Good day ladies and gentlemen, and welcome to the Second Quarter 2007 Earnings Call. My name is [Angelique], I will be your coordinator for today. (Operator Instructions) On your call today, we have Mr. Paul Sarvadi, Chairman of the Board and Chief Executive Officer, Mr. Richard Rawson, President of the Company. I would now like to turn the call over Mr. Doug Sharp, Chief Financial Officer. Please proceed sir.

Thank you. We appreciate you joining us this morning. Before we begin, I would like to remind you that any statements made by Mr. Sarvadi, Mr. Rawson or myself that are not historical facts are considered to be forward-looking statements within the meaning of the Federal Securities laws. Words such as expects, intends, projects, believes, likely, probably, goals, objective, outlook, guidance, appears, target and similar expressions are used to identify such forward-looking statements and involve a number of risks and uncertainties that have been described in detail in the company's filings with the SEC. These risks and uncertainties may cause actual results to differ materially from those stated in such forward-looking statements. Now let me take a minute to outline our plan for this morning's call. First, I'm going to discuss our second quarter financial results. Paul will add his comments about the quarter and on our outlook for the remainder of the year. Then Richard will discuss trends in our direct cost including benefits, Workers’ Compensation and payroll taxes, and the impact of such trends on our pricing. I will return to provide financial guidance for the third quarter and the remainder of 2007. We will then end the call with a question-and-answer session. Now let me begin by summarizing the financial highlights from the second quarter. We reported a 35% increase in second quarter earnings per share to $0.50. This was significantly above our expectations, primarily as a result of higher unit growth and gross profit for worksite employee. The average number of worksite employees paid increased 9% to a 108,336 for the quarter, above the high end of our forecasted range of 107,750. Continued pricings strength for our HR services combined with favorable outcomes in each of direct cost programs resulted in an increase in second quarter…

Thank you, Doug. In my part of the call today, I’ll discuss several factors contributing to our continuing success growing our core business. I’ll also describe progress we have made, re-engineering our middle market strategy to improve results and to take advantage of the significant opportunity represented by this segment. In addition, I'll provide some insight into new opportunities we are also investing into the future, centered around our HRTools business plan. Over the first half of this year we’ve experienced strong unit growth in our core business, offset by a decline in the middle market segment for our clients above the 150 employee level. The number of worksite employees in our core business increased by nearly 8% in the six months from December 2006 to June 2007. Over the same period, the middle markets bottomed out at a 15% decline from year end in March before recovering nicely in the second quarter to only a 6% deficit by the end of June. On a year over year basis, our 9% unit growth this quarter was a combination of an 11% growth rate in the core business offset by a 4% decline in the middle market. Currently the middle market is 12% of our base and the core is 88%. Now, before I describe our plan to remedy the mid market segment, let me take a few minutes to highlight the strength of our core business growth. During the second quarter we averaged 254 trained sales personnel, up 7% over the same quarter last year. This team however, is substantially more experienced due to the reduction in turnover, from 40% one year ago to 30% today. In fact, the number of trained sales personnel with more that twelve months tenure with the company, is up more than 25% over this…

Thank you, Paul. This morning I am going to discuss the details of our second quarter gross profit results. Then I will explain how our pricing strategy and direct cost trends should shape our gross profit per worksite employee per month for the balance of this year and into 2008. As many of you know our gross profit comes from the markup on our HR services, combined with the surplus that is generated when our direct cost pricing allocations exceed the corresponding direct costs. For this quarter, our gross profit per worksite employee per month was $241, significantly above our forecasted range of $221 to $225. These results came from achieving our targeted average markup for the quarter of $200 per worksite employee per month and generating a surplus of $41 per worksite employee per month, a 3.6% of the total markup. This surplus came from contributions in all three of our direct cost centers, which are payroll taxes, workers' compensation and benefits. So, let me give you the detail. The surplus in the payroll tax cost center came primarily from the State of Texas unemployment tax refund that Doug had mentioned a few minutes ago. Last quarter, I had mentioned the possibility and we might be getting a refund due to the increased level of surpluses in state unemployment tax funds. So, we were not surprised when we got a refund check in the mail. Without this refund, we still generated a surplus in this cost center, but not quite as much as we had forecasted. In this case, that's a good thing. Remember, after the first quarter of the year, if we are growing faster than we forecasted, we will have more payroll tax expense than our allocations for each new employee until their wages exceed the state…

Thanks Richard. Now, let me begin by providing an updated forecast, of our full year key metrics beginning with unit growth. But the rebound in our unit growth during the second quarter and the positive sales metrics that Paul just discussed, we are now forecasting an increase from our previous full year guidance. To a new range of our 110,000 to 111,000 average paid worksite employees per month. As for gross profit, we are forecasting a fairly similar range to our previous guidance for the reasons mentioned by Richard a few moments ago. Our updated range is $224 to $227 per worksite employee per month. As for operating expenses, we now expect to be in the range of $239 million to $241 million for the full year, as our better than expected first half results have given us the opportunity to make further investments and our growth in new product offerings. The increase over our prior guidance includes costs associated with additional service personnel to support our improved mid-market service plan. And costs associated with further developing new product offerings including in HRTools product enhancement. The high-end of the expected range of operating expenses includes additional incentive compensation high to achieving higher unit growth in gross profit goal. When combined with our 2007 expected range of average paid worksite employees, operating expenses on a per worksite employee per month basis are now expected to decline from $183 in 2006, so approximately $181 for 2007. We now expect net interest income to be in a range of $12 million to $12.5 million for the full year, down slightly from our prior forecasts due to the use of funds to repurchase shares. Utilization of these funds which were previously invested in tax exempt securities has resulted in a slight increase in our expected annual affected income tax rate to 35.7%. We were now forecasting 27.5 million average diluted outstanding shares for the full year, down from prior forecasts of 28 million shares as a result of share repurchase activity during the first half of this year. Now for third quarter guidance, based upon my earlier comments we expect average paid worksite employees per month to be in a range of 112,250 to 112,750 for the quarter. As for gross profit based upon Richard's earlier discussion, we expect to be in a range of $216 to $219 per worksite employee per month for Q3. Third quarter operating expenses are expected to be in a range of $58.25 million to $58.75 million. This is down sequentially from Q2 by approximately $1.7 million as higher cost associated with our new service and product initiatives are more weighted to Q4 and into 2008. We expect net interest income to be between $3 million $3.2 million and are forecasting 27.2 million average diluted outstanding shares for the quarter. Now at this time I would like to open up the call for questions.

(Operator Instruction) Your first question comes from the line of Tobey Sommer with SunTrust Robinson Humphrey. Please proceed.

Thank you. I had a question about the sales force, you gave some mentioning metrics about how the ten years improving in that likely bodes well for sales trends and productivity over time. I didn’t catch, and I apologize if you mentioned it, the number of trained and hired sales people and maybe also in that context if you could update us on your office expansion plan? That'd be appreciated, thanks.

Sure, Tobey. The number trained for the quarter was 254, the number hired was between 290 and 300 at this point, and we had a lot of success there of late, so we are excited about how that’s ramping up. As far as the new office openings, we have announced four, the fifth one is imminent. Right in front of us, we have three more opening up over the balance of the year, and I think that’s going to put us in good stead for growing the sales force at the right rate.

Thanks. So at the mid point that looks like kind of 16% delta between hired and trained, given the fact the tenure is improving and sales force turnover is down and you're having success hiring, any thoughts about the potential productivity of the overall sales force? Do you think upper limit of that productivity -- you think that it may be higher than you had thought previously?

Well, this could be interesting. As you go into the fall we are going to have two things happen. First of all, you have this significant increase in the number of tenured reps as you go into the fall campaign. Obviously that should be very beneficial for our selling season. But we also have a significant new crop, that 16% that you were talking about sales staff that were not in the training number will be enrolling in as new reps. So you will have some little bit of account of balance to that, but I think we have just positioned very nicely for a strong fall selling season.

And shifting gears, I wanted to talk about the plan redesign with United. Historically, that has lowered your cost, and obviously you got some negotiated lower administrative fees as well. I think the last time you did that was in 2005 and you had generated a lot of earnings growth. I just want to get a sense for -- looking back historically and maybe 2005, I know it's back a couple of years, what sort of contribution did -- and how meaningful was that plan redesigned in 2005 to the very good year that you had at that time?

Tobey, it was significant, I guess, is the best way to say it. We have almost -- I don't know 70 somewhat thousand participants on our benefits plan today. It doesn't take a lot of change in a plan design to bring some significant reduction in cost to our program. Now, you have to realize that, obviously we are little bit early in talking about 2008, but we know that the trend in healthcare cost is certainly going to be in the 10% to 12% range, at least that's what people are saying today. And so, any plan design changes that we implement will actually reduce that trend for 2008. And we like that because that actually makes our total package offering to our customers more attractive because if our cost normally go up say 7%, as opposed to 12%, then that's a real benefit to our client owners worksite employees and their families. So, we are thinking about how we may benefit from this, it will be more than just a financial, it will also potentially before new growth.

Right, that makes good sense. In terms of the percentage worksite employees on the healthcare plans and maybe breaking it down in terms of percentage of eligible also? And then I'll get back in the queue. Thank you.

Yeah, we have about, I don't know, 72.5 or so percent of the total worksite employee basis in one of our health plans on any given day. But when you look at eligible it's closer to 88% to 90%. People, they select their spouse to be in another plan and so the worksite employee with Administaff will go in the spousal plan and so that eligible number is a significant number as well and it makes for a good solid operation.

Thank you very much.

Your next question comes from the line of Jim Macdonald from First Analysis. Please proceed.

Yeah, great quarter guys.

Thanks Jim.

Just following up on the healthcare, it seems like you have been a little bit behind in terms of pricing versus cost, do you think there will be any catch-up you will need to do next year or do you think you can offset that with plan design changes?

Well, definitely plan design changes are going to be a big factor of that but we are still continuing to increase our allocations, because we want to make sure that we are doing that very best that we can to match the price and the cost, and so, on both new and renewing business. So there will be another increase in the allocation site coming very shortly. But then as we move into 2008, we will also be looking to see how the participants act in terms of which plans they migrate to and that may cause us to not have to do much of the increase in the allocation. I think we are really comfortable as the allocation rate increases that we are planning though it still created a nice advantage for our current customers and also the markets at large.

Yeah.

Okay. And just one -- and I think just going back and you said you had number of summer hires. Can you kind of quantify that? Is that going to be an issue going into the Q3 of Q4?

That's kind of hard to tell exactly which ones are summer help, but it was probably around 1000 or so employees and you can generally expect those to come out in the third quarter beginning in the September timeframe. So you just kind have to factor that into the whole picture here.

And that’s what your guidance was based on?

Yeah.

Thanks very much.

Your next question comes from the line of Thomas Giovine of Giovine Capital Group.

Hi guys. Well done.

Hi Tom, thanks, I am back.

Can you just describe maybe what the current thinking is in the Board regarding buybacks and I think in last first quarter I was trying to see if I can -- and wished you guys would be a little more aggressive in terms of that or putting in a 12b1, whatever you may call that, but clearly you were very aggressive during the quarter, but you still have a capital structure that still kind of defy gravity, and then can you tell me maybe what the current thinking is there?

Yeah, I think we had a better quarter in trying to execute on our own game plan. We bought back 1 million shares and we were able to, once we got beyond our open window, we went ahead and filed the 10b5-1 plan so we could keep taking advantage of the low valuation that we foresee. We are going to have our Board meeting next week, so we'd get kind of an update from everybody and how we feel about that. I like the way we executed this particular quarter. And I think that, steady as you go approach, but with aggressively setting a size capital to return to shareholders, this perhaps is appropriate for where we are.

And just, I am sorry, just to go backward, but you did buyback shares for the year? I think it was at 35?

Yes, we did.

All right, thank you very much.

Your next question comes from the line of Mark Marcon of Robert W. Baird. Please proceed sir.

Good morning and let me add my congratulations.

Thank you, Mark.

Thanks Mark.

I'd like to ask you, you outlined a number of initiatives you have got, you know kind of reengineering of your mid-market service offering. You have also got the HR tools that you are going through. What I was wondering is as we look towards this guidance that you've given us for the back half of this year, is the full expense of those initiatives included in that guidance and could there be any spillover in terms of additional expense going into 2008 or should you be done by the end of this year?

Yeah, Mark, this is Doug, I will answer that. Basically, the increase in the operating expense guidance over the initial guidance of $2 million does relate to the initiative that we are putting in place with mid-market and the HRTools and the product initiative. So, we have considered that in the balance for 2007. Yes, there will be some additional investment going into 2008, as Paul mentioned. I think he was quantifying in total dollars, to some extent to the mid-market and the HRTools investments over a 12, 18 months period. So, obviously some of this investment goes into 2008.

So, it doesn't look like it's going to, I mean, even with this additional investment, you are still actually going to see a decline in terms of your operating expense per worksite employee and it sounds like that could potentially continue to be the case going forward. Is that correct?

That's correct. That's what we are forecasting, yes, for the '07 period and we should hope to see that going forward, the leverage we have.

Okay. Terrific. And then, with regards to, kind of one-time gains that you had this quarter. Can you just summarize those, it sounded like you had the Texas payroll tax refund, I think you also had something from CNA, if I recall correctly?

Let me try to clear that out for you. And the best way to explain it is by looking at the gross profit per worksite employee number, which was about $19 and $20 in excess of the midpoint of the forecast that we provided. The payroll tax refund from the State of Texas was about $9 of that. Now, we did not included in our forecast, although as Richard mentioned in last quarter's conference call, by when till the unexpected considering the environment of the state funds out there. But plus nine bucks of the twenty, the other is attributable to the workers comp cost coming in lower than expected. That makes up the majority of the variance.

Okay, great. So, that basically addresses that. And then, in the Southwest it looks like you had a nice rebound in terms of your revenue growth rate, was there anything particularly driving that?

No, I don't think so. Our success rate across the markets are pretty good, the only one that kind of lagged behind was the West Coast, but that was more driven by the loss of mid-market accounts that regards -- that too early in the year, how that lost to subsequent quarter.

How was the West Coast that we strip out the mid-market, have you looked at the core?

Yeah, the core business, but I can say it's been growing nicely throughout the year and was certainly fine out in the West Coast as well. A little better in Southern California and Phoenix than in the North, both acceptable.

Are they around the national average, in terms of what you are seeing in the West Coast?

Yes.

Great. And then finally, you mentioned, you have got the benefit of your sales forces, is become more effective, you are seeing an increase in terms of the number of employees per client, and then on the foot side the attrition rate is slightly higher, is that all mid-market or is that also in the core?

Yeah, it's still there, in the attrition side, we still see, this year we have had fewer accounts terminate but the average size is higher. So, the 150 employee line in the sand between mid-market and core isn't an absolute gradation in there that some we do have. What I think are, some things we've addressed in this middle market initiative that will help us keep a larger and growing account. So that’s why is called a reengineering effort, is not just after the 500 or 1000 personal account, but what about those when they go from a 100 to 130 to 140. Let's do a better job on this as well.

Great, thank you.

Your next and final question comes from line Kevane Wong of JMP Securities. Please proceed.

Hi, how are you guys doing?

Great, Hi Kevane.

And just first of all, a point of clarification on the worker comp cost upside, I am assuming that wasn’t in guidance and as you wouldn't have anything like that in guidance going forward at this point?

Well you know every quarter we get -- well first to answer your first question, it wasn’t in the guidance. That happens, but we have been receiving these kind of, what I would call, positives to the reserve adjustment on both the current policy and the prior year's policy about every quarter for about nine to ten quarters now and so that fact is that like in the first quarter of this year Kevane I think that adjustment was about $6 million in this year and in this quarter its about $6.4 million. They’ve ranged anywhere from $2.5 million to this $6 million level and you never what it’s going to be until the outside actuary looks at the number of the claims that were incurred during the period, plus they look at the number of claims that were settled during the period that related to prior period. So no one advances until that happens.

And Kevane, as Richard mentioned in his script, we look at the workers comp that relates to the guidance more in total cost. So we have lowered the range as a percentage of payroll from 0.75 to 0.80 to the 0.60 to 0.70 and so we consider it more as a whole when we included it in coming up with the guidance on that gross profit metric.

And I am assuming though the guidance is -- as far as the numbers you are giving are really excluding sort of these benefits that come to, truly sort of a, hey if you don’t have these benefits where would be and therefore we should be looking for, the fall season upside based on these sort of refunds coming back?

Yeah, and we just again look at it more in total.

Great.

That’s also how our costs are trending.

Got you. And also I’m sort of curious about generally what the sales environment is like, I mean, it sounds like it's not like the environment seems to be good, I am trying to figure out if you guys have actually sort of seen an easier sort of pace the sales as far as people understanding the PEO model etcetera and that’s sort helping drive stuff and I guess sort of conversely, had the economy been where it should have been, had that coverage any sites or is that really not been an excuse so far for you guys?

I think so far so good on the economy side within the small business community. We are still -- companies are meeting or exceeding their business plans. They are still hiring, the number one issue is finding and attracting key people. We still see that there is a labor shortage out there and it's hard to find the right folks. So that’s the good environment for us. Obviously it would be better if more people are available to put in these positions, we'd grow faster. But all in all I think we are in a good environment and I think the attitude in our sales staff is good and we’ve had a good solid year. We have made some adjustments on commission and so forth and paying, tying payment to the initial payroll of the paid worksite employee. So, we are trying to fit things up there and I think we are doing well in that area.

Okay. Well, this is maybe a little bit of a broader thing, in the mid-market effort, the one thing you talked a bit about before is the benefits system you are rolling out, which really gives a lot more flexibility on choice of what people would have. I was just curious on sort of the feedback on that system, has it helped as far as attracting mid-market guys, or is it too early yet to out list on that?

Yeah, it's really too early yet. Even though we kind of took mid market offline, it's simply reengineering. It didn't, obviously didn't stop, we have customers in the pipeline; we made sales this quarter and already have some going in the Q3. So, we're moving along, but relative to the benefits of flexibility, I don't think that's been a big part of it yet. We still think it will be achieved kind of going to next year, but at this point not.

All right, thanks guys. I appreciate it.

Ladies and gentlemen, I would now like to turn the call back over to Mr. Douglas Sharp, Chief Financial Officer. But before I do, I would like to remind you, if you have any further questions, please contact Mr. Douglas Sharp, Chief Financial Officer.

Okay. We thank you for joining us today and we look forward to talking to you soon.

Ladies and gentlemen, this does conclude the presentation. Thank you for your participation in today's conference. You may now disconnect and have a great day.