Paychex, Inc. PAYX
Q4 2010 Earnings Call Transcript

Operator: Adam Frisch, Morgan Stanley.

Adam Frisch - Morgan Stanley: This lower selling season that we had in the past couple of quarters, obviously, had an impact on the F '11 outlook. So, two questions here. One, is there material upside or downside potential to your outlook? Then two, what would drive any delta there?

John M. Morphy - SVP, CFO and Secretary: Adam, I think one thing, we went into the recession a year later than everybody else, and when we went into it, our results were not very volatile, and it's my belief and it has been this way for a long time that our results never change rapidly. I can't remember them ever changing surprisingly. So you want to talk about any significant upside or downside, it would have to relate to either some very significant change in interest rates or some very significant change in the economy. Without that, those things happening, we can predict what revenue is going to be within 1% probably 95% of the time.

Adam Frisch - Morgan Stanley: So then there were a lot of data points in the fourth quarter that shows material improvement and the guidance is a little tepid. So what's kind of holding you back a little bit at this point? Is it the sale season that you already had, which determines next year's rise? Is that the major driver here?

Jonathan J. Judge - President and CEO: Adam, this is Jon Judge. So that's part of it. I mean a part of what John was trying to get across is that when you have a business model like ours, it has a very high recurring revenues. When changes that happen in the economy, they take a while to work them their way through, and us getting affected by at least. You remember, in the fiscal year '08, we had a record year when the rest of the world was already into the recession. And so we went into it in '09 and now '10. So you'll start to see all these economic indicators went positive for us and that's fantastic news. But as John said, if the interest rate jumped to 4%, tomorrow you'd see an immediate difference in us and it'd be very sizable. When the interest rate went from 4.5% to basically 25 basis points or less that caused us $70 million on the top and bottom line. So something like that coming back quickly would help us. If the losses change dramatically, that's obviously a huge help to us because all those losses that happened over the year, we'd end up having that revenue for the whole year. On the sales side, it's what you said. Sales typically in a year will only affect our top line somewhere in the neighborhood of 10% to 12%, and that would be at probably the maximum level. So we could go crazy selling and unless it all happened in the early months of the year, then it would have a modest help to us in the '11 and would have obviously a much bigger help to us in '12.

Adam Frisch - Morgan Stanley: Last question, good to see you still investing in the sales force, I know it's not only 2%, but at least you're still trying to grow that boding well for the future. Sorry for the obligatory question, but how is the pricing environment progressing here? Are you still seeing some aggressive tactics from your largest competitor?

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