don't want to say pressure on that margin, because it really is the margin a little bit higher than normal - as the selling process we hope it gets better. We'll have to pay more out in commissions and you'll see us start to continue to invest a little heavily in some things that should spur growth in the future. So all in all, the first quarter was great on revenue. Checks per client were strong, that's where the extra revenue came from. It was all in payroll. HRS is right on what we expected. Expense control was exceptional as the core advance system allowed the branches to be a little more efficient. Hope that will go on and we kept investing in the things we wanted to, so we didn't turn anything off. But I think we had a little bit of a jump there, and we'll see how it goes. But right now we're cautiously optimistic but you know when you're in times like this, we did not want to take one quarter and jump the guidance way up and then for some reason something happened and have to reduce it. So we'll watch the year closely and we're optimistic and we think things will be slightly better than we thought. But until we get a little more traction on this we're just going to be our usual conservative nature.

Next question is from Giri Krishnan at Credit Suisse. Giri Krishnan – Credit Suisse: A quick question on the CEO search. I know you can't give us a lot of detail, but compared to the last time would you say there's more interest from folks from outside the industry, and are you as predisposed to hiring from outside the industry versus within?

There's definitely been a lot more interest from both within our industry and outside of our industry, and I think the reason for it is quite frankly is because it's been more of a public event. When I decided to retire as CEO, we decided to do a very quiet, silent search, and because of that I think it actually restricted the number of good, quality candidates that we could find. But this time we seem to have been deluged with people that are interested in the job and may have some qualification for the job. So we're much happier with the process this time than I was six years ago.

And just on the cap ex likely investment for the year, could you maybe speak to where you're spending the additional moneys? I think there was a reference in the queue to investing more in technology and infrastructure?

Basically, as you're well aware, we put a lot of money into the core system over the last six or seven years. On a much shorter focus, we're now taking a hard look at the MMS system and making sure we get that integrated as well as it can be, and we're making improvements to that system. We also have agreed to buy a building in Rochester that came up, got a good deal on, that's less than $10 million so it’s not a significant event. But pretty much we will continue to invest. We went through the last recession in the early 2000s investing. We believe that these things will turn around. We believe we've got a long term presence and we're going to continue to be successful and if we stop investing that's going to impede that progress. So I wouldn't say when it comes to investing in things we've turned anything off.

Next question is from Jim Macdonald at First Analysis. Jim Macdonald – First Analysis: Could you tell us a little bit more about your channel strategy? Some of your competitors have accounting related products and also maybe talk about some of the other potential channels and what's happening with those?

Sure. About four or five months ago Del introduced a CPA program called Explore. It's very very aggressive. It's designed to increase our call activity on CPAs and obviously for the reason to increase our referral points from CPAs. That's always been a trademark of Paychex. I think maybe it got a little less active than it should have been over the last few years. But Del is certainly doing everything he can to reactivate it and get that going. We're also becoming much more competitive in the Internet area. If you go on the net you'll see continuous advertisements. In fact if I put in my name I can't even get by three Paychex advertisements, including some friends of mine that I have. But in any event, we're getting really aggressive in that area and I think that's good. But the real, basic sales mechanism at Paychex is CPAs and our current clients. Two-thirds of our clients literally come to us from those two sources. Banks are a small factor in our world, probably a little bigger in the other guys' portfolio. We do some activity in it, but it's not major compared to the other two. And I don't think Paychex is going to change. We've just got to get back to the levels of accomplishment that we used to enjoy, and I think that's pretty easy. It's going to take intensity and focus and maybe some minor modifications in our product and our pricing. And that's what we're going to do. There's no reason why this company should not be successful from a sales and marketing perspective.

And just as a follow up, any thoughts on when you can get back to positive client growth?

I can't make a prediction like that, but I can guarantee you one thing, the intensity of the board of directors and myself is very very high on this issue. We think it's the number one issue in the company, and we're going to be doing everything we can to accomplish it.

I would say that the 2011 goal does hit positive client growth.

Next question is from David Grossman at Stifel Nicolaus. David Grossman – Stifel Nicolaus: First I wanted to ask about the trend in checks per client. They've been positive the last two quarters, and my recollection at least is that typically at the front of the cycle it's more difficult to grow the checks per client given that so many new businesses are coming on that are smaller than the average in the base. Is that what's happening now, is that there's just diminished new business starts? Or is there something more fundamental going on within your client base that -

There's no doubt that the new sales not picking up as quickly as it does probably is helping checks decline a little bit, but I don't think that much. I think what's happened here is they fell so sharply. They fell more than they've ever fallen before. But I think right now the businesses that are kind of running things are reasonably good right now. You've got some troubled ones but the lost client numbers started to diminish pretty significantly, and those businesses that have fought through this difficult time, a lot of them are hiring people, not tremendous numbers, but they're hiring enough, and they're not laying many off anymore. So I think the 1% that's been really sitting here now for - the 1% has been sitting here for six months but better yet I think is the fact that checks per client, the stability in it, has been here now for over 15 months. So my belief is that the small business end of the economy, where people are kind of proven participants, they're doing reasonably well. Maybe not great, but they're not suffering as much as they were. The thing that gets this economy to go a little bit faster, which is the growth part of the engine, isn't quite where you'd like it to be. But I still think checks per client would be positive. Maybe it wouldn't be over 1% , but it would be close to 1%, and that in itself is higher than any time I've seen it since I've been here.

And could I ask you just on the, just switching gears quickly, on the new initiatives, if in fact given what you're doing and some of the things, Tom, you outlined, does this have any impact on the margins of the business? Or are these things that get absorbed just in the ordinary course of business and the growth of the business as you imagine it to be through the course of 2011?

I would think there's not going to be any major impact on any of the margin areas, except the one that John mentioned earlier. Obviously if we sell more, our incentive pay goes up, our commissions. But as a proportion to everything else that's going on it's fairly minor and we'd be glad to do it every day. Incremental revenue in this business is very very profitable, and offsetting sales commissions is something that doesn't bother us at all. We look forward to it.

And one other question, just on the CEO search. Again, I know you don't want to talk much about this, but what are the parameters that you're looking for? What are the key parameters that you're looking for?

I think if you were to ask our board members you'd get a slightly different opinion from each of them, but I think if I were to use one parameter that applies to all of us it would be that we're looking for somebody who wants to be a long term builder, not a caretaker, not a maintenance person, but somebody that really wants to build something. Because not only is there such a huge market in the United States, there's a huge market worldwide, and quite frankly this company's been pretty dormant in trying to seek out opportunities in other parts of the world. So we want somebody who's got a long term focus, somebody who wants to build an organization and grow it at a very predictable, steady rate, and that's our number one parameter. Quite frankly, it was always my biggest parameter when I was running the company. So that's what we're looking for if I was to underscore one particular trait.

The next question is from Jim Kissane, Merrill Lynch. Jim Kissane – Merrilly Lynch: Just a quick question. When you don't close the business, where do these small companies go? Are they going to traditional competitors? Are they going to small processors? Are they going to Internet-based or software-based competitors?

Jim, thank you for asking that question, but I can tell you we've done a lot of market research and I'm not going to answer the question. There's a couple surprises in there, but we're going to let everybody else find out for themselves. This market research has directed us in a particular direction that we think we're going to have a pretty positive result, but we can't say anything until we make it happen.

And kind of going back to David's question, I think you and John said the infrastructure is solid in terms of technology and controls, but there's some concern out there that a new CEO will want free rein, and big investment in innovation, technology, which could have some short term and long term impact on margins. What's your sense of that?

That philosophy is something that the board of directors is very aware of and probably has added a level of caution to our search. I think the issue you bring up is a very very important one, and something we've got to be very careful with in the selection. This company, I don't want to say it's destiny is predetermined, but because of its marketplace, because of its opportunity, it would be foolish to go off in different directions that are not as predictable and not as opportunistic as the payroll processing world is concerned. So it's definitely a consideration in the search.

And in core payroll and adjacent markets you feel like you're on the right side of the curve in terms of technology and innovation?

Yes, I mean getting a new core payroll system in was a major advance for us, and we feel from that perspective we're in really good shape, not only from the product offering perspective but from an operational point of view for our payroll [specialists].

Next question is from Jason Kupferberg of UBS. Jason Kupferberg – UBS: Just wanted to start with one on the CEO search here, but Tom, just wanted to pick up on your comment. You said "could be days, could be months." In the "could be days" column, should we interpret that as any offers actually having been made at this point and you guys waiting for a decision from those candidates who offers have been made to? Or is that not the case?

I wouldn't portray it that way. I'll take one little step here and I'll say a group of candidates has been submitted to the board for interviews.

Okay. Fair enough. That's helpful. And just to pick up on your comments around the need to improve sales effectiveness and obviously changing some of these processes. I guess for the last year or so during the recession a lot of what we had been hearing from Paychex is "we're not losing share, it's just the economy, maybe in some areas we're actually gaining a little bit of share." But you seemed to highlight a bunch of company-specific factors that have caused a decline in close rates. So I just want to reconcile all that and get your personal view. Has the company lost market share during the downturn, or not?

The term "market share," I don't know how applicable that is when you're sitting there with an industry that's got 15% market penetration. What was lost was our ability to grow at the traditional rates that we've grown over the last 20 years. And one way to visualize it is if you know you're going to lose a certain percentage of your clients to all the kinds of reasons you lose clients for, and then you want to grow your client base say by 5% or 6%, you know you've got to sell 5% or 6% more of your clients than you lose. And we haven't done that successfully in the last several years. And we obviously are determined to get back to that level. If that falls into place, then we can start talking again about double-digit revenue and profit growth. We're not there. Obviously we want to be there and we're going to work very hard to get there. And we've put together some plans and ideas and so forth that I think gives us a very good chance to do it.

Just a last one from me on the international front, since you brought it up. I know Germany was an initiative a number of years ago, and I think it's probably still well less than 1% of revenue, but as you look at other markets outside the U.S. are there any that kind of jump out in your mind as being more attractive potentially? I guess all the different regulatory and compliance parameters in different places around the world have to some extent complicated international expansion in the past, but it sounds like it could be another growth lever going forward.

Right, I haven't had a lot of opportunity to do a lot of work in that area, and I don't think it maybe my place to do it. Probably the new CEO - that's going to be his primary responsibility. I do know, though, that when I look at the world, and I know there are governments that are very intrusive into the employment process, there has to be opportunities for us. We haven't spent a lot of time lately trying to focus on those opportunities, but it's something that we should be doing.

And your next question is from Kartik Mehta of Northcoast Research. Kartik Mehta – Northcoast Research: Tom, I wanted to get your thoughts on - you talked about obviously changing sales and I'm wondering over the last couple of years how much you believe the environment was a reflection of the economy and how much was execution on Paychex's part. So kind of a percentage in your opinion that was a result of not having maybe the right products or prices, or compensation structure, versus what the economy was doing?

I'd say 70% internal versus 30% economy.

So would that mean that -

That's a very strong statement you make and you're allowing me to beg, but that's -

I've got to add one thing though. He doesn't believe you can even say a recession ever took place. [Laughter.] Just add that to the equation. I'm not saying I disagree totally with what he said, I don't mean that, but it's a blend. But execution definitely was a problem.

And then John, what would be the biggest concern you have for not raising guidance? So if you look at all the metrics, what's the one that you're concerned about?

I didn't have any concern on any metric. It was - you know, it's funny. I read - the process works great - I wake up in the morning and I read what all you're saying and I go, "are they cautious, are they conservative?" So I add a few words to the speech and - No, it was simply a matter - I don't like changing anything off only three months. I think we're off to a good start. We've got to watch spending. We'd like to see the sales thing pick up. If that picks up I'm going to have some more expense. We couldn't have been more pleased with the first quarter in every area except the sales one, and I think sometimes you need to go through that to get the ability to really push hard, and we're doing that. So we felt real good about it, and I just don't want to take three months in a world like this and say "okay, now we think this is going to happen, and this is going to happen," because I do not want to go backwards on this. So don't believe that we're at any unbelievable concern about something. That's not true.

And then just a last question. Has there been a change in how you're acquiring clients over the last two years, or as you've done all this market research. Have you come to a conclusion that maybe there's a difference in how you have acquired clients today versus in the past?

Not really. The difference has been the quantity of them, quite frankly. Just our closing rate and our productivity per sales rep has dropped to a fairly significant level. There's been a significant drop. We think, as I've said, that we can bring it back. We don't know how long it will take, but we're doing all the right things I think so far.

Yeah, slight changes. We're not - we used to be a little more aggressive in buying small payroll providers. The reason we stopped is we're very aggressive now with the lower prices in the small, small ones. We've found in some of the larger ones, no matter how we would write the non-compete, our retention on the ones that were - we paid more for and were a little bit larger - just wasn't worth what we were doing. So that's a modest change that affected client growth a little bit but not dramatically.

And then any thoughts on what the original closing rate was and what it is now?

I'm not going to disclose that.

Any magnitude? Is it 30% less? 40% less?

I'm not going to disclose it.

Next question is from Adam Frisch of Morgan Stanley Adam Frisch – Morgan Stanley: Just want to ask -we've been hammering away at this CEO thing a little bit. Tom, you're obviously more involved now than you have been in the last several years. A lot of questions are headed your way. You're comprising a lot of the Q&A here. Do you expect to be more involved going forward? Or are you just kind of subbing in here until you find the right guy, and then you're going to back off and go do other things - while still being involved obviously in Paychex, but not the day to day things?

My guess is I'm not going to be involved in the day to day things, but I'll bet you that I'll probably be more involved than I have been in the last five years.

And how does that impact the search, and who might be interested in -

I think that's going to depend on the candidate. A lot of people try to make a big deal out of this founder thing, that they're difficult to work with. I don't know. I guess I'd have to ask our people's opinion on whether or not I'm difficult to work with. But the fact of the matter is -

Can I ask Morphy that right now, or no?

Ask him.

You can ask. [Laughter.] I don't think he's difficult. I think when you look at the questions here one thing - this is going about how I would have expected. I've been doing this a long time, and I knew that when you got on this call and you had access to Tom for the first time in a while that the questions would change here, and I think they've stayed off some of the accounting stuff. First off, the accounting stuff was pretty simple this quarter, and you know you can always get to me to get those answers. So this is going pretty much how I would have expected.

And then just on the outlook. John, I appreciate the fact you don't want to change on a dime, just after three months, given the volatility, but is it all just kind of general uncertainty or is there anything about the product bundling pricing thing which may add some volatility into the predictability of the -

I don't have any specific thing I’m sitting here worrying about. We've got a bunch of things we're doing. Selling season is so imperative to us that you want to see how that looks like. I will add right now we're into September checks are still strong. We went a period here in this recession where no matter how low I made the forecast for the next month we couldn’t make it. We now haven't missed a revenue forecast in payroll in quite some time. And checks stay strong, so I think this economy has some strength to it. I'm on - some bank stuff, I don't want to say the name of the bank, some you do know, but their feeling is that things are reasonably good. Not perfect, and isn't going to come back fast, but there is some substance to what's going on. Obviously it could be tenuous, based on what's going to happen, but I think most people are saying we're just going to go slow, but it's going to keep going. So that's kind of what we see, and so until we see how the selling thing shakes out exactly and some other things we're doing, and how we invest - and we're not going to change it that dramatically, so to me I'd rather - we have a long tradition of doing what we say we're going to do, and we want to keep it that way.

Okay, got it. Last question here - Tom, on the strategic perspective, obviously Paychex is a giant in its payroll niche. Are you considering going outside of the core, or do you just want to do the core better, and in more geographies? Because I always thought the distribution platform was underleveraged for related but different services.

There's no question that the primary focus today is the core business. And it's obvious. The opportunity is so huge, the leverage from a profitability perspective is great. We have begun to look at some other items, though, some other potential ways to leverage our sales organization and our client base. We think we've got some interesting ideas, but quite frankly we're not ready to discuss them yet and probably wouldn't be for maybe three to six months.

Okay. The general theme is better execution on the core, potential geographic expansion, and more leverage.

Without question.

And more leverage on distribution.

Correct. Let me add something to that. We really believe that because of our distribution network there are opportunities out there. If we get involved in these opportunities it would probably be in a very conservative, pilot basis. That's how so many of our products, such as tax pay and 401K, were initiated. So we think there are some opportunities out there. They won't be big deals for some period of time.

More like a commission sharing thing as opposed to major capital investment?

Correct.

Next question is from Joseph Foresi of Janney Montgomery Scott. Joseph Foresi – Janney Montgomery Scott: My first question - I know you don't want to talk about the specifics on pricing, but could you at least - is this going to be for the new, or the existing customer base, or both? I'm just trying to get a feel for who gets affected.

Generally for the new, but it probably will apply to some of the areas of the existing.

Okay. And I wonder, just sort of coming back to the business, have you seen any structural changes in the market over the last couple of years? I know you've talked about market share going down, and obviously you're going to, you know, do some bundling and some changes on the sale side and the pricing side, but have there been any structural changes that you see in the marketplace?

I don't think we said the market share went down. And structurally, I don't think a lot has changed. You go in short periods of time and ADP is moving around a little bit, and you go back about 18 months ago the locals and the small regionals are moving a little more aggressively and lately they seem to be less of a problem. So there's still two major players in the market. I don't know where Ceridian is. I assume they're on the map someplace. We don't see them. In this thing it moves in little pieces but it doesn't move a lot because there isn't too much for it to move.

And then just lastly, any thoughts on the capital allocation at this point? I know that you obviously play out a relatively high dividend payout. Just as you look at the new initiatives, can we expect any changes on that front? Or is anything - just how you view that would be great.

No, we're very comfortable with the capital allocation. We're very comfortable with the dividend policy. I feel better today because things seem to be going back up as opposed to continuing to sink. The board talks about this all the time. We understand how important the dividend is to our shareholders. We know we've got some shareholders it's very very important to them and they ask about it. So I don't think there's any changes in mind on that, and we'll continue to go down the road. The good news is we're still generating cash, even at that high dividend. And I think anything we want to do with $700 million in the bank and debt capacity we can continue on the path we're on.

Okay, so just in short you feel like you can still grow and maintain that particular policy?

Absolutely.

Next question is from Rod Bourgeois with Bernstein. Rod Bourgeois – Bernstein: Tom, specifically, I completely understand that you may not want to provide specifics in terms of the future strategy of the company, particularly with a new CEO not being on board, but can you give us a sense of the likelihood that when a new CEO comes on board, whether he or she will drive significant new investments or potentially incur meaningful restructuring charges?

Well, I think first of all the answer to that question may be determined by are we going to have an insider or an outsider become the CEO? And the answer to the question is quite different. Certainly if it's an insider we would expect that person would be very consistent with what's been going on, the philosophy of the company, and its initiatives, and all that. Because probably they've been part of it. If an outsider comes in, it's definitely a concern, and an issue. It wouldn't be the first time that somebody came into a new company with all kinds of radical ideas, but I think that's the responsibility of the board, and particularly the chairman, especially a chairman who's been active in the business, to make sure that new CEO is educated and doesn't fall into counterintuitive traps.

One area I don't think is even on the scoreboard, and you talked about it, is restructuring costs. There isn't enough in our balance sheet to restructure to ever get anything very significant, so I think you could get somebody that would come in and want to say I want to invest in something, but for somebody to come in and do something that says I've got to write a lot of cost off, or I've got to this or sometimes say well, let's bury the balance sheet to go forward. That isn't going to happen. We're conservative on the balance sheet. We've got cash and a little bit of receivables, and the rest is pretty hard, so I don't see any of those things being an area of concern.

Makes sense on the restructuring side but if you want to enter new markets and add new products there's a history in the overall BPO market of making up front investments and a lot of those investments historically in the industry have proved to not really drive a good return on capital. So I guess I'm wondering whether the board would be open to a new CEO coming in and making significant up front investments. On the one hand your distribution platform may be underleveraged, on the other hand there's a track record in the industry of up front investments being somewhat problematic. So I guess Tom, I'd love your perspective on how you think about that equation.

Well, I think we have a history of not going that route. The only significant, real significant acquisitions Paychex made, or structural investment, was the acquisition of Advantage Payroll back in the early 2000s, and another one called Interpay. Those definitely were in the purview of what we were doing and we certainly have an understanding of what we were taking on when we took on those acquisitions. And as I've mentioned before, our general tendency is when we want to go into a new market area we just start a small pilot project and learn it from the bottom up. We have not been real acquisition oriented or interested in other businesses to marry with Paychex. We find it far more sound from a philosophical and financial perspective to build them rather than to acquire them. Now, I don't want to say if one came along that we wouldn't be interested. We might. But that's not our normal m.o.

Great. Sounds prudent. And then one other quick question. Is there anything recent that's happened in your sales process that's hurt your closure rate. I'm looking at - and I don't guess you gave the specific bookings growth number, but if the bookings were down year-over-year, the comparison against the year ago period was not that difficult. So I guess I’m wondering whether the CEO departure created a distraction, or whether there was something else that happened that hurt the sales.

You'll find it over a number of years, and there's no one year that's stuck out larger than another.

Okay. So the recent weakness in sales is more of a continuation of a long term trend, and then just hesitation on the part of the companies to make new decisions about payroll in this uncertain economic environment?

I think that's a pretty good description.

Your next question is from Ashwin Shirvaikar of Citi. Ashwin Shirvaikar – Citi: So when you make these sales effectiveness changes, what is the timeframe that you expect that the changes take effect over? Is it a matter of, you know, you make the change and move on, or are you going to make changes over a period of several quarters?

No, the changes are going to be fairly immediate, most of them. Our ability to see results, positive or negative, probably will take three to six months.

Okay. And in terms of sales force turnover, there was a comment there that said you thought that the sales force turnover was maybe too low. I don't know if he implied -

No, what I was talking about on the sales force turnover was, in the company's interest in reducing turnover it got our compensation plan a little bit out of whack. It became too base pay-oriented and not enough incentive-oriented. So we want our sales people to be able to be successful financially. We aren't particularly concerned if our average cost per salesperson goes up - in other words their compensation goes higher. The important thing is we bring in the client. So we want to make sure that incentive plan, or compensation plan for the sales force, has enough incentive to make them work.

Right, but you're not thinking of going back to the old m.o. of keeping your salespeople kind of hungry for the first two years.

I don't know if that's ever been our m.o. We expect our sales people to be productive in their third month going forward after that. Whether or not they can reach the level of a full producing sales rep with three years' experience in their first year, that certainly is questionable. But we've not changed our general parameters of what we think they should accomplish. We just didn't have a compensation plan that incentivized enough.

Okay. Just a broader question. It has come up a few times but I guess - you keep mentioning underpenetrated market, but obviously 85% of small businesses do use other means. They don't ADP, they don't use Paychex, they don't use Ceridian. What exactly do you think it is that they use and why should they start changing all of a sudden. Because that's not really a failure on the part of Paychex's sales force necessarily.

Correct, but you have to understand that most of the payroll processing industry as I define it are ourselves, Automatic Data Processing, and a number of regional payroll processors that are what we call a full-service provider. By a full-service provider, we load the client into our system, we balance all their prior quarterly payroll tax returns, we process their payroll, we talk to them every pay period, and we deliver the payroll back to them. And we do all their federal and state mandated payroll tax returns. That's what we call a full service. Now obviously there are all kinds of ways you can do your payroll - everything from writing a check out of your checkbook - I guess a less sophisticated one would just be paying an employee cash - but everything from writing a check out of your checkbook right through some sort of online or desktop software. Now, 20 years ago, the primary non-classical payroll service meant that you did it on a board, or you wrote it out manually. Now today, instead of doing it on a board, writing it manually, you may be doing it on your PC, but you're still doing it yourself, you're still responsible for all the payroll tax returns and so on and so forth. So how companies are doing their payroll today manually may be slightly different, but as far as a full-service offering like we have, just basically ourselves, ADP, and a small number of regional processors. And it's a wide-open market for us. I think ADP probably feels the same way.

Okay, understood. Last question. John, obviously, HRS growth is pretty good here. On the health and benefits side of it, is it possible to say that new healthcare reform is having an initial impact? Or is that still yet to come?

I think it's still yet to come. Most people know that's off a ways, uncertainty, but the people we get, are people who really want to commit to healthcare and do what they're doing. And a lot of it basically gets moved from another carrier to us.

Next question is from Chris Mammone of Deutsche Bank Chris Mammone – Deutsche Bank: Maybe expanding on one of your responses to an earlier question, but in sitting here at the end of September, could you just compare your level of visibility into the year-end selling season now versus, maybe, several years ago, in better times? Is it materially worse? Can you just give us some sense there?

I think it's pretty much - it's not like it really changes. We know the core one is still a lot of people changed around the end of the year. MMS they've got visibility, and they're off to a good start. So I don't think that's changed too much. It's just what level is it going to be at? Nothing changes dramatically overnight, but we're encouraged, we're optimistic, and we'll see what happens, and especially if we execute better we'll do better.

I would agree with that.

Okay, and then for Tom. I don't think anybody yet has asked for an expansion on your comments on training deficiencies and maybe what could be modified there. I think you said to get more current with the environment. Could you give us any more color on what can be done on the training level?

I've always been a basic believer that a customer or potential customer buys a service like payroll processing from a sales rep that has the most technical knowledge and exudes the most confidence that they know what they're talking about relative to payroll and payroll tax returns. I want to see our sales reps become a lot more oriented to the basics of payroll. They should be able to do payroll processing manually. They should be able to file payroll tax returns. So they can always talk the language with both the potential clients, and more importantly, the CPAs. I think we've gotten away from it. That's one of the things. Number two, I think we need to train our salespeople how to do better at a competitive pricing environment. I would say that pricing in a competitive pricing environment in the last two or three years has probably gotten stiffer, probably because of the recession. I think we have to do a better job in teaching our people how to deal with that in our particular environment. So none of this stuff is really new, but I can tell you in a sales organization - I've always considered sales organizations to be pretty fragile entities, and that they can lose their edge in a fairly short period of time, and you've just got to stay on top of these things to make sure they keep their edge.

And then just finally, an accounting question here for John, since you're missing them, but could you quantify the one-time expense as related to the CEO departure in the quarter?

We disclosed it. It was $1.9 million.

Next question is from Glenn Greene of Oppenheimer. Glenn Greene – Oppenheimer: Just want to drill down a little bit more on the sales closing ratio and the commentary that it's really execution, which on the surface sounds good in a way because it's something that's fixable, and we can see improvement over time. I guess I just want to get the underlying confidence why it is execution and that nothing structural, in terms of either competitive or pricing, has really happened in the market, and that perhaps your 600 basis points of slower client growth is, as you sort of suggested, 70% an internal issue. It's sort of a qualitative question.

Sure. First of all, I didn't mean to imply that our product definition and our pricing were not an issue. They are part of the issue. If I were to break out a ratio, and break down what I thought was price product versus execution, right now I would probably say 70-30 execution. But the price product thing is important. It's a very hard thing for us to quantify the impact it's had on us. But we've got some really good ideas, we've done a lot of market research, and we think that we're going to point this thing in the right direction. Are we 100% absolutely sure it's going to work, and it's going to change things? No we're not, but we're willing to bet on it, and obviously we are betting on it.

Okay, and then for John, you had given the disclosure in the fourth quarter - the disclosure was new sales to newly formed businesses, which I think in the fourth quarter was up 12%. Do you have a comparable metric for this quarter? Just to get a sense for the new business formation you're seeing?

Didn't even see it. It's up some, but it's not up dramatically.

But I guess the bigger picture question is are you seeing any change in new business formation trends?

No. Not significantly. But again, one thing is we measure it based upon what we sold to them. So if you've got a bit of an execution issue that can be disguised slightly. So it could be a little better than we think. And the other thing, Tom has talked about this execution, this has not been anything that fell off any, even three steps. This has been kind of a gradual thing. By the same token you've got to recognize we're still the industry leader, so that's what makes it hard sometimes. You're the industry leader, you're not quite where you'd like to be, and people just - we've just got to get pushing harder.

Next question is from Mark Marcon , R.W. Baird Mark Marcon – R.W. Baird: It sounded like you said that the pricing environment got a little bit better during this quarter. Is that -

Discounting got a little bit better, but we've been all over our sales force. We did an analysis. We can give each zone manager - we can tell him by each sales person what's the discounting based on about four different ways. You know, what kind of product did they sell, which sales people had more experience, we are all over this with data, more so than we've ever been. So it is having an impact.

So you controlled it to a greater extent rather than saying that the competition has eased up a little bit?

Well, I don't think ADP is getting any worse. I wouldn't say they're easing up, but they're going to have to let up at some point. And they will, but I think they've gone on this thing where they believe in a down market - some other people have said this too - you go after as much share as possible. And they have a little bit different philosophy in competing with the locals and the regionals. We don't believe you lower the price dramatically to compete with them, because you've got to sell them and your product is better. If they don't care about the safety of their payroll tax money, if they don't care about compliance with the law and those things to the same degree then they can pick them. But if they care about those things they know they've got to pay some price, because the other thing to remember, you know you're talking about an average client paying $2,200. So you can hear 30% and say well that's just a staggering amount. But it's not a staggering amount of money when you figure out how much payroll taxes are going to go through. I mean $600 is a very low insurance policy to know you're not going to lose the money. So you've got to sell value, and you've just got to keep pushing. But I don't think much has changed in the competitive environment because nobody's doing a lot better than we are. If you look at ADP they're not doing appreciably better than we are.

Okay, but I just meant in terms of pricing, you're basically saying most of the improvement basically came from internal efforts.

Yes, but by the same token we think with a little bit different pricing structure and how we look at it in product packaging we can sell more. The thing we're focused on now - I'm not so much focused on the ones I sold. I'm really getting focused on the ones I didn't sell. Why didn’t I sell them?

And then along those lines, can you talk a little bit more about, you know, when you think about the market structure and the penetration rate - John, I've heard your perspective on this, and I'd be curious to hear Tom's with regard to - does this mean we can go after even smaller businesses because when you say the 15% penetration rate it depends on how you're defining the market, and there's a lot of businesses out there that are that are onesie, twosie, threesie. Is that something that you can go after?

We've been active. 40% of our client base has four or less. I guess the only way to go less would be to go to zero, and I don't think they want to pay you. I'm only kidding. But we're down there.

And so you're including all of that in there in terms of thinking about it in terms of number of businesses?

Yes.

And can you talk a little bit about it structurally, just in terms of the alternatives that have emerged over the last few years, and how you're thinking about competing against those?

I don't think it's changed much. I think the only thing you have at the low low low end - you've got some Internet-only providers that charge next to nothing. We have those products. We just haven't quite decided what we want to do strategically with them, if we want to put them out there. And we had put them out, just [unintelligible] put them out there had to take them a little bit back. But that's something you've got to look at. But we don't think you can sell - if you're going to sell effectively at that end you can't really sell it with your sales force. So those are all things you have to think about. But those markets, they're there. I don't know that they're monstrous, but we think we're in the best part of the payroll marketplace, and you'll see us continue to expand up to some degree, not going all the way to the 5,000+, certainly not. I think on the way down we've got to continually evaluate what do you do on that low end where you start to get off of being the full service provider to something less. And we've wrestled with that, and will continue to wrestle with it, and when the market gets big enough, or we believe there's enough there, I'm sure we'll have a solution.

In the meantime, we've done the pricing packaging thing so that the availability of the full payroll service that we offer versus the limited offering of do it yourself, the difference is so small that people should opt for the full service. At least that's our philosophy.

Great, and then are you going to test it before you roll it out nationally? Or are you pretty committed to it?

No no. We've already been doing this.

We've already been doing some of this.

So you've already tested it and you've determined that it actually leads to an incremental improvement in revenue?

The level of revenue we don't think it's in our best interest to go after, and by putting together a product and its packaging that really is appealing to the low end of the marketplace, as well as being a full service offering, that's where we should be and that's where we think our clients should be. John mentioned something earlier that I'm not sure the investment community understands. He used the term safety of your money. One of the things that's evolved over the last several years, and I guess it's been more prominent during the recession, is payroll processors have fiduciary funds under their control. You know Paychex has a little over $3 billion that is tax money and salary deposit money that goes into trust accounts that we maintain. And obviously the fact that we and ADP have audited financial statements and our auditors periodically come in and inspect our fiduciary accounts - while most of the payroll processors out there have audited financial statements. And there's been a history of payroll processors utilizing those funds either to expand their business or to use them for their private benefit. In fact if you go on the Internal Revenue web site you'll find a whole bunch of them. So that's another factor, since the handling of money has become such a predominant factor in payroll processing. In 1990 it didn't exist. But it's a very important part of payroll processing today. The smaller payroll processors, with the unaudited financial statements, with the not-so-good financial controls, there's a lot of exposure to clients. If you're a payroll client of a payroll processor, and that payroll processor takes the funds out of your account for your payroll taxes and doesn't pay them to the IRS you are still responsible to the IRS and you could end up paying double. We had one just here in the local market this year. About 1,000 companies found themselves in that position. So there's more to it than just the low end. The fact that there's so much money handling going on, the selection of a payroll processor is much different today than it was 15 or 20 years ago.

Can you also talk a little bit more about the CEO search? You mentioned potential for internal candidates. Is that something we should think there's a 50-50, 70-30 type probability?

I'm not going [unintelligible].

Our next question is from Tien-Tsin Huang of JPMorgan. Tien-Tsin Huang – JPMorgan Chase: Just wanted to ask on the pricing changes - it sounds like you're moving more to, I guess, an a-la-carte pricing or what have you. I know you're not going to give a lot of specifics on the levels of pricing, but can we still rely upon this 3% to 5% coming from price annually in the traditional model in terms of revenue? Is that still applicable?

Most of the price increase comes out of the existing base, looking at recovery of discounting at the end of the year, and I think more of it's trying to control where's the list price and where's the discount price and that's why when you go look at this net I don't think it has a big difference. But you've just got to feel your way through it and you know this is very competitive stuff, and it's a competitive marketplace, and you can't really - it's not fair to anybody for us to say any more than we've said. Tien-Tsin Huang: How should we measure, then, the success of it - this pricing and these sales, other than watching your sales. I guess we'll know in the form of revenue and sales? I'm just trying to understand -

It will either be better or it won't. This isn't hard to figure out whether it's working. Tien-Tsin Huang: Okay, because I guess my - I asked the question, John, because I wonder if we could see some deterioration in certain metrics before seeing things get better. I don't want to jump to conclusions as we see things play out. I want to understand what you're thinking about to measure the success.

I'm not anticipating significant enough deterioration to have to talk very much about it, but obviously we have, and I think we're pretty open. We give a lot of indicators, and we talk about what's going on, and we talk about things we know about, and sometimes we talk about things we're not exactly positive. But you'll hear us talk about them, because that's how we operate. We're as transparent as anybody in this industry Tien-Tsin Huang: Okay. No, that's definitely the case. Just to follow up on the last questions around full service versus self-service. It sounds like Paychex is still committed to self-service but - and we've talked about this before John - there's sort of a finer line between self-service and full service with so much of the world being delivered through the web. So is the idea here still to get people over the hump and focus on outsourcing, but try and deliver things more through the web? Is that part of the thinking here? Or am I way off base?

No, you're not off base, but I don't think it's going to happen as fast as one might think it's going to happen. For example, the idea of paperless payrolls. And basically what that means is that we deliver your payroll information to you through the web, and you look at it when you want to. You print it out when you want to. The issue with that is all your employees have to be on salary deposit before that works effectively or on some sort of debit card. So the transition to that is going to happen, but it's not going to happen as fast as you think it's going to happen. I think we right now are in really good shape on that issue as it does move in that direction. You certainly can do payrolls without talking to the customer if they don't want to talk to us. We certainly can deliver it without delivering paper. We can do all of those things. But we are a full-service payroll processor and we want to continue that mode. Tien-Tsin Huang: Okay, that's good stuff. Last and I'll jump off. Just from an outlook standpoint, John, sort of a [unintelligible]. The outlook for client fund balance growth we've been off a little bit on that. Can you give us some guidance on that for the year.

Well, it's going to depend on what the government does on tax rates and withholding, but I still think you're going to get - you get about 3% wage inflation plus client growth. Now you've got to realize when you saw 1% growth the client base over that period was down 3% so you had reasonably good wage formation. So wage had to be 3% or 3.5%. So I think it's getting back to normal and they haven't changed any tax laws recently, but I'm sure as hell they're going to do some things coming forward. I'm not sure what they're going to do, but they're going to do something.

Next question comes from David Parker, Lazard Capital Markets. David Parker - Lazard Capital Markets: Just wondering if you could provide some more color around the implementation of the new platform. Last quarter you said you converted about a half million clients to the new platform, but when is the old platform going to be retired and we're going to see the new platform in full effect with the true productivity benefits?

We're done. The client conversion on that platform was basically done four or five months ago completely, so it's in place. So whatever was going to get replaced is gone, and it's moving along very fine. The interesting part about this is you actually can train a person who knows nothing about payroll faster than sometimes the people who have been with us a long time, because they knew all these tricks around the system as opposed to some other things. And the new people they know Windows real well, so it's working out fine.

Okay, good to hear. And then also last quarter you mentioned that you were going to reinstate the matching for the 401k plan, and also the salary freezes. When are we going to see the full impact of those changes?

Wage freeze is totally out now, so the wages are coming back full, and the 401k plan is - half the match is back and that will probably start January 1. So that will be a little expense headwind in the second half, but not like it was with what we took out. So that's not a big deal.

Our last question is from Thomas Rippl of Schaper, Benz & Wise Investment Counsel. Thomas Rippl – Schaper, Benz & Wise: I had two questions. The first one is on the first page of the press release you noted the positive contribution to revenue was somewhat offset by the impact of a shift in the mix of assets to investments earning lower fees. Assuming you're talking about people putting more money in a money market fund, my understanding is that you were earning somewhere around 40 basis points on whatever assets you have under administration, and so I'm just wondering if the fee structure changes depending on what type of asset class -

Actually the fee structure is closer to 30 basis points, although sometimes people say different things, and that's evolving. We made a conscious decision three or four years ago - we are the leader in 401k business in small business, and we realize that these basis points are eventually going to evolve away. Now we charge a higher fee for some of these things, so it really isn't so much that they put the money in money markets if they take investment choices where they have more ability to pick and actually can pick anything they want, and it isn't then controlled then by it being all at Merrill or Smith Barney, where we're not going to get the basis points. So this is a thing that's moving. It’s not dramatic. I'm sure it will move over time. The 401k business for us is excellent and if you want to be a world leader in this you're going to have to let this evolve or you're not going to be a world leader. So on the one side it costs a little bit, but we get more market share. At the same time we get more fees on some of these accounts that are more complicated. So right now it's not affecting revenue very much at all.

So do you - is any portion of the fee that you charge the clients fixed? Or is it all 30 basis points -

No. Most of it's fixed.

Do you meet with clients directly in that business, or is somebody else -

No. We can't tell them how to invest the money, but we do the record keeping directly with them. Then they work together with the money managers, and then they have people that help them if they want to make the choice to go well diversified. We're not allowed to manage the money.

Okay. Do you serve as trustee on those plans

I'm not legally expert enough to - I think that sounds right, but I don't want to say that for sure because then you get into fiduciary responsibilities, etc.

Okay. And then the second question. Just going back to the healthcare program. Now that you've had some time to review the laws - and I know that people are still going through them, and nobody really knows what's ultimately going to happen - but as you've looked through the stuff that the administration has put out, what areas do you think you're going to deliver products to your clients, and what form will you deliver those products to your clients?

I don't, at this moment, see enough changing yet. I think wait and see what happens. Next presidential election we'll see if this stuff's going to hold or not hold, and I think it's too early. People have got to take care of healthcare today, and that's what they're doing. I don't think anybody knows exactly what's going to happen and who's going to pay for this. But I think people who have got to deliver healthcare are delivering it and what's happened now the rules have gotten so uncertain that some of the ones that were holding off aren't holding off as much because they know they've got to do something today. I mean it's either an issue to do it or not. They can postpone it if they want to postpone it, but some of them have employee groups where they really don't think they can postpone it. So I think you've just got to wait and see. I think everyone wanted to predict it was dead one time. It came back. I can't tell you how much money got spent trying to foresee what was going to happen and what happened isn't near what anyone thought was going to happen.

Yeah, I understand John. So right now you're serving as a broker. You're helping find insurance plans for your clients.

Yep.

And then also doing a little bit of work in health savings accounts, so you actually transfer the money -

Not much there but we do some. No, I think right now we're in a good place and we'll just - we're going to evolve with it, and we're going to have opportunity. We're not going to get shut out, and we'll just have to keep paying attention to what actually does happen. Good business for us.

So you earn an ongoing fee based on insurance that one of your clients has? A one-time fee?

That's right. Ongoing.

There are no other questions at this time.

Okay. Well, I want to thank you all for joining us. It was a little extra treat with the founder here today. But I saw you shift those questions quick. I didn't feel bad about it though. So you can always shoot at me any time. So thanks a lot, and you guys have a great rest of - I guess the summer's gone, but maybe a good early fall. So thanks again.