沛齊 (PAYX) 2001 Q3 法說會逐字稿

PAYCHEX'S THIRD QUARTER PRESS RELEASE

Good morning, and welcome ladies and gentlemen to the Paychex's third quarter press release. At this time, I would like to inform you that this conference is being recorded for rebroadcast and that all participants are in a listen-only mode. At the end of the management presentation, we will open the conference up for questions and answers. I would now turn the conference over to the CFO of Paychex, Mr. John Morphy, please go ahead, Sir.

Thank-you for joining us for our third quarter press release. Also with us today is Tom Golisano, our Chairman, President and CEO. Upon the completion of the review of our financial statements, we will conduct a question and answer session. This morning, we released our financial results for the quarter-ended February 28th, 2001. If you need a copy of the release, they can be obtained by calling 716-383-3406 or accessing our website at www.paychex.com at our investor relations page. We have also filed our third quarter Form 10-Q at the SEC, and it is available on our website. In addition, this teleconference is being broadcast over the Internet and will be archived and available for access on our website until March 26th, 2001. Please refer to our website for access to all recent news releases, current financial information, related SEC filings, and investor relations presentation. Since the release has been made available to all of you, we are discontinuing our practice of completely reading the release on the conference call. The release is summarized as follows; the third quarter press release enjoyed another strong quarter, as total revenue growth in the third quarter was 19%, which in turn generated 34% increase in net income. For the first 9 months, revenues increased 21% accompanied by net income growth of 35%. Quarterly earnings per share were ¢18 versus ¢13 a year ago, up 34% on an unrounded basis. EPS for the first 9 months was ¢50 versus ¢37, up 34% on an unrounded basis. We will now refer to the third page of the release, the consolidated income statement. At the end of the formal presentation, we will discuss in detail the potential effect of changing interest rates. Payroll service revenues, which is revenues before float income, for the third quarter, increased 14% to 177.8 million and by 17% to 509.5 million on a year-to-date basis.

The increases are primarily related to the addition of new clients, new services, price increases, and increased utilization of ancillary services by both new and existing clients. As of the end of the quarter, 83% of our clients utilized Taxpay and 52% utilized the Company's Employee Pay Services. Revenue growth for our Major Market Services payroll offering remained strong, as revenue increased 65% and 59% for the third quarter and 9-month period to 13.7 million and 34 million respectively. ENS investment revenue grew 58% and 50% in the third quarter and 9-month periods. Higher comparable rates of return increased utilization of Taxpay and Employee Paid Services, and net realized gains on the sale of available-for-sale securities drove the increases. Net realized gains included ENS investment revenue were 3.4 million and 3.1 million in the 3 and 9-month periods, compared with net realized losses of 0.8 million and 1.6 million in the respected prior year periods. Total payroll service revenues increased 19% for the quarter and 9-month periods. The total payroll service revenue comparisons for the third and fourth quarters of fiscal 2001 are impacted by the fact that there is one last billing day in the third quarter and 2 less billing days in the fourth quarter when compared to the respected prior year quarters. Comparison to the fourth quarter of fiscal 2000, should also consider the last quarter of fiscal 2000, contains higher than normal total payroll services revenue growth of 24%. Something for the impact of further changes in interest rates, the company expects full-year fiscal 2001's percentage growth in total payroll service revenues to be in the range of 18% to 19%. The HRS-PEO segment now accounts for over 11% of total service revenues.

HRS-PEO service revenue increased 25% and 33% in the third quarter and 9-month periods. These increases in service revenue are primarily related to increasing recurring revenue streams from such products as 401(k) recordkeeping, workers compensation insurance, section 125 and Paychex administrative services clients. We expect fiscal 2001 revenues for the HRS-PEO segment to be slightly under 100 million. 401(k) recordkeeping revenue increased 34% and 41% in the third quarter and 9-month periods to 11.4 million and 31.5 million respectively. Total service revenues increased 19% and 21% for the third quarter and 9-month periods respectively. These increases are in line with our expectations. Looking forward, the growth in total service revenues is expected to be around 20% for the full-year fiscal 2001. Operating costs increased 18% and 16% for the third quarter and year-to-date periods. SG&A increased 12% and 14% for the respective third quarter and 9-month periods. These increases are in line with annual historical ranges. As you remember, effective September 1, 1999, we implemented an increase in payroll sales force compensation of approximately 6 million annualized. The lower percentage increase in the third quarter of fiscal 2001 reflects the elimination of this comparison item as well as lower spending in other areas. Combined operating costs and SG&A cost with yield and year-over-year increase of 15% for both the quarter and year-to-date periods. Looking forward, we expect to grow the combined operating cost and SG&A expenses in the fourth quarter to be in line with the first 9 months of fiscal 2001. In comparison to the fourth quarter of fiscal 2000, you will remember the fourth quarter of fiscal 2000 contained higher than normal growth in these expenses, at a quarter-over-quarter growth rate of 22%.

Third quarter and 9-month operating income increased 28% and 32% respectively. Operating margins increased to 38% and 39% for the 3- and 9-month periods up from 35% and 36% in the respective prior year periods. These increases reflect the continued ability to add highly profitable ancillary services and leverage our infrastructure to grow profits faster than revenue growth. Investment income increased 80% for the quarter and 62% for the 9-month period due to the continued growth in our total cash and corporate investments position, higher comparable rates of interest, and net realized gains on the sale of available-for-sale securities. Net realized gains were 0.6 million and 0.4 million in the 3 and 9 months of fiscal 2001, compared with net realized losses of 0.4 million and 0.7 million in the respective prior year periods. Our effective income tax rate was 29.5% and 30.1% for the third quarter and 9-month periods, compared to 31.0% for the respective prior year periods. The slight decrease in the effective tax rate is due to growth in tax-exemption income, exceeding the growth in taxable income and other tax reduction opportunities. Tax-exempt income is derived primarily from income earned on municipal debt securities. We expect the effective tax rates to approximate 29.5% and 30.0% for the fourth quarter and full year of fiscal 2001. Looking forward, we expect the fiscal 2002 effective income tax rate to be in the range of 30.0% to 31.0%. As mentioned earlier, net income increased 34% in the third quarter and 35% in the 9-month period when compared to the same periods a year ago. Moving to page four of our press release, our balance sheet.

Our balance sheet is very consistent with May 31, 2000, plus our growth during the first 9 months of fiscal 2001. Total cash and corporate investments have grown to over 613 million. Total available-for-sale investments, including corporate investments and ENS investments, which represent money received from clients that would normally be disbursed to employees or taxing authorities, at a market value exceeding the cost basis by 20.7 million at February 28th, 2001. This compares to an available-for-sale portfolio in May 31, 2000, that had a market value that was 13.4 million lower than our cost basis. The move from an unrealized loss position to an unrealized gain position is due to current interest rates being below levels of last May, thus increasing the market value of held investments. Our net property and equipment balance increased by 11 million, during the 9-month period, reflecting capital expenditures of 29 million and depreciation expense of 18 million. We expect capital expenditures for the full year of fiscal 2001, to approximate 35 million compared to full-year depreciation which is expected to be in the range of 25 million to 26 million. In addition, the company is proceeding with the construction of a new building to be utilized by ENS and information technology personnel. This building is currently estimated to cost approximately 40 million but will allow for a significant reduction in lease space in the Rochester area. Occupancy is expected in the fall of 2002. Total stockholders equity increased to 717 million at February 28th, 2001, with 89 million in dividends paid during the 9 months of fiscal 2001. Our return on equity for the past 12 months was 38%. Accumulated other comprehensive loss balance at May 31, 2000, of 8.6 million has changed to an income balance at February 28th, 2001, of 13.2 million, which reflects the previously discussed increase in the market value of our available-for-sale portfolio.

We will now move to the last page of release, which contains segment information for our payroll and HRS-PEO business segments including our corporate functions. In our discussions regarding the consolidated income statement, we already provided revenue explanations for each of the segments. During the past year, we have been combining more and more of the HRS support functions with ENS functions to better service our customers and improve our efficiencies. These consolidations tend to diminish our ability to accurately depict segment operating results between the payroll and HRS-PEO segments. We are currently evaluating a change and are our reporting to include only one business segment. At the present time, we do not anticipate any changes to our revenue disclosure. Payroll operating income increased 21% in the third quarter and 22% in the 9-month period. HRS-PEO operating income increased 37% for the third quarter and 58% for the 9-month period. Segment operating income growth for the full-year fiscal 2001 is expected to be slightly higher than the growth rate for the first 9 months. Quarter-over-quarter percentage comparisons in the HRS-PEO segment may vary significantly throughout the year, and any one quarters results may not be indicative of expected full year or future results. Corporate expenses increased 0.7% to 16.7 million from 16.6 million for the third quarter. For the first 9 months corporate expenses decreased 0.9%. Corporate expenses remained relatively flat for the 9-months of fiscal 2001, as increased expenditures to support the company's growth that have been offset by lower spending on national marketing efforts and other areas. We expect the growth in corporate expenses to be flat in the fourth quarter and up less than 10% in fiscal 2002. Well, Mike did not talk about investment rates and returns.

Over the past several months, we have received many questions about the potential impact of changing interest rates. The purpose of the following comments is to provide some concise as well as informative information relating to changing interest rates. Recent actions by the FED have placed much more emphasis on interest rates as the trend of rising rates in fiscal 2000, has been replaced by a trend of decreasing rates in the last half of fiscal 2001. We refer you to our recently filed Form 10-Q and last year's annual report both available on our website for detailed information regarding our investment portfolios and the affect of changing interest rates. The following comments represent a summary of the items presented in our SEC filings. In simple terms, increases and decreases in interest rates quickly affect earnings from short-term funds and over time affect earnings from the available-for-sale portfolio, which is referred to as our intermediate funds. The earnings from the available-for-sale portfolio do not reflect changes in rates until the investments are sold or mature and the proceeds are reinvested at current rates. The immediate impact of changing interest rates on short-term funds maybe temporarily offset by realized gains or losses from transactions in the company's available-for-sale portfolio. In fiscal 2001, we expect our total investment portfolio to average 2.2 billion versus 1.8 billion in fiscal 2000. Our normal and anticipated allocation is 50% short term and 50% in intermediate term. The average duration of short-term investments is generally less than 30 days, whereas the average duration of the intermediate term investments is 3 years. As interest rates change, the market value of our available-for-sale securities portfolio moves in the opposite direction. Unrealized gains are generated when rates decrease and vice-versa. As of February 28th, 2001, the company had 1.1 billion investments in available-for-sale securities at fair value with weighted average tax-exempt yields to maturity of 4.6%.

Assuming a hypothetical decrease in interest rates of 25 basis points, given the February 28th, 2001, portfolio, resulting potential increase in fair value would be in the range of 6 million to 7 million. Conversely, a corresponding increase in interest rates would result in a comparable decrease in fair value. These are balance sheet variations only, as the income statement is not affected until there is an actual transaction in the available-for-sale portfolio. We estimate the earnings affect of a 25 basis point change in interest rates, 17 basis points for tax-exempts investments. At this point in time, it equates to approximately 3 million for fiscal 2002. As previously mentioned, unrealized gains on the available-for-sale portfolio were 20.7 million at February 28th, 2001. The exact affect of changing interest rates is difficult to determine due to the many factors involved. They include, but are not limited to, daily interest rate changes, seasonal variations in investment balances, actual duration of short and long-term investments, the proportional mix of taxable and tax-exempt investments, changes in tax exempts, municipal rates versus taxable investments rates, and the fact that realized gains are more prevalent in a decreasing rate environment and vice-versa for realized losses. You should be aware, that certain written and oral statements made by the company's 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 statement at the end of page 2 of the press release for our discussion of forward-looking statements and related risk factors. I would now like to turn the meeting over to Tom Golisano, who will provide some comments before we open for questions.

Good morning everybody. A couple of comments, the first of all in our core payroll sales and loss category. Everything is in track and in a very satisfactory mode. As a matter of fact, as a point of interest, we sold slightly over 22,000 new clients in the month of January, which of course is the biggest month in the history of the company. Our losses seem to be in a very narrow range and very acceptable at this point. All of our ancillary services remain very strong including Taxpay and the employ pay option. Our ancillary services such as 401 (k), workers' comp. Incidentally in workers' comp, we had our first month, a couple of months ago where we sold over 1000 clients and we have been able to do that in successive months. In fact, in the month of January, we sold over 1400 new clients in our workers' comp product range. 401 (k) and major markets remained very, very strong and our Paychex administrative services, again we've also had 4 consecutive months now where we sold over a 120 new clients each month. What I would call a, not a substandard, but not as a determined sales effort as we have in some of our other product categories. It makes us feel very comfortable going forward and we have a great opportunity with Paychex administrative services. If you recall, the average revenue per client is about $11,000 per client per year. If you multiply that it adds to 125 clients, it is about $1.3 million in new revenue per month over a 12-month period, that's about $15 million. So, in a 3- or 4-year period we should have a business that is of much significance to us. Everything seems to be hitting on all cylinders. The only thing we are getting a lot of questions about is of course is interest rates. I think John just gave you a good overview. The impact, I think the impact is far less dramatic as most people seem to think, and when you start doing the math it is when it confirms it. Other than that everything is going on very, very well here and we look forward to your questions.

Anna?

Yes Sir. The question and answer session will begin now. If you are using a speakerphone please pick up the handset before pressing any numbers. Should you have a question please press '1' '4' on your pushbutton phone? If you wish to withdraw your question press '1' '3'. Your question will be taken in the order that it is received. Please standby for your question. The first question comes from Patrick Burton. Please state your affiliation followed by your question.

Hi! Salomon Smith Barney. It would appear Tom that the major markets revenue growth is actually accelerating. Could you give us an outlook for the fourth quarter and next year for that part of the company? Thanks.

As far as the outlook for going forward, I think that right now we average about 75 to 77 sales reps, and I think you are going to see about a 33% increase in that number, plus we are going to be opening up about several new markets. The final number hasn't been determined, but I think that should reflect our confidence level in what's happening. Also, as you probably know, some percentage of the new client additions that are going into major markets are clients that have graduated from our core payroll service and that also has obviously helped us with maintaining client levels instead of losing clients through our core payroll service. So, our enthusiasm level for major markets remains very, very high. I see no unusual competitive reaction in any way, shape, or manner. At this point, it's probably too strong on the radar screen.

What percentage as a followup of that revenue growth would be clients graduating and what percentage roughly would be new clients? Thanks.

Somewhere between 25 and 30 would be graduating clients percent.

Thank-you Tom.

Our next question comes from Randy Mehl. Please state your affiliation, followed by your question.

Robert W. Baird. Congratulations on another fine quarter. The quarter payroll revenue growth is about 14%, it looks like it is slower than it has been in the past couple of quarters and slower than last year. That obviously excludes that effect of rate. Where do you expect that to trend? I know there is a days comparison issue there, but where is the normalized growth rate for that and why did it slow down?

I think we have given a lot of guidance, and we think the revenue numbers are going to be looking outward for discussion. So, I don't think we want to get more pointer than that. Now, you've got to realize, one day of growth is equal to about 1.5% year-over-year. We're walking into the fourth quarter with a very, we don't usually have these are more difficult comparison since that you remember last year's fourth quarter revenue was extremely strong and the total revenue growth was 26%, way above our norms. So, comparing against that, you get some movement and where billing are and how strong year-ends are and special billings, and we didn't see anything highly unusual, but last year, we had all things going very, very good. This year, we haven't really seen much change, going against a period where revenues were extremely strong a year ago.

In terms of the past product, you mentioned that you're getting good progress there. Tom, when do you expect to ramp up your sales effort or make it a more sustained effort there?

I think what you're going to see happen next fiscal year, Randy, is we're going to take some of the growth of our HRS sales division mainly people that sell 401 (k) and flexible spending account. We're taken a dedicated a number of them plus new hires towards only selling the past product. So, I think next year we're going to have something like 40 dedicated reps selling that product or service across the country, and I think the year after that you'll see another dramatic increase in that. At this point, we have to be very careful to make sure that we stay with it service wide, and we got a lot of employee training to do on the service side. So, we have to stay within their parameter.

Great. Thank-you.

The next question comes from Jim Kissane. Please state your affiliation, followed by your question.

Hi! Tom and John. Jim Kissane from Bear Stearns. Tom, do you envision the industry, maybe led by Paychex moving more towards a fee for service for the tax filing over time so that you can avoid all these questions maybe?

That's actually happened a little bit Jim without also having anything to do with that. I remember a few years ago the internal revenue change, the method and style of collecting payroll taxes. They reduced the flow a little bit and the payroll processors including ourselves, absorbed some of that loss that probably reflected it in a higher feed back to the client. I don't think you're going to see any initiative taken by either ourselves or by anybody else, I think it is just going to be part of our culture from this point on. The customer, at least the narrowed end of the spectrum, doesn't consider that lost interest income a factor. Okay, so, it's kind of hard to replace that with the fee when the customer doesn't think they're paying for it in anyway now. So, I think you're going to see us remaining the same but we're going just to have to live with this interest like.

Okay, thanks Tom.

Our next question comes from Karen Taylor. Please state your affiliation, followed by your question.

Karen Taylor with Wit SoundView. Just a question regarding the major market services. Are the retention rates in that business similar to what you're seeing in your core payroll business? And then the second question - as far as technology, are you investing with respect to technology in that business?

Karen, the turnover rates or retention rates in our clients for major markets - the retention rate is much higher and probably the reason for it, the single largest reason for it, is the fact that you don't have businesses going in and out of business like you do at long end of the marketplace. A client base is a much more stable group of companies than they are in a core payroll service. So, consequently, the retention level is much higher with major markets. As far as technology is concerned, Paychex is moving to a direction of bringing our softwares together. Currently, right now, we have a payroll system for major markets and a payroll system for our core payroll services. I think over the time, that can be a short period of time, but over time, you're going to see all the functionality in our major market system moved over to our core clients so that they can both take advantage of it, but other than that it's pretty much status quo.

Our next question comes from Jeffrey Ho. Please state your affiliation, followed by your question.

Yes, hi! Whitehall Asset Management. John, a question for you on the investment trade and return. Issues that you covered at the end of your prepared remarks, you've mentioned, I think, if I understand it right, that a 25 basis point change in rates would net effect inclusive of the gains on your portfolio investments available for sale, have a negative $3 million effect if we were to have a 25 basis point decline as well?

...the $3 million is before capital gains.

Oh!, it's before capital gains. Okay.

There are a lot of factors going on here which makes this complicated. We spent a lot of time before this release, all the same information is in our 10-Q, to try and provide the best information possible, to help you people work in this environment and what you have to realize [_______________] is the impact of a 25 basis point change before the recognition of any gains. We've talked in the past that, generally in the short term or temporarily, rate changes are somewhat offset by realized gains.

And that this is such a unique period, and as of tomorrow, we're hopefully going to get at least a 150, maybe even more cumulative basis point rates of cuts, all our FED funds in the last 3 months. Looking forward in the next year because this compression is so tight, would you envision there wouldn't be some material affect, if inclusive of cap gains as they wash through, or would there be delayed affect, we get the short term head first, and then the intermediate stuff flows through later or any disconceptual flow through of how this nets out inclusive of cap gains going forward?

I think it's pretty much as we've said and I think the difficulty again here, and we've quantified more here this time than we have in the past because we want to make sure everybody understands it accurately and you get a lot of things going on, I can't guess what [Greenstand] is going to do? You can see that we estimated what happens to the portfolio, that's the $7 million estimate, that $6 to $7 million of the affect on the portfolio what happens unrealized gains as you change that. I also know that these markets don't move in sync, that sometimes they move when you announce the change, sometimes the new markets move before you announce the change. It gets pretty complicated. So, I think actually we've given you as much information as we have, next year, I don't think interest rates are going to be a real big negative, because I think we're going to get some gains offsetting them, and right now, it's hard to exactly say what's going to happen because nobody knows.

Right. Okay, thanks.

Our next question comes from Kristin Gamble. Please state your affiliation, followed by your question.

Hi! Flood Gamble Associates. Can you see any effect currently of what's going on in the economy in your core customer base for instance, in the number of checks per employer, those kinds of things that would imply some change in the basic dynamic of your business?

Kristin, we have not seen any change in our number of checks per client. We have not seen any change in our ability to sell clients, and we have seen no change in what we consider to be our normal client retention.

And so, January, which is obviously an important time, the things were pretty much on track?

Yeah, and as I mentioned, we sold over 22,000 clients which was obviously the biggest January we've ever had, and we were very happy with that number.

Terrific. Thanks.

Okay.

Our next question comes from [_______________]. Please state your affiliation, followed by your question.

Hi! Actually it's Ben [_______________] for Bran [_______________] at Deutsche Bank and this question kind of follows that one pretty smoothly. Just trying to get your measure of DSOs on February 28th, and also, whether you've had any collections issues?

First up, when you look at our balance sheet, you want to track DSOs. What day the month ended on and a lot of other factors affect us. While we have not had any receivable collection problems that we have noted. At the same time, we are taking more and more of the money out in our electronic interface which tends to reduce our receivables. So, the fluctuations you see are just month-to-month, and at this point, somewhat to the economy, we haven't really seen anything at the low end that seems to be an indicator of any change yet.

Okay. Great, thanks.

Ladies and gentlemen, once again should you have a question please press '1' followed by '4' on your pushbutton phone at this time. Our next question comes from Randy Mehl. Please state your question.

It's just a quick follow up on the core payroll revenue growth issue, if you add back the day it gets you to about 16%, according to my calculations, you were trending higher than that in the past few quarters, and I'm wondering was January good enough that you expect now that number to accelerate and set you up well for the year or should we look at this as a more normal growth level for the core payroll segment?

Randy, January by itself is not enough to have that much of an impact, to have a material impact, because the client's revenue just hasn't been there that long. I think the issues that John talked about with the one day and so forth bringing that up to over 16. Also, considering the fact that doesn't include float account, we think we are very much in the strata that we should be in and have been in.

Okay, thanks.

Our next question comes from Greg Gould. Please state your affiliation followed by your question.

Thanks. Greg Gould, Goldman Sachs. Tom, can you just review quickly how much of your business is not tied to or what percent of the revenue is not tied to the number of Paychex? Just trying to get a sense for how much of the business is variable.

I'll give to you by product line, Greg. In the case of core payroll, of course, it is tied to the number of checks. In the ancillaries of Taxpay and the pay options that the employer uses, those things are flat fee in the case of Taxpay, in the case of employee pay process that is flat fee for some much of check, but the fee, I'll give you a typical example. If the client opts for direct deposit the fees as per 10 employees would be $6 flat fee and $2 and ¢50 for all of the employees, for the 10 employees or ¢25 per person. So, if you drop off one employee, it goes from 8.50 down to 8.25, it's not really that immaterial and certainly in that 10%. In the case of 401 (k) recordkeeping, same thing; the highest part of the fee is the fixed amount per month, so the number of employees will not have an applicable percentage reduction. In the case of workers' compensation, that's pretty much the same. In the case of PAS, PAS is more directly related to the number of employees and major market is more directly related to number of employees.

Okay, and then a second question - just back on the interest rates for a minute, because the impact is so, it seems relatively modest, are you confident that Paychex as a whole with the add on services can absorb the current guesses of what the segment will do tomorrow?

Give us that once again Greg.

Sorry. With the client expectations for tomorrow and as you outlined a relatively modest impact from say a 25 basis point reduction, does that mean that you're confident that you can absorb the rate reductions that are expected for tomorrow?

Well, I hesitate to answer that one because I am concerned following the speculation on the rate decreases tomorrow, but assuming they're not overly significant or overly substantial, we manage the process from year to year as best we can.

Okay, thanks.

So, I guess, I'm really not answering your question.

Understood.

Let me ask you a question Greg. How important is this interest rate stuff to the economy? Is it as big as they say it is?

It's not fair, we can only ask questions on the call. I'll defer that to the next question.

And it's amazing how fast it went up and how fast it came down.

Thank-you, good job.

Okay.

Next question comes from Robert Maina. Please state your affiliation followed by your question.

Sure, it's Robert Maina from CIBC World Market. Economy in a market where going down insurance cuts do matter more than when they go up, so that's your question. My question stems from the margins of the PAS product, can you give us some idea what those margins are relating to or versus your other businesses?

Yeah, basically the revenue for the PAS product comes from three components. First one is payroll processing and ancillary services related to payroll like Taxpay and direct deposit, that is at full retial based on the number of employees and whether they take those optional services. For the HRS services, it's full retial price for all of those, everything from employee handbooks right to 401 (k) recordkeeping. And the third component, which is new to us, is the component that we call the customer service representative component. This is actually a person that for the first time goes into our client's offices and actually on a high level of service works for the client and has actually a record of a certain number of calls on each client per month. The average revenue per customer service rep per client is about $5000 a year. So, we have full retail per payroll and payroll related, full retail for all of our HRS services, and another component of $5000 per CSR per client. The average CSR we expect to handle somewhere between 35 and 45 clients. You multiply 40 times $5000 that's $200000, and you can certainly take a guess at what the personnel cost is for that component.

Yeah, fairly small.

It should have all three, it should have the margins we definitely used to on payroll and HRS and certainly the CSR component should be very profitable for us too.

And then just a followup question. On the investment portfolio, the classification of investments, usually the fourth quarter declined a bit, should we expect any larger impact in the May quarter than normal?

No, but you have to realize that last May, the last FED rate changes we're in, so revenue growth and float incoming in the fourth quarter will be less than float has been so far this year subject to gains and all those other things that are going to happen which with the number looks like when I get to the end there might be somewhat different from what I see right now, but that's why this subject is so difficult.

No, I am talking in terms of the absolute dollar amount in the investments, I mean, last year it was 2.1 billion down a percent.

Oh! The dollars should go down because the best season for us is yearend and then the first calendar quarter when it gets to May 31 our balances start to tend to go down a little bit, that's the seasonality of the payroll tax withholdings.

Sure. I am looking back over the last two years, and last year we were down a percent at the year and before we were down 5%, what's the fluctuation, what drives that number?

The fluctuation in the balance?

The fluctuation in the balance, I mean, that's pretty wide spread, but last May..

...we're at the end the quarter and the end of the year is too.

Okay, that's helpful. Thank-you.

Our next question comes from John Mathis. Please state your affiliation followed by your question.

It's already been answered, thank-you.

Okay, our next question comes from Sameer Shah. Please state your affiliation followed by your question.

My question has also been answered, thanks.

Thank-you. The next question comes from Patrick Burton. Please state your affiliation followed by your question.

Hi! Salomon Smith Barney. John, one followup question, in the core payroll segment, given you've got a negative two-day comparison next year, plus the revenues were very strong in the fourth quarter last year, could we be talking like a 10% growth quarter for core payroll in the fourth quarter? Thanks.

No, that's too low.

Too low? But definitely less than the 14 this quarter?

Look Patrick, I won't know until I get there. You've spend a lot of time on the revenue growth, but what you don't understand is we've got an offset that's going to be favorable to us. Last year at two unusual things, one was revenue, but the other one was expense growth. We invested significant amounts of money to get the MMS a little more kick-started in some other programs and those expenses won't be here. So, I think we'll just focus on the revenue thing without looking at the expense thing as a mistake.

Okay, so both will be low, in a percentage of increase terms both should be lower.

Yes, you guys realize last year that quarter was, when you go back and it's fun when you're in the middle of them, but in the following year you've got to go compared to them. A year ago, we had two extremes on both those topics and it really was just in the fourth quarter.

Okay, thank-you.

Ladies and gentlemen, if there are no further questions, I'll turn the conference back to Mr. John Morphy to conclude.

Okay, we want to thank-you very much for participating today. We apologize again for the inconvenience, I am going to let Tom, who has a few more comments here right before you, and thank-you very much.

Just a quick comment. We understand on the line today is Mr. Donald Brinkman who is a retired member of the Paychex Board of Directors, and we understand Mr. Brinkman went through some heart surgery and appears to have come out of it really well, and it's nice to have you on the line Don, and I just wanted to say hello on behalf of all the people of Paychex. Take care everybody.

Ladies and gentlemen, that concludes our conference for today. Thank-you all for participating and have a nice day. All parties may disconnect now.