沛齊 (PAYX) 2002 Q4 法說會逐字稿

Good morning. Welcome to the Paychex

results year end conference call. All will be on

listen only mode until the question session of the

conference. If anyone has an objection, they may

disconnect at this time.

I would like to introduce your speakers for

today's call, Mr. John Morphy, Chief Financial

Officer, and Thomas Golisano, Chief Executive

Officer. Mr. Morphy, you may begin.

Thank you for joining us for our fourth quarter

and fiscal year end press release. Today we have

just end 200 people on the phone. Also with us

today is Tom Golisano, our Chairman, President,

and CEO.

Upon the completion of the review of our financial

results, we will conduct a question and answer

session. This morning we released our financial

results for the quarter ended May 31, 2002, and

filed a Form 8-K with the SEC that provides

additional discussion and analysis of our results

for the past three years.

Fourth quarter earnings release SEC filings, and

our recent news releases, current financial

information and updated investor relations

presentation can be obtained by accessing our

website at WWW.Paychex.Com at our investor

relations home page.

This is being broadcast over the internet. It

will be archived and accessible by the internet

until July 2, 2002. For the fourth quarter and

fiscal year ended May 31, 2002, total revenue

growth was 7 percent and 10 percent, respectively.

That income growth was 1 percent for the fourth

quarter and 8 percent for the year. Quarterly

earnings per share were 18 cents in the fourth

quarter of fiscal 2002 and fiscal 2001 up

1 percent at an unround basis.

Year-to-date earnings per share were 73 cents

versus 68 cents a year ago, up 8 percent on an

unrounded basis. Our results continue to be

impacted by recessionary economic conditions in

the United States. In response to the declining

economic conditions, the Federal Reserve has

lowered the federal funds rate 11 times since

January 2001 to 1.75 percent which represents a

cumulative 475 basis point reduction. The last

reduction the federal funds rate occurred in

December, 2001. The impact of the rate cut on

year-over-year comparisons for interest on funds

held for clients in corporate investment income

more significant in our third and fourth quarters.

Year-over-year comparisons for interest on funds

held for clients and corporate income combined

were up 14 percent and 2 percent for the first and

second quarters of fiscal 2002, respectively. But

were down 30 percent and 33 percent for the third

and fourth quarters and down 15 percent for the

fiscal year.

In addition to the effects of volatile interest

rates, the impact of a recessionary economy has

resulted in a lower number of checks per client as

our existing clients reduce their work forces. In

the fourth quarter of fiscal 2002, the company

experienced a 3.0 percent year-over-year decline

in checks per client compared to 4.8 percent in

the third quarter, 4.3 percent in the second

quarter, and 2.6 percent in the first quarter.

For the 2002 fiscal year checks for clients

declined 3.7 percent, compared to the recession of

the early 1990s when the company experienced a

total reduction in checks per client of

approximately 3 percent.

Despite the above factors, the income before taxes

remained 41 percent of total revenues during

fiscal 2002 compared with 42 percent in fiscal

2001 and 38 percent in fiscal 2000. In addition,

we continue to leverage our infrastructure as

operating income when you exclude interest on

funds held for clients as a percentage of total

service revenues with 34 percent in fiscal 2002

compared with 32 percent in fiscal 2001 and

30 percent in fiscal 2000.

We estimate that if the interest rates and checks

per client conditions experience in fiscal 2000

that continued throughout fiscal 2001 and fiscal

2001, net income growth for 2001 would have been

approximately 25 percent compared with actual

growth of 34 percent and net income growth for

fiscal 2002 would have been approximately

20 percent compared with actual growth of

8 percent.

We will now refer to the third page of the

release, the consolidated income statement. Total

service revenues increased 12 percent and

13 percent in the fourth quarter and full year

period to $230.5 million and $892.2 million,

respectively. Service revenues consist of service

fees earned from our payroll and human resource

and benefits product line. Payroll service

revenues for the fourth quarters in nine months

increased 10 percent and 12 percent to

196.5 million and $770.2 million respectively.

increases are related primarily to growth in the

client based, increased use of ancillary services,

and price increases. As of May 31, 2002,

85 percent of our clients utilized tax base and

57 percent utilized the company's employee paid

services.

Major market service revenue increased 51 percent

for both the fourth quarter and 12-month period to

$20.3 million and $71.7 million, respectively.

Approximately 1/3 of our new major market services

clients are converging from the company's core

payroll services. We now provide M and S services in

over 60 markets covering approximately 85 percent

of our total client base.

Human resource and benefit service revenues

increased 27 percent and 25 percent in the fourth

quarter and 12-month period to $34.0 million and

$121.9 million, respectively. The increases are

primarily related to growth in retirement services

clients and client employees served by the

company's past PEO bundled services. Retirement

services revenue increased 31 percent and

30 percent in the fourth quarter and 12-month

period to $15.2 million and $56.5 million,

respectively. May 31, 2002 we had over 23, 000

retirement services clients.

Paychex administrative service past and the

company's Professional Employer Organization, PEO,

are comprehensive services that include payroll,

employer compliance, employee benefit

administration, and risk management outsourcing

services that are designed to make it easier for

businesses to manage their payroll and benefits

costs. Sales of past and PEO products have been

strong with administrative fee revenue from those

products increasing 37 percent and 41 percent in

the fourth quarter and 12-month periods of fiscal

2002 compared with the respective prior year

periods. As of May 31, 2002, our past and PEO

product service over 80,000 client employees.

Interest on funds held for clients decreased

39 percent and 25 percent for the fourth quarter

and 12-month period compared with respective prior

periods. The decreases are as a result of lower

interest rates in fiscal 2002 offset somewhat by

higher average portfolio balance. Net realized

gains in the sale and available for sales

securities included in interest (inaudible) fund

to 1.5 million for the fourth quarter from 2.5

million in the (inaudible) quarter.

I apologize here. We're making the call and we've

got a call coming in on the other line. Net

realized gains increased to $9.2 million for the

12-month period compared with 5.7 million in the

respective prior year period. The funds result

for clients portfolio earned an average rate of

return of 2.4 percent and 2.9 percent in the

fourth quarter and full year fiscal 2002 compared

with 4.3 percent and 4.6 percent for the same

periods last year. Average daily portfolio

balance totals $2.0 billion and $1.9 billion for

the fourth quarter in the year ended May 31, 2002

compared with $1.9 billion and $1.7 billion in the

respective prior year periods. The increase

reflects high utilization of tax pay and employee

pay services by new and existing clients.

I just want to take a second. Tara?

Yes.

Is everything still fine here? I just wanted to

make sure we didn't lose anybody.

No, sir, everything is fine.

Thank you.

You're welcome.

(Inaudible) and SG and A expenses increased 8

percent and 11 percent in the fourth quarter,

12-month period, compared with respective prior

year periods. This reflects increases in

personnel, information technology, and facility

cost to support the growth of the company. There

are approximately 7400 employees at May 31, 2002,

compared with 7300 at May 31, 2001. Fourth

quarter and 12-month operating income increased

5 percent and 8 percent, respectively.

Investment income decreased 16 percent for the

fourth quarter and increased 15 percent for the

year. The decrease for the quarter is primarily

due to lower average interest rates earned. The

increase for the year was due to net realized

gains on the sales available for sales securities

and the increase in average daily invested

balances offset by lower average interest rates in

fiscal 2002. Net Realized gains were $1.5 million

and $6.7 million in the fourth quarter and

12-month periods of fiscal 2002, compared with

$1.3 million and $1.7 million in respective prior

year periods.

Average daily balances invested were $740 million

and $685 million for the fourth quarter and 12

months ended May 31, 2002 compared with

$640 million and $575 million the respective prior

year period. The increases in the average

portfolio balances were driven by additional net

cash inflows from operations. Proffered

investment portfolio earned an average rate of

return of 3.4 percent for the fourth quarter and

3.7 percent for the 12-month period compared with

4.4 percent and 4.5 percent in the respective

prior year periods. For those of you who spend a

lot of time tracking on these exact balances and

numbers, we have enclosed a table in our Form 8-K

where this data is very prominently disclosed, and

we would refer you to that to make sure you have

all the correct numbers.

Our effective income tax rate was 30.5 percent for

the fourth quarter and 12-month period of fiscal

2002 compared with 29.5 percent and 30.0 percent

in respective prior year period. Fiscal 2003

effective income tax rate is expected to

approximate 31.0 percent. As mentioned earlier,

net income increased 1 percent and 8 percent for

the fourth quarter and 12-month period of fiscal

2002 when compared to the same period last year.

Looking forward, we are not sure how long the

challenge in economic conditions and interest rate

comparisons will last. On an encouraging note,

while year-over-year checks per client continues

to reflect declines, we are beginning to see

indications of improving check conditions in our

client base. We have based our fiscal 2003

expectations on current economic conditions

remaining in place with no significant changes.

Accordingly, for fiscal 2003, we project payroll

service revenue to grow in the range of 9 to

11 percent and human resource and benefit service

revenue growth in the range of 17 to 19 percent.

Total service revenue growth is anticipated to be

in the range of 10 to 12 percent.

We expect interest on (inaudible) for clients and

corporate investment income combined to be down

approximately 15 percent. 15 percent down

expectation is based upon the expectation that

realized gains will not be very available after

our first quarter.

Taking aforementioned factors into consideration,

we anticipate achieving record total revenues and

net income for fiscal 2003 and estimate total

revenue growth to be in the range of 8 to

10 percent with net income growth approximating or

slightly less than total revenue growth.

We now move to page 4 of the press release, our

balance sheet, which is very consistent with our

May 31, 2001, Funtell (phonetic) growth during the

past year. All cash and corporate investments

have grown to $725 million. Our total available

for sale investment, including corporate

investments reflected and Funtell (phonetic) for

clients reflected unrealized gains of

$26.7 million and May 31, 2002 compared with

unrealized gains of $20.5 million at May 31, 2001,

unrealized losses of 13.4 million at May 31, 2000.

The decrease in interest rate environment drove

the improvement in the market value of the

available for sale portfolio.

A powerful interest rate market has resulted in

significant changes in the market value for

available for sale portfolio. During fiscal 2002

the unrealized gain position ranged from a low of

$7.5 million that happened during the first -

fourth quarter to a high of $35.9 million during

the second quarter. The unrealized gain position

was $31.5 million on June 20th, a few days ago.

So you can see that the market rates have been

moving rather abruptly if we recognize our low of

$7.5 million about 6 or 7 weeks ago, but as of

just the recent few days ago was back up to

$31.5 million.

Our net property and equipment balance activity

during the year reflects capital expenditures of

$54 million and depreciation expense of

27 million. For fiscal 2003, capital expenditures

are expected to be in the range of $65 to

$70 million, including the purchase of a 220,000

square foot facility in Rochester, New York, which

is expected to be completed in the first quarter

of fiscal 2003.

The past 12 months we have purchased two buildings

in the Rochester area. The first was Webster,

announced some time ago that would allow us to

expand our facilities on a much more

cost-effective manner than our original plan to

expand our corporate headquarters. Appreciation

expense for fiscal 2003 is projected to be in the

range of $33 to $35 million.

(Inaudible) stockholders equity increased to $924

million May 31, 2002, with $157 million in

dividends paid during fiscal 2002, a payout of

57 percent of net income. A return in equity for

the past 12 months was a strong 32 percent.

Accumulated other comprehensive income balance at

May 31, 2001 of $13.1 million has increased to

$17 million at May 31, 2002 which reflects the

previously discussed increase in the market of our

available for sale portfolio.

Investment rates of return. With the volatile

interest rate environment we often receive many

questions about the potential impact of changing

interest rates. We refer you to our Form A-K

which was filed with the FCC this morning under

the section entitled Market Risk Factors for

further discussion of interest rates and the

related risks. The A-K includes a table

disclosing the average investment balances, rates

of return, realized gains and losses in the

portfolio, unrealized gains and losses in the

portfolio, portfolio duration, and the weight of

the average yield to maturity of available for

sale securities.

To summarize, changes and interest rates quickly

impact earnings on short-term investments. The

overtime impact of earnings on available for sales

securities as current holdings are sold or matured

and are reinvested at current rates. Exact impact

of changing interest rates on the company is

difficult to determine due to many factors.

However, we estimate that a 25 basis point change

in taxable interest rate, 17 basis points after -

on a tax-exempt basis, will have an effect of $3.0

million on our earnings in the next 12-month

period.

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 on page 2 of the press release

for our discussion of forward-looking statements

and related risk factors.

At this time I'll turn the meeting over to Tom

Golisano, our Chairman and CEO, will provide his

comments on the first quarter and the fourth

quarter before we open the meeting for questions.

Thank you, John. First, I'll cover all of our

key areas relative to sales and (inaudible) hang

on just a second. We've got another phone line

ringing.

Our core payroll sales organization had a fairly

good year considering the environment out there.

We didn't sell as many clients as we anticipated,

but the great news was the average size client we

sold this year for the first time in our history

actually jumped in size. The annualized revenue

was actually up 10 percent. I think that's as a

result of the fact referrals were down because of

new or lesser than average new business startups,

so consequently our sales organization gravitated

to existing companies.

On a client retention, we think we did

surprisingly well considering the economic

involvement. We were within 1 percentage point of

our all-time record client retention so we're very

happy about that.

Our MMS sales organization, major market sales

organization, was the star of the company this

year. Their achieved their quotas, the gross rate

in revenue was up almost 50 percent and we are

expanding the product next year to about 14 new

markets. (Inaudible) is going to grow about

25 percent. Our core sales organization, our

growth rate is somewhere going to be between 6 and

8 percent of core payroll sales.

401-K, we got off to a slower start than we

anticipated in the year. We never really did make

it up, but we finished the year fairly strong with

24,000 clients in our 401-K recordkeeping service.

Workers' comp was strong all year long. We ended

up the year with about 25,000 clients. We expand

the number of carriers to five, and that market,

even sales effort, is going great.

Our past product, we're approaching 2000 clients

and combined between our past product and our PEO,

we have approximately 80,000 employees covered.

All four sales organizations next year are geared

and ready to go. All the people have been hired,

all the growth has been put in place, so we think

we're in great shape.

John mentioned a little bit of the good news, the

fact that our average checks per client stopped

its decline. In fact, we had a slight bit of

recovery. One quarter doesn't make a year,

obviously, but certainly it's a positive sign. So

with that, we'll turn it over, Tara, for you and

for questions.

Thank you. At this time we'll begin

the question-and-answer session. If you'd like to

ask a question, please press star one. You will

be announced prior to asking your question. To

withdraw your question, you may press star two.

Once again, to ask a question, please press star

one. One moment, please.

Our first question will coming from Jennifer Dugan

of Merrill Lynch. You may ask your question.

Thanks. Last quarter you reported you had a

net positive competitive pay glaze with some

pricing pressure. What was the situation this

quarter?

Take-aways from - I'm not sure I understand.

For core new sales that you had been having

competitive wins versus 80 P (phonetic) and it

actually had a few take-aways as well.

You're probably referring to a year-end 80 PK

(phonetic) from the calender year end, 80 PK

(phonetic) very aggressive and coming after some

of our clients and we responded and we think we've

fared very well, but that pressure level, that

intensity has dissipated over time. I think it

was a sort of one time sort of year end event and

we haven't incurred much unusual level of

competitiveness than we usually have to endure.

So I think it was a one time thing at the end of

the calendar year and things are pretty much back

to normal.

In terms of the pricing as well, is that back

to normal or is pricing still a little bit below

average?

Paychex is respective. I certainly can't speak

for ADT. We probably upped our discounting a

little bit to respond, but I'll tell you in the

overall scope of things (inaudible).

Okay. Great. Thanks.

Greg Capelli (phonetic of Credit Suisse

First Boston. You may ask your question.

Thanks. Hi, Tom and John. It's Greg and Josh.

Could you give us a little more color about the

progression through the quarter on the checks per

client, perhaps where you ended versus entered the

quarter?

I would say, first of all, I think our

comments, John, if I'm correct, include the first

two or three weeks of June. It started probably

in the tail end of April. Noticed that certainly

in May and it seemed to - I'm sorry, in April and

it seemed to accelerate a little bit in - I'm

sorry. Started in April, accelerated a little bit

in May, and the first two weeks of June looked

very, very positive.

Okay. And then just in a fiscal three guidance

to the kind of assume an improvement from here

with the numbers that you gave on the revenue

side?

We did the budget. It was in line with what

kind of happened the May period. We've just

completed that process. Our expectations for next

year are not based on any significant improvement.

Maybe a little bit in the last half but first half

we remain cautious. Running the company based on

things not changing. We didn't want to put the

ability to spend in the budget and find out we

didn't have the revenues to support it.

One final question. Tom, have you guys done

any tweaking at all in the quarter to the sales

force just in terms of the structure or pay over

the past quarter or so?

Yeah, we've done a couple of things, primarily

at the major city level we found out the

management of our organization a bit. We used to

have the position - I'll give you an order:

(inaudible) rep, district sales manager, metro

sales manager, loan sales manager. Basically what

we've done is eliminated the metro manger

position, put in place more senior sales managers

and a few more district sales managers.

The net result is economically about a wash, but

we've reduced the level of management at the city

level, which we think is going to have a very,

very positive impact. We did tweak the

compensation levels a little bit for our sales

reps but nothing significant.

Okay. Great. Thanks a lot.

Jim Kusane (phonetic) of Bear Stearns.

You may ask your question.

Thanks. Hi Tom, John. John, can you give us

the retention in the quarter and the full year and

how that compares with a year ago?

Don't generally give exact numbers on pension

but they're in the range where they've been

historically. We see a little change,

bankruptcies, but we're not seeing a lot of

difference. We actually did see some improvement

this year in view of the fact we think our

operation had a much better operation than it did

a year ago, but Tom will probably throw a few

comments.

Jim, there's no question our branch manager and

operations did a better job this year than last

year. We measure it by clients that we lose due

to poor service; we measure it by customer

complaints at the corporate level and so forth.

We had a far better year this year than last year,

and I think that's the reason our client retention

actually, consider the economic condition, was

better than we expected. I did say earlier we

were within 1 percentage point of our overall

record for client retention. We're pretty happy

about that.

Despite the increase in bankruptcies?

Right.

And historically what portion of your new sales

have come from new business startups.

45 to 47 percent.

And this year what was it?

Gee, I wish I could give you that calculation.

I know it's down. I can't give it to you. I

don't want to guess. We know there were fewer

startups and that did affect us.

Okay. Great. Thanks.

Greg Seeber (phonetic) of AG Edwards.

You may ask your question.

Gentlemen, I'd like to follow up on this

somewhat positive note proving (inaudible)

derivative and asked if you've seen any other

metrics such as average size of check per client,

indications there may be overtime or hours worked

on the job are increasing. Or maybe just, you

know, new startups, do you see anything else

that's showing signs of bottoming out.

No, I can't say we have. The only thing we can

say we feel comfortable about because we have a

very accurate count on is our checks per client.

Anything else would be intuitive and quite frankly

I don't feel strongly enough about any prior to

make any kind of declarative statement about our

economy.

Could you on your guidance give a little more

comment on deceleration and HR and benefits

services. You're taking out 25, now taking down

to the high teens. How much is simply growing

base or how much, you know, because you had a

pretty good fourth quarter up 27 percent.

I think the base is just getting larger and

obviously we're trying to manage, if you will, our

revenue and profitability growth over the year and

I think to be on safe ground we decided to bring

it down a few points. We're not being as

aggressive in building our HR and sales

organization this year as we were last year. Did

a quantum jump in sales reps. This year we're

being more conservative.

Don't you normally around May put forth a price

increase and have you done so and has it helped?

We put in the price increase the first week in

May as we traditionally have. I think it's

somewhere around if we were to pick a number,

3 percent, 3 1/2 percent, somewhere in total,

fairly conservative. We've had about zero client

reaction to it.

Thank you very much.

Randy Mel of Robert W. Baird. You may

ask your question.

Yeah, good morning. Just wanted to ask about

the core payroll growth assumption. I think I

heard 9 to 11 percent. You came in at about

10 percent in the quarter, and maybe just comment

on why that shouldn't improve throughout the year,

just based on comparisons getting a bit easier

than they were in the fourth quarter.

Randy, we haven't built in boom tech (phonetic)

conditions. We have a little here but not enough.

We have some signs that are encouraging, but to

make a stronger statement than that. But where

the revenue growth is you've got tax pay, maturity

sitting there a little bit, so we've been

conservative. We think we're well within

realistic numbers but we decided very much in our

planning process we were not going to artificially

push the revenue model and have it not show up.

We've obviously battled a full 12 months here,

budget prices with revenue being below

expectations mostly outside our control. We've

got people on a pretty tight leash on expenses.

And what will the increase in total payroll

sales force be going into the year?

The official number of sales territories is

going to be about 900, but the organization will

be deeper than that because we usually keep bench

strength (phonetic) so there will be 900

territories.

And that's -

About 855 or something like that, I think,

(phonetic).

Okay. And then unit growth looks like around

4 percent, although I know you're not giving exact

numbers. Just wondering what the trend was in the

fourth quarter there.

About the same.

Yeah.

So it left the year, roughly at about 4 percent

we have to round in some numbers there, but

yeah, you're close.

And final question. Very good cost reduction

in the quarter to help out with the margin. What

was the source of those and should we expect

anything more? Are there any other efficiencies

you might be able to get?

As a source, Randy, was at the fifth point of

the fiscal year we sat down and did a rebudgeting

process, mainly because of the economic conditions

and we brought a lot of self-restraint rolled into

our spending, and what you see in the fourth

quarter was obviously a part of that.

Actually, Randy, those numbers are actually a

little bit better than what you see because once

the economy has brought to us on our direct

deposit products, they've also expanded it

greatly, is percentagewise we're okay but our

year-over-year losses money (inaudible), we lose

it because the stars are in the wrong place. But

when you look at the cost we actually can control

completely. We did a very, very good job, and

right now we are doing a much better job even on

the other ones, on the receivables, so we felt

real good about those margin improvements, in

fact, throughout the slow income.

I'm sorry, could you explain the losses again.

Basically as you're moving money, direct

deposit account or a ready check, you think you

have the money and you find out you don't, so you

get a lock on the payroll. And the number of

clients it happened are very few, the dollars are

higher than in prior years, not alarming, and the

profit margin is still very high, but the economy,

a few more people are in troubled times and wind

up going the wrong way.

Do you understand that, Randy?

Yeah, I do. Okay. Thank you very much. I

appreciate it.

Adam Waldo of Lehman Brothers. You may

ask your question.

Good morning, Tom and John. Thank you very

much for taking my questions. Reviewing your very

detailed fiscal 2003 guidance this morning's AK

filing, as I went through my modeling the midpoint

of your revenue guide (inaudible) service bureau

revenue segments and using your 15 percent

estimate for year-over-year decline in E and S

investment revenue in fiscal '03 I come out with

revenue growth outlet for fiscal '03 at the high

end of your total revenue guidance of 8 to

10 percent revenue growth. Is that a fair

assumption to be using?

The guidance what we gave is what we gave. We

don't extrapolate the - you can extrapolate the

numbers. We felt we gave quite a bit of guidance

here, more than we sometimes give because we want

to make sure people have a clear understanding,

but we don't really comment to say what's the

specific number.

Okay. John, can you give a little more color

as to the assumptions made around payroll service

bureau unit pricing, that new client change in

(inaudible) per client change in your fiscal '03

service bureau revenue guidance range of 10 to

12 percent growth, would you be modeling through

that 3, 3 1/2 percent price increase and 3 percent

year-over-year decline checks per client and then

the balance being essentially net new clients?

Basically model of the pricing increase that

Tom talked about and did not show very much

improving check conditions although a little bit

we probably saw in the beginning here probably in

there, might be a little bit at the back end when

you hope the economy is better but not sure and a

little more penetration or reasonable penetration

in direct deposit. (Inaudible) sometimes the

growth, got other ancillaries that are in that

that we look at and that's pretty much what we

rolled up. We didn't do anything unusual. The

budget is a very detailed process. We actually

budged the checks level at the branch level so an

awful lot of effort put into it and usually it's

pretty predictable.

Fantastic. Now, you're essentially at about

$31 million or so in unrealized gains today. Can

you update us on your thought process in terms of

taking unrealized gains over the course of '03? I

think you said you'd assumed basically the gains

wouldn't be available beyond the first quarter.

What led you to that view?

Basically the gain situation is one that's

changing. I'm not sure a freight train will go

with it. You're down to 7 1/2 million we were

doing the budget problems. We basically

forecasted in the first quarter when things got a

little bit better the gain taking would be similar

to what it's been in the last four quarters. That

means you're in the 3 to 4 million-dollar range.

The second, third, and fourth quarters, we don't

know what we're going to face. Again, we took the

conservative posture and we didn't put anything

in. Now, since there are 32 million right now,

could I give you a different answer? I suppose I

could, but I'm going to stick with where we are.

We really hope those gains in a way go away

because we'll be in a better economy if they go

away.

So right now that's where we are. That's subject

to change but you've got a situation where only

six to seven weeks ago that $31 million was 7. I

wish I was Houdini, I could predict what would

happen, but I don't. Right now we're looking for,

we said 15 percent, probably got a reasonable

number in the first quarter, similar to what we've

been doing, and very little, if anything, in the

last three quarters.

That's very helpful. And then finally any

updates in terms of your thinking on hedging

interest rate risk in the future or repurchasing

stock, given your strong balance sheet position.

I don't see us hedging. We look at it. Still

believing we've got to give something up to get

it. While perfect predictability might be worth

something, we don't think to hedge much past a

year. It gets difficult. Buying the stock back,

we still do those analyses and it's very hard to

get it to be positive or very much. We continue

to look for ways to use cash and we'll see what

happens. I don't see anything that's a big change

from when we've been doing.

Do you have handy the D and A in the quarter?

What do you mean?

The D and A, I'm sorry, expense in the quarter.

Depreciation amortization.

It's in the A-K.

I must have miss it.

Greg Gould of Goldman Sachs. You may ask your

question.

Two questions. First, I didn't hear it in the

earlier part of the presentation, Tom or John, the

new client, net new client growth for the fiscal

year ended 2002, I think in the past you had

mentioned that you would give us the year end

numbers. Can you do that?

What we're saying basically, Greg, is that our

client base is 390,000 plus.

No more precision in that number?

No. We don't want to mislead you with it.

Okay. The more question is more on a higher

level one. Are you seeing any signs of saturation

in the market at all? I know half the clients

come from new business startups, so that won't be

an area that's saturated, but are you seeing any

signs of further maturation in the market?

Greg, absolutely not, and I'll tell you what

makes me so strong in that answer. I don't know

if you heard me earlier say our major market sales

organization was the star of the company this

year.

Right.

Changing over (inaudible), even in these

economic conditions, If ever there was a part of

our company product line that could be reaching

maturation it would be the 50 to 500 client range,

and absolutely we're not seeing that happen even

at that level. So we don't think it's an issue at

all.

And sales productivity, you're increasing the

sales force and MMS by 25 percent. Would the

overall productivity continue to rise so that

revenue growth would be in excess of that?

Yes. Our sales force this year, I believe,

their productivity went up significantly over the

prior year. I think and our budget process we're

speculating it stayed the same. But we are

increasing the number of the sales people by about

25 percent or 25 people, actually.

Okay. Thank you.

Mark Marken of Wachovia Securities.

You may ask your question.

Good morning. I was wondering, what was your

all-time high in terms of client retention?

20 1/2 percent, I think.

20 1/2 to 21.

20 1/2 to 21 in terms of turnover?

In client base loss.

Right. And you recently made an announcement

with regards to Croel (phonetic). I'm wondering

if you could give us a little bit of color in

terms of that arrangement. And obviously, you

know, some companies are going out and expanding

their services offerings.

We made an arrangement with Croel (phonetic),

we're partnering with them, and they do background

checks for prospective employees of our clients.

It's a mainstay of our Paychex administrative

services and PEO Products and we're thinking about

considering expanding it to the rest of our client

base. Basically that's what it is. The working

relationship, they provide the service and we do

revenue sharing with them.

Okay. And where will that revenue show up? It

will be in your HR services?

Yeah.

Okay. Great. And with regards to your, you

know, your mature sales people, are you

continuing, you know, the people who have been

with your organization, you know, three years or

longer, are sales quotas staying basically the

same for those folks or are they continuing to

move up as well?

Well, our sales quotas now are generally

revenue based.

Right.

And I think the expectations for the next year

is approximately the same level they were this

year except maybe 3 to 5 percent increase. The

quotas assigned to our beginning sales people,

we're modifying them a little bit as part of our

program to improve our sales person's retention

during the eight months where we have our highest

turnover level. Our other than that it's pretty

much status quo.

Any change in turnover levels, either among

your sales people or among your payroll

specialists?

We're pretty consistent with the year before,

somewhere in the high 30s, core payroll sales

people. And our service givers, and I'm not sure

I can totally explain this other than the fact

that a lot of people have been putting a lot of

effort in it, we had our lowest turnover rate in

our payroll specialist in the history of the

company, and it continues on a monthly basis to

track even better. Very happy with that.

All right. Thank you very much.

Brian Keen of Prudential Securities.

You may ask your question.

Good morning. First question, how much does

tax pay make up of the payroll service revenue?

Tax pay average revenue these days is about

$450 per client per year, and our core payroll

services revenue per client per year is about

1400. If you want to take $450 and divide it into

1450 or 1900 or whatever it is, give a percentage.

Employee pay's another 450.

Employee pay was what, John?

Another 450.

Another 450.

Like a (inaudible) is the float (inaudible)

change dramatically. The float on direct deposit

now is very low, kind of goes back to when we lost

a day of float when the Feds changed the rules

sometime ago, we have the lower rate and the float

on tax pay is down to about 20 or 25 percent of

the revenue.

The rest is made up of payroll services.

(Inaudible.)

Okay.

Just want to follow up with something, Tom.

You said referral size were down but average

client size was up and then you had an explanation

of that. Could you help me through that again,

why you thought that might be?

Generally, approximately two-thirds

traditionally of our client sales have been

through client referral or CPA referral.

Generally speaking these have a tendency to be

brand-new companies. An entrepreneur went to an

accountant, said I'm starting a new company, the

accountant says, Well, you better get a payroll

service, call Paychex. When new business starts

are down, the referral aid is down and

consequently your sales people then instead of

directing their efforts at referrals will go out

and start are cold calling the business base in

their territory. And because those are existing

business, they have a tendency to be larger in

number of employees than brand-new startups.

That's new calls, are those coming from, you

know, people who are already on a service bureau

or are they brand new, people that were doing it

in-house or just a mix?

It's a mix, but the bulk of them have got to be

people doing their own in-house rather than adding

another service.

Okay. Great.

Adam Fritsch of UBS Warburg. You may ask your

question.

Good morning. Tom, you said before - I'm

sorry, John, revenues are going to grow faster

than the net income. Does that have to do with

potentially the duration getting a little higher

on the (inaudible) balance and therefore interest

income will be lower?

No. You've got the interest income in there

but one of the effects is that you have the checks

for clients phenomenon, hopefully it's

stabilizing. that those last checks, we lose them.

Some of them are the high profit ones.

One thing we have done during this period is we

have not shut down the very important investments

we want to make or we're going to. Only a couple

of data centers this coming year. We took on a

facilities that's not going to have a lot of extra

costs and then we got a great deal on Rochester

here in the last few weeks, that picked up a

little bit of expense, not alarming. But you have

a few pieces in here where you're investing in

things. We're going to continue to invest long

because we believe the long-term future is very

good, that's impacting at a slightly - all in

all, though, we still really hope it will be

closer to the same, but you've got rates, a little

bit of checks, a little bit of investment. No one

single factor, but they're all sitting there.

Okay. Other thing, sequentially, the pays per

control, I know it was better year-over-year

improvement versus the third quarter. Do you have

the data to really tell us how things were

progressing in the third quarter over the fourth?

I know they're getting better year over year.

This data (inaudible) not ready to say anything

has changed materially, we're just telling you

things that are - maybe the sun is coming out.

But when you look at the calendar the fiscal year

end quarter, the 228 quarter, you've got bonus

checks and other things in there. When we compare

we're really looking year over year and we saw a

little bit of improvement there, but still we've

got some decline. But we're encouraged, I think

we've said as much as we can say. We've seen some

signs, nothing so depend or strong you just sit

back and say wow, but it's nice to see things not

declining.

I would agree. And the last question, would

you just give us a general update on the duration

curve, where you think it might be going with it

the next 6 to 12 months, what you're going to do

with the portfolio?

Our policy is very strong for the investment

community and we have tended not to maneuver on

that. We're a little bit shorter on the duration

right now only because it's hard to invest in some

of these rates. We're not going to change that

too much. Float income is float income. There

will be times when it's more favorable, right now

it's less than favorable, but we run a business

really based on the services and our float income

is volatile. I don't know of a better way to

price the product. It's a benefit that's build in

to the way we do things. Some days you just like

it more than you like others.

So you don't have any real plans to change the

duration much?

No.

I guess my last question, is you said the

fiscal paroling (phonetic) steady with 2000 net

income would have grown 20 percent this year

versus 25 last year. What does that assume for

top line growth?

We didn't disclose that. We basically just

wanted to look at the factors of how the checks

came out, how the interest rate come out.

We didn't add anything in there when we did

that calculation for additional sales activity or

anything like that. It was strictly tech volume

lock, the interest we locked in and such.

We do it to really give you a perspective of

how those things have affected us.

So I guess what I'm asking, maybe ask it a

different way, is net income growth only going to

be falling (inaudible) 20 percent this year, all

things considered equal, versus 25 percent last

year, does that say anything about where the

direction of the business is going in terms of

operating leverage, or is that assuming the

business you've lost?

We're still getting some operating leverage,

but I think - and we're still going to see

improvement. But whether it can stay at the same

exact rates it was at when we were smaller - I

think our size is getting up there which makes

things a little bit more challenging too. We're

getting up there. You have some trends that will

change a little bit. We have said for some time

that 30 percent plus years aren't likely to

happen. I think we have a very strong business, a

very good business, but it's one that's getting

bigger and you have some of the normal things that

happen when you do that.

So the normal growth rates in a couple of

years, to 20 to 25 percent feasible.

I think a general feeling is a normal economic

environment is revenue growth should be 14 and

17 percent. If we do 14 to 17 percent on the top

line we'll do 20 or plus.

Okay. You broke up there at the end.

20 percent plus.

Okay. Thanks, guys.

Matthew Roswell of Legg Mason. You may

ask your question.

My question has been answered. Thank you.

George Sutton of RBC Capital Markets.

You may ask your question.

My question has not been answered. Curious

about your cash levels and any sort of thoughts

around potential acquisitions given the weakness

that obviously a lot of folks are seeing in the

market. Are you looking at that as an

opportunity, are you looking at deals? Did you

look at CBS Payroll, for example?

We had known about CBS Payrolls for some period

of time. We probably would not have been

interested at the level the organization was

interested in. We continue to do small

acquisitions under 200 or under 300 clients. We

do them as a matter of course. I think this year

in the last 12 months, John, we had -

40 or 50.

40 or 50 separate transactions under 2 to 300

employees?

Right, clients.

The opportunity for making large acquisitions

in our world is just not plentiful because of

obviously the limited scope of regional and

national players.

What about some of the private players out

there that could expand your capability? Is that

under any consideration?

For example?

Someone on the time and attendance side for

example or some of the beyond payroll areas.

Funny you raise that particular one because

that's one we're thinking about currently. We've

been using a variety of distributors of time and

attendance vehicles, and right now we're under

consideration of whether we should refocus that,

one, as to maybe own it.

So the answer is yes.

It could be yes on that one. We're a long ways

from doing anything serious.

Thanks, guys.

Evan Weber of SG Cohen. You may ask

your question.

One, if I could just follow up. Did you say

you bought 40 or 50 operators with, say a couple

hundred clients?

No, we bought 40 to 50 with under 200 clients.

Some might only have 20.

Because if you multiplied that out it became a

fairly big fraction of the increase in the number

of clients you talked about. So okay.

A couple of questions. Number one, I just wanted

a little more clarity, John I apologize. Where

you think that you're building in sort of

3 percent year on year checks per client decline

for the year or would you say I'm building in sort

of the current level of checks per client going

forth on some sort of seasonally adjusted basis?

We took where we were in April which is

probably about a 3 percent decline, give or take a

little bit, and that's what the - just hold it

constant and go and you didn't show us anything

better.

Okay.

I want to go back on this acquisition because I

don't want anybody misled here. We do these.

Some may only be 10 clients. We don't buy any

companies, we just buy clients, and basically we

know about what the pricing will be and pricing

has gotten better for us in the last 12 months.

We know we'll only pay for what we get. We have

pretty strong retention periods of 120 days in

global pay and we turn.

Now, we do a little bit of due diligence in the

field, but just so you understand the magnitude

here, you can turn this in my office. My

assistant, Jan Shuler, does a great job. Working

together, it takes about 15 minutes to do one of

these. They go pretty quickly.

You ought to be in the M and A business. A follow

up, a couple of questions, John. One, is there

any - when we look on a quarter basis are there

any variations in the number of billing days or

anything that would cause any distortion in the

quarters?

No, we had some (inaudible). We didn't have

anything there the calendar is straightened out.

And then my last question is, if you were

during this period if you were successful in

really going after established companies of which

there are a very large number in your kind of

sphere, and the startups were low, why wouldn't

you be investing a little bit more right now in

the sales force and trying to do both if you were

on the assumption that there were going to get a

little better economically? We ought to see some

more startups, et cetera. We wouldn't you be

trying to do that because somewhere down the line

in the not too distant future it would give you a

real jump start.

I don't think we have the level of comfort to

say things are going to get significantly better

in the next 12 months. When we made the decision

on the sales force growth, particularly the core,

it was based on what we thought the productivity

in the sales force was going to be. It was based

- obviously the cost of the sales organizations

is an important part of our budget and we - it

had to be part of a balance of growth or revenue

and earnings and we struck a balance that we think

we're very, very comfortable with relative to

where we think the growth rate is going to be and

what it's going to take the organization to

accomplish to make sure that happens.

Okay. So you're just trying to manage it real

conservatively, then.

Absolutely.

Okay. Thank you.

Rory O'Neill of PNC Advisors. You may

ask your question.

Thank you, and good morning. Just two

questions, basically a follow-up to two other

questions that were asked. On the top line, 8 to

10 percent revenue projections, can you give us a

feel, then, for what type of acquisition activity

is built into that number and secondly, I guess,

and you talked a little bit about the penetration

level and the core payroll services (inaudible)

your view what the penetration level is in

businesses of under 100 employees at the present

time.

Sure. First of all, the organization activity,

(inaudible) I think this year given about 40 would

number We don't build the big solid numbers

(inaudible) acquisition of budgeting.

The penetration in the one to 100 employee range,

there's still approximately 6 million businesses

out there in the markets that we serve, and that

is 103 of those markets, Ajax (phonetic) has

390,000 plus. We think ADT (phonetic) is

approaching half a million. (Inaudible) players

and it still comes out only about 12 to 14 percent

of the total market place. John and I were

looking the other day at one of our key areas, of

course, for Paychex is the 5 to 19 category and we

anticipate that the penetration level even in that

area, which is I think is highly penetrated I

think for the industry was under 25 percent, John

So even if that 5 to 19 category, which is a

terrific part of our world, we've got a long, long

way to go.

Thank you.

David Grossman of Thomas Weisel

Partners. You may ask your question.

Hi, two quick questions. First, Tom, if I did

my math right, it looks like we're billing $19 a

year per client. Can you just give us a sense of

how that's been trending over the last 12 to 18

months?

That's probably not correct. If - what you've

got to do is start with $1,400 for the quarter

payroll plan, add $450, 85 percent or 90 percent

of the time because that's the percentage of the

companies that take tax pay and then add

75 percent of the time of the companies that we

sell that take direct deposit or employee pay

option, and I think you'll come up to higher than

1900. Probably closer to 2000 or 2100.

Okay. If we take that total, then, can you

give us a sense for how the 2100 has been trending

the past 12 to 18 months?

No question, over time it's been trending up,

mainly because of the fact that our penetration

level with tax pay and our penetration level with

direct deposits have grown so dramatically over

the years.

If you look back at Paychex in 1990, the year we

started tax pay, our average revenue per client

was probably around $1100 and now it's grown all

the way up to - you can see the core service has

grown to about $1400, but the ancillary is

bringing up over $2,000, the two ancillaries. So

the revenue per client has been fairly dramatic

over the last decade.

Okay. And just one last follow-up on the

comments you made about the checks per client.

Any granularity in terms of what impact mix may be

having or geographic or still too early to make

any conclusions?

Way too early. Quite frankly, I don't think

we've looked at it geographically.

Great. Thank you.

Shannon Cowen of TCW. You may ask your

question.

My question is answered. Thanks.

Brent (inaudible) of Deutsche Banc.

You may ask your question.

Hi, good morning, Tom and John. Two quick

questions. John, I think I heard you say earlier

that about a third of the growth in major markets

came from migrating existing clients. Were the

remaining two-thirds wins from competitors, or

were those sort of first-time payroll outsourcers

And then that's the first question.

Second question is, what tax rate should we assume

for '03? Thanks.

The MMS client sales is about 30 percent from

automatic data, about 25 percent conversion of

Paychex clients who have outgrown our pay service,

our core payroll service, and the rest of a

combination of all other competitors and people

doing their payroll in some sort of in-house

automation. I would say as a balance of the last

two, it's probably 50-50 between in-house

automation and some other payroll processor.

Great.

31 percent. 31.0.

And just one other question on the major

markets. Is - the 50 to 500 is obviously a

pretty big range. Are you saying a lot sort of in

the 50 to 100 range and fewer in the 200 or 300 or

500? Could you give us a little more clarity

there.

It's definitely going to be much more directed

toward low (inaudible). I think your average size

client has about employees. The reason for that

is because the higher you get in the number of

employees, the fewer the companies are that have

that many.

Right.

So when you find 50 to 100, you're going to

find probably 50 to 100 employees are probably

80 percent of that marketplace.

Okay. Okay. Thank you.

Marta Nichols of Bank of America

Securities. You may ask your question.

Thanks a lot. I just wanted to ask the margin

question a little bit differently. Could you give

us a sense of what the relative margins of your

MMS and core payrolls are? If not explicitly, is

there a 500 basis point or 100 basis point

difference in terms of the markup that you can put

on an employee there?

And the kind of related question to that is the

fact that your margins are deteriorating a little

bit, I think you suggested, John, a number of

reasons why that can be happening, but can it

relate to the fact that MMS is growing so much

faster than core payroll at this point and your

margins on that business may be somewhat lower?

First of all, I don't believe I said our

margins are deteriorating. That's not happening.

Our margins are continuing to improve at a little

bit of impact on the checks per client when that

goes down because that's most profitable. But

everything else is positive. We're making some

investments that affect, things but really nothing

no do with this business change.

Now, you look at market changes in core, the only

reason there's a different profit level really

doesn't have to do so much as the major market

software versus core software, MMS is larger

clients. We've long talked about the fact we'd

rather do ten tens than one one-hundreds. Doesn't

mean we don't want to do the one one-hundreds, but

we like ten tens better because they're easier to

sell, easier to service, and you get a greater

margin because the revenue per check is higher.

The MMS impact difference is the same thing ADT

has. On the upper end you don't get as much per

check, you render service, you get little benefits

of volume, but it's not enough to offset that.

We're very comfortable with our margins at MMS.

We don't believe we're seeing any margin

deterioration related that. Some of the slowdown

is things that we don't have control over, but we

still expect we'll continue to leverage this

business as time goes on. Naturally when you take

the float income out, you'll see in the past 12

months we've leveraged in a very, very difficult

time. It went from 30 percent three years to 32

to 34, so we almost had the same improvement we've

had from the last few years when you factor out

the floater interest income.

I guess I didn't mean to imply that margins

were deteriorating just due to any specific things

other than the things that you were highlighting,

things like your investments and so forth. Can

you quantify at all the amount of the investments

that you're having to make that are flowing for

your P and L in fiscal '03 for the data center and

buildings in Rochester?

The data center I think we said was going to be

in the $30 million range when we got done, and it

looks pretty close to that.

And that's capital after expense?

(Inaudible) eventually, but they don't happen

right away. We did not disclose the building cost

on either one of the two buildings, but cost,

we're spending, I would say, less than half for

more space than if we had expanded on our current

site at corporate headquarters. The building we

got in Webster is every bit as nice as the one we

have our corporate headquarters in. I was just in

it. The cost is so low it's almost embarrassing.

The other facility we did not get quite as good a

deal, but we got a very good deal there because

they built a very nice facility, some with

manufacturing space that we can turn into office

space quite easily because they had a high level

degree of manufacturing. They were building a

world class facility based on the fiber markets

being very strong. They never really occupied

most of the building. They're looking to get rid

of it, and quite frankly, there aren't very many

people in Rochester area that have cash and have

growing businesses. So it's an opportunity and we

took advantage of it.

Terrific. Thanks a lot.

Eric Fell of (inaudible) Capital. You

may ask your question.

Hi, thanks. Struck me a little odd when you

mentioned a potential acquisition that you walked

away from because it seemed too expensive. Given

that your stock trade is 37 times earnings over 23

times EBITDA, it seems odd to me that just about

any acquisition would not be accretive. What's

the valuation cutoff that you utilize, you know,

management fits and everything else just strictly

on an evaluation basis? Where do you turn down

any acquisitions? Thanks.

We look at every deal on a deal-by-deal basis.

Obviously for something that's big, probably

willing to do more than something that's real

small. It's got to look like it fits in. All

those factors go into it, and we knew about the

one you mentioned and just didn't seem that

attractive to us. And we don't feel like we have

to do acquisitions. If we see something that

makes sense, we'll do it. And that one just

didn't make a lot of sense based on what it was

and how it was structured.

If I could add to that, there's two reasons for

us to consider an acquisition. One is to consider

sales volume and the other is some sort of

strategic benefit. One of the issues you had with

a company such as CBS is what strategic benefit do

they bring us versus client revenue? And usually

regional players are one branch or one city

player, it's strictly a client volume type of

thing. The philosophy is much different than

buying an organization that was national because

that has a much different strategic appeal to it.

We bought Rapid Pay sometime ago. It's been a

while ago now, but they were a company that had

some national presence and we said a pretty good

price for it at the time for whatever we thought

it was and it worked out quite well.

What are some representative multiples that

you've been paying for acquisition, either EBITDA

or earnings?

One-time buying, the market right now is

somewhere in 101,35 and I see it softening. Are

there deals out there that go beyond that? Yes.

Sometimes we participate, sometimes we don't.

Sometimes we can get it at a much lower level.

We're not talking about bit ones here. We're

talking about ones - we had one not too long ago.

I think there was about 75 clients.

I know who was competing with us, and that sales

guy said, John, you've got to go to 190. I said,

I'm not going to 190. Tell them 125 and I bet you

get that because they won't want to sell it to the

other party. Sure enough, we got it at 125. It's

really a fragmented thing we do. It's not life

blood at this stage. But if somebody walks along

and will give us some clients for a reasonable

price and we know our retention opportunities, we

take advantage of it. Other deals we continue to

look at things, but we don't feel by any means we

have to do anything. If something comes by and

makes sense, we'll do it.

Okay. Thanks.

Ashwinser Baker (phonetic) of Salomon

Smith Barney you may ask your question.

Thanks for taking my question. Questions on

the average investment assumptions that you had,

I'm not sure you addressed that for the coming

fiscal year.

I think it's disclosed in the A-K.

Okay. Thanks.

It's right there. I think we gave a number on

each piece.

For fiscal to currency? Okay.

Mark Marken of Wachovia Securities.

You may ask your question.

Quick follow-up. Pays for control still around

14 per client?

Minus about 3 percent. 14.1 minus 3 percent is

about the accurate number.

Okay. And what - you just went through the

budgeting process. You're being conservative,

which everybody appreciates. You know, if we did

have a change in the economic environment and

let's say that, you know, payroll or pays per

control increased by 1 percent, relative to where

they currently are, can you give us a feel for

what that would do in terms of revenue and more

importantly in terms of the high incremental

profits and what that would do on the bottom line

or at least the operating profit line if you did

have that kind of a change.

I think 1 percent would translate probably into

$4 or $5 million dollars of additional revenue.

1 percent would equal probably about 80 percent

revenue realization because just like when the

checks went down, your actual revenue per check

went up slightly, the other way it goes down

slightly and if that happens, what happens is

going to the bottom line because we weren't able

to cut costs when that happened, we won't increase

costs.

I'd say 80 percent of that, $5 or $7 million,

whatever it is for 1 percent, 80 percent of that

would go to the bottom line.

So it would be $5 to $7 million in incremental

revenue of which 80 percent would go down, at

least, to the pre-tax line? I'm sorry?

At least 80.

At least 80. Okay. Great. And just to follow

up in terms of the questions with regards to the

size of clients, in terms of new clients,

brand-new business formation, have you seen any

changes with regards to the size of clients that

are where you've just got a brand-new business

formation? Are they smaller now or about the same

size as before?

I'd say they're about the same as before.

We've seen no tactical difference there.

Thanks very much.

At this time there are no further

questions.

Okay. We would again like to thank you very

much for your interest in Paychex. We hope all of

you have a great and enjoyable summer and not too

hot and not too cold. So take care.