沛齊 (PAYX) 2003 Q4 法說會逐字稿

Welcome to Paychex Fourth-quarter and Year-end Earnings Release Conference Call.

All participants will be able to listen only until the question-and-answer session of the conference.

This conference is being recorded.

If you have any objections, you may disconnect at this time.

I would like to introduce the speakers for today's conference.

Mr. John Morphy, Chief Financial Officer.

Sir, you may begin.

First of all, thank you for joining us today for the fourth-quarter and fiscal year year-end press release.

Also with us today is Tom Golisano, our Chairman, President, and C.E.O.

Upon the completion of the review of our financial statements and results, we will conduct a brief Q-and-A session.

We released financial results for the quarter ended May 31, 2003, yesterday afternoon after the market closed.

If you need a copy of the release, it can be obtained by calling 585-383-3406 or by accessing our web site at www.paychex.com at our Investor Relations home page.

We have filed our form 8K with the SEC, which will provide additional discussion analysis of the results of the past three years.

This filing is also 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 July 2, 2003.

Please refer to our website for access to all recent news releases, current financial information, related SEC filings, and investor relations presentations.

Paychex has been and will continue to be committed to providing the best and most timely financial disclosure possible.

We are one of the few companies that provide 10-Q data the same day as a teleconference call with analysts and investors.

This quarter, due to the acquisition of Interpay on April 1, has required a significant effort from our finance staff.

I would like to recognize all of them for their efforts to make today's teleconference possible.

The year-end earnings release is summarized as follows.

For the fourth quarter and fiscal year ended May 31, 2003, total revenue growth was 19% and 15% respectively, which in turn generated an increase in net income of 4% and 7%.

Quarterly earnings per share were 19 cents versus 18 cents a year ago.

Up 4% in an unrounded basis.

The quarterly earnings per share in was line with our expectations.

Year to date earnings to date per share were 78 cents versus 73 cents a year ago, up 7% on an unrounded basis.

Operating income exclusive of interest on funds helped our clients, and investment income was up an impressive 9% for the quarter and 16% for the fiscal year.

We finished the year with 490,000 clients including the 82,000 clients gained in the Advantage and Interpay acquisitions.

Organic client growth was just under 5%, compared just under 4% in fiscal 2002.

Fiscal 2003 proved to be an exciting year as we went over the $1 billion mark in total revenues 20 years after going public.

We supplemented growth by completing the acquisition of two comprehensive payroll processors that serve small to medium-sized businesses throughout the United States.

On September 20, 2002, we acquired Advantage Payroll Services for $314 million in cash.

April 1, 2003, we acquired Interpay for $128 million in cash.

The integration of Advantage and Interpay is well under way.

By the end of fiscal 2003, the Advantage and Interpay sales forces were fully combined with the sales force of Paychex.

The responsibility for Advantage and Interpay branch operations and corporate support has been fully integrated into the Paychex management structure.

In addition, certain branch operations have been combined into existing Paychex locations with more consolidation expected to occur in fiscal 2004.

Our focus on client service and retention has paid off in better-than-expected client retention.

The conversion of Interpay clients has commenced with one half expected to be converted by November, 2003, and the rest by November, 2004.

In addition to the normal Advantage clients, the Advantage core system supports the clients affiliated with the independently owned associate offices, and other Advantage co-branded products, both of which have the Advantage name prominently displayed on their end product.

For this reason, the conversion of our normal Advantage clients is not of high emphasis because we need to maintain the system for the affiliated and co-branded clients.

The conversion of 3,000 Advantage clients that were not using the Advantage core system has been completed with the majority being converted to the Paychex system.

All in all, we are pleased with the acquisitions of Advantage and Interpay.

Our results of operations for fiscal 2003 include the results of Advantage and Interpay since the respective dates of acquisition.

We refer you to the press release and/or the 8-K recently filed, for detailed Advantage and Interpay results for the year ended 2003.

As integration efforts accelerate, the ability to separately distinguish and report Advantage and Interpay operating results will no longer be possible.

With this in mind, our fiscal 2004 disclosures will focus on consolidated results and will provide limited if any discreet data for the acquired companies.

We will now move to the fourth page of the release, the consolidated income statement.

Total service revenues increased 20% and 17% in the fourth quarter and 12-month periods to $276.7 million and $1.046 billion respectively.

Service revenues consist of service fees earned from our payroll and human resource and product lines.

Payroll service revenues for the fourth quarter and 12 months increased 20% and 17%, to $236.7 million and $897.5 million respectively.

The increases are related to revenue growth from Advantage and Interpay, organic client base growth, increased utilization of ancillary services and price increases.

Organic client growth increased slightly less than 5% in fiscal 2003 and slightly less than 4% in fiscal 2002.

Payroll service revenues continue to be impacted by year-over-year changes in checks per client.

We experienced year-over year reduction in checks per client, this excludes Advantage and Interpay for the first through third quarters of fiscal 2003 of 1.7%, .3%, and .1% respectively.

On a positive note, we ended the seventh quarter reduction in checks per client with a .3% increase in the fourth quarter of fiscal 2003.

Year-over-year reduction in checks per client for the first through fourth quarters of fiscal 2002 respectively were 1.9%, 3.8%, 4.1%, when it peaked, and 2.6%.

As of May 31, 2003, 87% of all clients utilized our tax following and payment services, and 60% utilized the employee payment services.

More than 90% of new clients purchased our tax volume and payment services.

More than 70% of new clients purchased employee payment services.

Major market services revenue increased 40% and 42% for the fourth quarter and 12-month periods to $28.4 million and $101.7 million respectively.

Approximately 1/3 of the new major market service clients are conversions from the company's core payroll service.

Human resource and benefits service revenue increased 18% and 22% for the fourth quarter, and 12-month periods, to $39.9 million and $148.5 million respectively.

The increases are primarily related to growth in retirement services clients and in client employees served by the companies past and P.E.O. bundled services.

Retirement services increased 13% and 18% in the fourth quarter and 12-month periods to $17.2 million and $66.7 million respectively.

Paychex administrative services and the company's Professional Employer Organization are comprehensive services that include payroll, employer compliance, employee benefit administration, and risk management outsourcing services designed to make it easier for businesses to manage their payroll and benefit costs.

Sales of past and P.E.O. products have been strong with administrative fee revenue from products increasing 35% and 40% in the fourth quarter and 12-month periods of fiscal 2003 respectively.

As of May 31, 2003, our past and P.E.O. products serviced over 103,000 clients and employees.

Interest on funds held for clients decreased 4% and 15% for the 40s quarter and 12-month periods of fiscal 2003.

The decreases are the result of lower average interest rates earned in fiscal 2003, and the decrease in net realized gains on the sale of available for sale securities, offset somewhat by higher average portfolio balances.

The higher average portfolio balances were driven by the acquisitions of Advantage and Interpay and the growth and utilization of our tax filing and payment services and employee payment services.

Average daily portfolio balances totaled $2.50 billion and $2.18 billion for the three and 12-month periods ended May 31, 2003, compared to $2.01 billion and $1.85 billion in the respective fiscal 2002 periods.

The funds held for clients portfolio earned an average rate of return of 1.9% and 2.3% for the fourth quarter and 12-months of 2003 compared with 2.4% and 2.9% in the respective prior year period.

That realized gains on the sale of available for sale securities included an interest on funds held for clients, decreased to 1.0 million and -- and 4.0 million for the fourth quarter in 12 months compared with $1.5 million and $9.2 million in the respective prior year periods.

Consolidated operating, selling, general and administrative expenses increased 26% in the fourth quarter and 18% for the 12-month period over the prior year periods.

This reflects the acquisitions of Advantage and Interpay and investments in personnel, information technology, and facility costs to support the growth of the company.

There were approximately 8,800 employees at May 31, 2003, compared with 7,400 at the end of fiscal 2002.

Operating income increased 7% and 10% for the fourth quarter and 12-month periods to $98.0 million and $401.0 million respectively.

Operating income excluding interest on funds held for clients as a percentage of total service revenues was 31% and 33% for the fourth quarter and 12-month periods of fiscal 2003.

Compared with 34% in both the respective prior year periods.

Excluding the Advantage and Interpay acquisitions, operating income again excluding interest on funds held for clients as a percentage of total service revenues was 33% and 35% for the quarter and full-year periods.

The fourth quarter was negatively impacted by one less billing day, startup for the dual data centers, and slower growth in human resource and benefit revenues.

We continue to leverage the operating margins despite these difficult economic conditions that exist today.

Investment income net decreased 3% for the fourth quarter and 12-month periods due to a decrease in average daily invested balances, as a result of the funding of the acquisitions.

And lower than average interest rates earned offset again by higher net realized gains on the sale of available for sale securities.

Average daily balances invested were $434 million and $548 million in the fourth quarter and 12 months of fiscal 2003 compared with $740 million and $686 million for the respective prior year periods.

The corporate investment portfolio earned an average rate of return of 3.0% and 3.3% for the fourth quarter and 12 months compared with 3.4% and 3.7% in the respective prior year periods.

There were 4.1 million in net realized gains for the fourth quarter and $13.7 million for the 12-month period of fiscal 2003.

This compares with net realized gains of $1.5 million and $6.7 million in the respective prior year periods.

The use of corporate investments to fund the two acquisitions reduced investment income by approximately $7.6 million in fiscal 2003.

The expected reduction in fiscal 2004, due to the funding reacquisitions will be another $7.4 million or approximately $15 million in total for the use of the funds.

Our effective income tax rate was 32.0% for both the fourth quarter and 12-month periods of fiscal 2003, compared with 30.5% for the same periods last year.

The increase in the effective tax rate is the result of lower levels of tax-exempt income on funds held for clients and corporate investments.

The fiscal 2004 effective income tax rate is expected to be approximately 32.5%.

As mentioned earlier, net income increased 4% and 7% for the fourth quarter and 12-month periods of fiscal 2003 compared with the same periods last year.

Looking toward to fiscal 2004, our expectations are based on interest rate conditions continuing with no significant changes.

Accordingly, for 2004, we expect to gain 15% to 17% and human resource and benefit service growth in the range of 21% to 23%.

Total service revenue growth is anticipated to be in the range of 16 to 18%.

We expect interest on funds held for client, that's after recognition of realized gains to be flat in fiscal 2004 or corporate investment income is expected to be down approximately 45% primarily due to the sale of investments to fund the acquisitions in fiscal 2003.

These expectations do not take into effect what the Fed may do on interest rates today, but it is our belief that any changes they would put in place today would be immaterial to our results looking forward in the next 12 months.

Taking these factors into consideration, we anticipate achieving record total revenues and net income fiscal 2004 with estimated total revenue growth to be in the range of 15% to 17%. 10% to 12% without Advantage and Interpay accompanied by net income growth of approximately 10%.

The impact of lower interest rates will continue to moderate year over year growth.

In addition, we estimate that growth in operating income excluding interest on funds held for clients will be in the range of 15% to 20% for fiscal 2004.

We'd like to now move to the balance sheet.

Our balance sheet since May 31, 2002, reflects our growth during the fiscal year, fiscal 2003, plus the impact of the two acquisitions.

Cash and corporate investments totaled $381 million, with decrease since prior year end reflects cash used to acquire Advantage and Interpay offset by cash in-flow was operations, net of capital purchases and dividends.

Our total available for sale investments including corporate investments and funds held for clients reflected unrealized gains of $45.0 million on May 31, 2003.

Compared with unrealized gains of $26.7 million a year ago.

The decrease in interest rate environment has driven the improvement in the market value of the available for sale portfolio.

The volatile interest rate market has resulted in significant changes in the market valley value for available for sale portfolios.

During the fiscal year of 2003, the unrealized gain position ranged from $22.3 million to $22.7 million.

The unrealized gain position was $43.1 million at June 20, 2003.

Our net property and equipment balance activity during the 12-month period reflects capital expenditures of $60 million. $11 million of assets acquired with the two acquisitions and depreciation expense of approximately $34 million.

For fiscal 2004, capital expenditures are expected to be in the range of $50 million to $55 million, and depreciation expense for fiscal 2004 is projected to be in the range of $40 million to $42 million.

The company recorded $394 million of goodwill and $95 million of intangible assets of the acquisition of Advantage and Interpay.

Intangible assets primarily represent client lists and agreements with offices amortized or periods ranging from 7 to 12 years using accelerated or straight-line method.

Goodwill recorded from the purchase of Advantage and Interpay will not be amortized but instead be tested for impairment on an annual basis.

Total stockholders' equity increased to $1 billion in May 31, 2003, with $165 million in dividends paid during the fiscal year 2003.

Which represents a payout of 56% of net income.

A return in equity for the past 12 months was 29%.

The accumulated other comprehensive income balance on May 31, 2002, of $17 million has increased to $28.7 million on May 31, 2003, which reflects the previously discussed increase in the market value of our available for sale portfolio.

Investment rates of return.

With the volatile interest rate environment, we receive many questions about the potential impact of changing interest rates.

Please refer to our form 8-K, filed with the S.E.C. yesterday, after the market closed under the section entitled Market Risk Factors, Further Discussion of Interest Rates and Related Risks.

To summarize, changes in interest rates quickly impact earnings on short-term investments and over time impact earnings on available for sale securities as current holdings are sold or mature and are reinvested at current rates.

The exact impact of changing interest rates in the company is difficult to determine due to many factors.

However, we estimate that a 25-basis point change in taxables, basically 17 basis points in tax-exempt, will have an effect of approximately 3 million on our earnings for the next 12-month period.

You should be aware that certain written and oral statements made by the 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 refer to the Safe Harbor Statement on page 3 of the press release to discuss what our forward-looking statements and related risk factors are.

At this time, I will turn the meeting over to Tom Golisano to provide comments on the fourth-quarter before we open for Q-and-A.

Good morning, I guess I will make my comments more focused on the year.

First of all, as John mentioned, the acquisitions of Interpay and Advantage are going very well.

The sales forces have been integrated, plans are all laid out for the conversions of the majority of these clients over to our processing system.

And we don't think we have a schedule that's overly aggressive.

So we feel pretty comfortable with it.

Our sales organizations going forward for next year are probably going to have fairly higher significant growth in numbers of people, percentage-wise than we've had the past few years.

Especially in the area of M.M.S., which is continuing to grow at a significant rate.

Our past service, Paychex administrative services, we feel very comfortable with that product offering today.

And we are going to expand the sales force significantly.

I think it's between 30% and 35%.

And payroll we should be increasing our core payroll sales organization by 8% or 9% again.

So our turnover rate, you always ask about that -- over the last 12 months for the sales organizations, probably better than it's been in the last three years.

Obviously we continue to work on it.

But for example, in the core payroll sales organization turnover, I think ran in the mid 30's.

Not totally happy with it but better than it's been.

John already mentioned our check count going up a bit in the fourth quarter.

We're happy to see that.

As far as client retention is concerned, we had a near-record year.

This year and considering the economy, we think that's great.

The retention of our payroll specialists continues to improve.

And we think that's the major factor in our high client retention rates.

John already mentioned next year's goals of 15% to 17% revenue.

And 10% to 12% with the interest income consideration and 15% to 20% without it.

We feel -- I feel very comfortable with those numbers, and they should be achievable.

One comment I'd like to make on our industry.

I don't think a year ago that anybody would have predicted the consolidation that's gone on in the payroll processing industry that's happened in the last 12 months.

Obviously Pro-Business, which was just approved, Advantage, and Interpay.

In my years of experience in this industry, I can't think of any year that we've had this kind of significant change.

Obviously this reduces the numbers significantly of regional players and semi-national players.

We plan to be aggressive with our sales organization next year.

And -- but our industry has changed a little bit.

Obviously with the emergence of Intuit, showing a high interest level in our world, we'll see how that plays out over a number of years.

But it's a slightly different selling environment, and hopefully we'll be able to capitalize on it.

With that, I think we'll turn it over to questions.

Thank you.

At this time we are ready to begin the question and answer session.

If you would like to ask a question, please press star-one.

You will be announced prior to asking your question.

If you would like to withdraw the question, press star-two.

Once again, to ask a question, please press star-one.

Our first question is from Bryan Keene of Prudential Securities.

Yeah, hi, good morning.

I guess, Tom, on the client retention that it's picked up, does that mean it's higher than 80% now?

Is it above those rates?

No, not quite.

I don't think we've ever been higher than 80% in our history.

I think the highest was around 79.-- something.

The best has been 78.5.

Yeah.

And then just moving over to pricing.

I'd be interested in price increases kind of expectations for next year, has there been much push-back from clients and what you're doing about pricing for Advantage and Interpay which I think have a little lower price than a typical Paychex customer.

For the typical Paychex customer this year, we did the normal 3-3.5%.

We got hardly any feedback on that, that's been traditional over the -- over the years.

As far as Interpay and Advantage, we're being slightly more aggressive, probably into the 7%, 8% category.

But we don't think that's going to have a real profound impact at all.

So we're pretty comfortable with it.

But I'll probably let you know more in about 60 days.

Typically on the Advantage and Interpay clients.

Even 7% to 8% increase in Advantage and Interpay, it would still be -- that's still lower price than your core payroll?

Oh, significantly.

Significantly.

They on average were probably -- their clients were probably priced around 20% to 25% lower than ours.

So we're only taking it up a few points this year.

Okay.

And my last question, just -- it looks like with the consolidation you mentioned in the U.S. market for payroll, does that mean Paychex might turn more of its focus internationally over the next year or so?

No actually, I meant it in the environment that the consolidation is probably better news for us in the U.S.

But we are still working on the international -- you know could we talked about do something acquisitions over there.

They really haven't panned out, at least not to my satisfaction.

So we're considering Plan B, starting them from scratch.

In fact, we've been doing interviewing.

But no, the consolidation in the U.S.

I think just means more opportunity in the U.S.

But I guess most of the big players in the U.S. have been -- it would have to be more of a smaller base or is there still -- still payroll companies of substantial size that --

The payroll processors out there have between 5,000 and 10,000 clients.

But they're few and far between.

But they do exist.

That's a big difference between 5,000 and 10,000 clients and 40,000 and 50,000 clients.

So -- which Advantage and Interpay had.

So it's totally different now.

Considering barriers to end tree for corporations that may be interested in getting into the world, they think they're going to do it through acquisition.

It obviously would be harder today than it would have been two years ago.

I guess you plan to go aggressively after those Pro-Business customers that are trying to switch over to A.D.P.?

Absolutely not.

The Pro-Business clients are traditionally much larger than the market we serve.

Although if they have clients in the 100 to 500 or 100 to 1,000 range we'll be interested in them.

It's not our nature to aggressively go after somebody else's clients.

In a way you sort of described it.

We're a little bit more conservative than that.

Right.

I was just thinking on the -- on your large payroll end.

I guess they are -- most are above and beyond what you --

obviously one of the things that people have to consider is Pro-Business got a lot of the clients from -- like we have for our major markets from A.D.P.

And if customers perceive that's an issue -- but I'll tell you, I don't expect any large fallout.

I think it should work pretty well for them.

Great.

Thank you.

Yeah.

Greg Gieber of A.G. Edwards.

You may ask your question.

I have a couple of questions.

First of all, as you grow your sales force, how long will it take them to get up to speed?

What's the average sort of time, and will the increase, you know, will this addition do much for sales next year, or are we really looking at the '05 fiscal year for impact?

No, what traditionally happens at Paychex is we start hiring in March and April for a fiscal year that starts June 1.

And usually if salespeople have somewhere between two or three months of training under their belt, they're not 100% productive.

But you could easily say they're 80% productive.

So all of the people, most of the people have already been hired, already trained, and already out there.

So we expect to get significant repayment on that investment this fiscal year.

And then next fiscal year, we'll start the same process again, start the hiring process and n March and April.

Get them trained, and then they're ready for the fiscal year.

Okay.

If you look at the sort of 5% organic growth that you reported for the past year, how much of that growth came from things like, you know, new incorporations, new startups which I think has traditionally been a major source of growth for you?

Was that normally around 40% the new clients?

Was that the case this past year?

Are you getting more by pounding the street, picking up existing firms?

Well, actually, your point is somewhat right on.

If you were to compare the last two or three years during this recession compared to five or six years ago, you would find that we are getting less percentage-wise of new clients being new businesses.

And obviously in this economic environment, there's not as many new businesses starting.

The other thing that's impacted, though, since your sales force needs to do more hard-core sales work, the average-sized clients that we're selling today is larger than -- we're selling today is larger than it was three or four years ago.

They're more focused on average-sized clients.

The spread of the differences percentage-wise in dollars is probably more favorable toward the fact that we're selling higher sized client.

But it's not enough to say that this is a major trend and either a positive or negative issue with us.

It's one of those things that's happening.

Hasn't -- doesn't have much overall impact.

Then finally on the number of checks per client, which was up just slightly, I wonder if there was any, you know, sort of mixed factor there as your M.S. product has been growing so fast.

If you looked at just the core part of your business, what were checks per client?

Was that also up?

Currently we combine for computation of checks per clients, we combine the two groups of clients.

I can't really break it out for you by M.M.S. and by the low-end market.

We combine them because actually M.M.S. isn't a pure 50 and above.

It's more based on the technical requirements of the client.

And with 1/3 of it coming off the core, we don't look at many things now purely core versus M.M.S.

Okay.

Thank you very much.

Dirk Godsey of J.P. Morgan.

You may ask the question.

Thank you.

I would follow up on a couple of your comments, Tom.

One was the slightly different selling environment, I think that was one of the question and the aggressive move on sales force additions.

I wonder if you could put color on the differences you're seeing in the selling environment, and also what's striving the aggressive move here on the sales organization?

First of all, it's pure speculation that a selling environment is going to be significantly different.

Obviously, there are two players that were competitors that are not competitors anymore.

And also we've been able to maintain the referral relationship with the Fleet Bank which owned Interpay.

So part of the reason, probably the driving reason why we're maintaining that pretty aggressive growth rate of the payroll sales force is we've acquired a lot of new clients.

Through the acquisition mode.

And we always like to look at our sales activity as a -- as a percentage of the existing clients we already have.

Because this company sells mainly by referral, both client and C.P.A., the more clients we have theoretically, the more referrals we should be getting.

So consequently, we thought we had to be -- make sure that we stayed our sales force growth-wise in alignment with the growth of our client base.

And because of the two acquisitions, obviously we had -- we were pushing it harder there, sure.

Pass is a slight lie different story.

We've been in the refinement process for this product the past two or three years.

We like where we are.

We think it's a very salable product, and we think it has a great future at Paychex.

So I just decided this of the year we were going to get more aggressive.

And start capitalizing on that opportunity.

The average revenue of a Pass client is about $11,000 compared $2,200 or $2,300 for a core payroll client.

M.M.S., the growths that sales force, again, I think it's in the 25% category.

It's just a reflection of how big we feel the opportunity has been.

Our sales force traditionally over the last four or five years has grown at least at that percentage rate.

It's just a reflection of our confidence level and what we're doing with major markets.

Okay.

That's had helpful.

I guess one of the things we've been hearing is that A.D.P.'s new sales force initiatives are going to be focused on regaining share from Paychex and the small employer and mid-employer end markets.

It sounds like your strategy is more market driven and opportunistic than in defense what have A.D.P. might be planning.

Absolutely.

We look at the marketplace and think it's so big and so unpenetrated at this point.

That our mentality has always been to go after clients that are not on another service.

I know A.D.P. has a slightly different attitude.

I guess whatever works for them is fine.

We just look at the large, untapped market and say, let's stay with our -- within our boundaries within ourselves.

At the same time, being fairly aggressive and growing that sales organization.

We're -- we feel comfortable where we are.

Good.

One last follow-up.

In terms of margins, can you talk at all about how the expansion of the sales organization might impact the make-up of the margins going forward.

You won't even notice it.

Won't notice it?

Okay.

Thank you.

Right.

Jarrod Queen of Genison Associates.

You may ask your question.

Thank you very much.

Question is, if -- if you look at the organic revenue growth and you break it down into the following components -- pricing, new client growth, and ancillary services, how would it break down looking back and what would you expect to change going forward?

Well, let me give you the going forward number because it's -- the one that's most out there.

I think it's the one that everybody's probably the most interested in.

Going forward, we want to grow that client base, you know, 6% to 8%.

On top of that, 3% to 3.5% on price increases.

Then the ancillary services bringing us up 6% to 7% which in aggregate will bring us up to 15% to 17% number.

The last year looking back, we're slightly below the client growth number.

And obviously we -- a lot of it we think is economy driven.

If we get a stabilization or an upturn in the economy, we feel very comfortable in the 6% to 8% range.

Okay.

And then as a follow-up, on the client growth there was slightly less than 5% for the last 12 months.

Could you describe the linearity of that during the year.

Was it less earlier on, and then it's picked up recently?

Actually, it's gotten a little better.

During the last half of the year.

I think -- I don't know.

I wouldn't take that to the bank because it's marginally not significant.

At this point.

Selling is also very seasonal with the January period.

So --

Okay.

And then just a follow-up on the earlier question.

On checks-per-client increasing .3% during the quarter, there's two ways you could get there.

One is just by selling the to bigger companies.

The other is your existing customers actually hiring people.

Any sense --

No.

It's the client base.

Because what you could sell in one quarter is so insignificant compared to the size of the client base, it is definitely the client base that's grown.

So you think that businesses are actually hiring again.

Derek, I guess what we would say is that staff's a little better.

I look back 12 months as things kind of close to unstuck, but most of the last 12 months we would have had a bias toward negative.

The next move would be.

Now I think our bias would be toward positive.

It's early to say.

But net improvement did come about as a result of some hiring.

But, you know, how limited it was, I don't know.

But it was not of getting bigger clients.

Okay.

Great.

Thanks, guys.

All right.

Pat Burton of Smith Barney.

You may ask your question.

Hi.

First of all, congratulations on the year and a very, very difficult environment.

Within the benefit number you guys gave out, the 21% to 23% growth next year, could you break that down, Tom, and what you think Pass will contribute, other products, things like that.

How do we get to that number.

Thanks.

Pat, I don't think traditionally we've broken it down.

And I don't think we will we want to start today.

Plus, I don't think -- I don't think I could give you an accurate description without having the numbers in front of me because I did not anticipate this kind of question.

But generally speaking, we don't divulge it.

So -- I don't think we'll start today.

At the same time, I don't see it being significantly different from what's happened in the past.

Okay. follow-up question.

A new -- on new products, I think you guys introduced a new payroll card.

Could you give us an update on maybe some of the new initiatives that you're going to roll out over the next couple of years.

And thanks again.

Pat, I'm not sure I understand what you mean by new payroll card.

Are you experimenting with a prepaid card where people get their money on a card as opposed to a check?

Oh, we call that Access Card.

Actually had it in our portfolio for about seven years now.

Right.

It's never been -- it's never grown to our expectations.

And we think there's very good reasons for it.

But right now, there is a large clamor actually going across the country about the -- the opportunity for using a debit card in place of a payroll check or in place of direct deposit.

And we kind of sit back with amusement -- we kind of sit back with amusement and say, jeez, where's everybody been for the past seven years.

It may start to happen or may start to evolve in the marketplace.

That this will become another viable option for paying employees.

Seems to have a lot of appeal for part-time employees, employees that may have language barriers, or not interested in having checking accounts.

But to say now that anything significant is going on other than a lot of conversation and clamor -- I'd say that's where it is.

We've been positioned with it for about seven years.

I'm sure we have several thousand employees that utilize it.

But right now, it's not -- it's not a significant contributor to anything for Paychex today.

Okay.

Thank you.

Okay.

Adam Frisch of UBS.

You may ask the question.

Thanks, this is Jason Kupferberg for Adam.

A couple of questions.

First, can you discuss what the outlook is for cross selling some of your human resource and benefits services to the Advantage and Interpay client base, and what sort of contribution to H.R.B. revenue growth in fiscal '04 do you anticipate from the acquisitions.

First of all, the selling of ancillary services to the Interpay and Advantage client will move as the conversion moves.

We're not in a position to offer 401k and workers compensation and insurance services to those clients until they move over to our payroll system.

We don't think it's a wise investment to build the interfaces between Paychex's ancillary services and Advantage and Interpay's core payroll system.

As clients convert over, we will aggressively go after them with the sales opportunity for ancillary services.

To answer the question, over the next 12 months to 18 months, I don't think there's any significant noticeable increase in selling activity because of the opportunity to sell ancillary services.

As time goes on and those clients get converted we will aggressively go after them to.

But to quantify any results for the next 12 months I think is just -- not -- not noteworthy.

Okay.

A follow-up question.

Can you talk about in terms of the percentage of the client base which is not retained, whatever that may be, something -- somewhere in the, you know, 22% to 25% range, can you talk about sort of how that breaks down between clients who defect if you will to other payroll providers versus those who might choose to bring the payroll process in house or then, obviously, bankruptcies being part of the equation also.

Give us a feel for the fiscal '03 how that broke down versus prior years, if there is any significance.

Actual there hasn't been much swing.

The loss of clients to bankruptcies, business being dissolved, or being sold, still runs between 48% and 50% of our losses.

Okay.

The next largest category for lost clients is what they -- we call price.

Now, in the case of price, I think the majority of it and that's my speculation, is clients that have just grown too small.

And they just don't want to pay for our services anymore because they may not be able to afford it.

Or it could be a competitor going in and undercutting our price and taking the client away.

Uh-huh.

The categories after that are -- are perceived quality of service being poor.

Maybe a relationship with an accountant and the accountant wants to take on the payroll processing.

But all of those last two are -- are under 10%.

Of our losses.

So the main ones are out of business and the second largest one is what we call price.

Which is a combination, somebody coming in and undercutting us.

But mainly I believe it's clients that have just grown too small.

Don't think they can afford us anymore.

Great.

Thanks for your comments.

And I see no major trend shift in that this year over last year.

Okay.

Okay.

Thanks again.

Jim Kissane, of Bear Stearns, you may ask your question.

Thanks.

Tom or John, can you give us the two to three-year outlook on where you can get the operating margins back to?

There's opinion moving part the last year or so.

I don't know about back to.

We think about it getting better.

They can still move upward.

It's hard to exactly quantify it.

You know, we do a plan each year, and we do look out further.

But I think they can move, you know, 100 basis points or so.

I think we've given enough guidance on the revenue targets and the bottom line so you know there's some in there -- I can't say we go crazy over defining exact percentage.

We tend to keep pushing.

But you can still move them up because those ancillaries still commit a higher revenue areas.

The Advantage and Interpay are going to provide room for margin improvement.

Any diminishment you've seen is the result of them coming in.

The only thing probably worth talking about right now is H.R.S. this past quarter wasn't as strong as a year ago.

A year ago, the year over year growth was 27%.

A year ago, everything went their way.

This year, nothing went their way.

The 401k markets were tougher than they were a year ago.

People had money invested in the -- in our portfolios, switched more to [gics] and things where the basis points we actually get in those aren't as good as when they're in equities.

The workman's comp market got soft.

We did have one less day of billing for the whole company.

It was just a little bit of an environment that went the wrong way.

Where a year ago, they did.

We put price increases in I think two years ago.

Last year we didn't do too much on pricing and H.R.

So it's just a bunch of little things.

Some people are going to look at the fourth quarter and say, well, jeez, did you lose momentum in some of these areas?

The answer is no.

It's the same reason when you were talking about all of the great momentum we had for the last three or four quarters, we didn't talk too much about it because we knew this was coming.

It wasn't a surprise.

But when you look at the plan next year, we're going to get right back to doing all the same things we normally do.

Okay.

And Tom, can you elaborate on the comment to CNBC that over the past three months you've seen some pickup in the economy.

Yes, John already mentioned that our checks per client went up .3%.

Which is significantly different than what's happened over the last, obviously, two years.

We've seen the trend for now for four quarters now in terms of the improvement.

Well, it's decreased less.

This is the first time we've seen anything that would be any indicator of any hiring going on.

And don't over-react to the significance.

At least we think hiring went on.

And on the new -- you mentioned earlier you've seen improvement in the new client ads, as well.

Is that business --

New client ads were good.

Sales force put on a big push.

We've got a Vice President of Sales, Mr. Turek.

He doesn't like to lose.

We've been kicking him hard for a while.

The sales force did a good job near the end here.

Maybe the environment will look better.

But that's separate.

The checks per client really moves off of the little bit better environment on hiring.

Excellent.

Little, not much.

Great.

Thanks.

Greg Cappelli of Suisse Boston.

Hi, I wanted to follow on that quickly in the HR earned benefits segment.

John, is sounds from your comments that that's a division that could rebound back up into the 20%-plus range or -- are you more comfortable kind of, you know, having to model it out at the rate that it is now?

No, I think it's going to come back in the low 20's.

We had an aberration this quarter.

We've known it was there all year, coming at us.

You know, it -- you got it remember the revenue base is more volatile.

We also have the workers comp in there.

A year ago, we had a great year on the quality of what we put into the base.

We got performance kickers.

This year, we had a pretty good year in light of what happened.

And we got some performance kickers, but not as much.

And the net revenue base of $25 million to $30 million a quarter doesn't take much to affect it.

We don't feel real good about it.

Low 20's is very achievable.

Okay.

Is the margin on the business again, should we expect that to stay -- I know you don't break out details, but should we expect that to stay at about where it's been historically?

What we have anything where margins are going down.

That's not -- that's not acceptable behavior for us.

Okay.

Tom, I wonder if you could clarify one thing.

I'm sorry if you mentioned this already.

The rate at which you're expecting the acquired clients that have come on board to transfer over to Paychex, kind of throughout '04 generally.

Yes.

We are going to be more aggressive with the Interpay clients than the Advantage clients.

But we fully expect by the end of calendar 2004 that all of our -- all of clients will be converted for the most part.

All, okay.

Great.

Thanks a lot.

Okay.

David Grossman of Thomas Weisel Partners.

You may ask the question.

Thanks.

First for John.

John, kind of looking at the guidance just back of the envelope -- it looks like operating expenses are expected as a percentage of revenues to stay relatively flat.

If that calculation is right, perhaps you could shed light on what's gone on and, you know, maybe where some investments are going.

And perhaps, you know, how that could trend beyond fiscal '04.

And then for you, Tom, a quick question on ancillary services.

Sounds like you're investing in the sales force and making changes, you know, enhancing -- in terms of coverage for certain areas.

Perhaps you could isolate which ancillary service could have biggest impact in quotas and profitability over the next couple of years.

Going back to the first one could we've made investments primarily in two dual data centers that -- for I.T. that will give a better means of backing up tapes and providing a more continuous -- although it hasn't been a problem -- service to customers.

We've increased other I.T. expenses to invest on things they're doing in software.

That's what some of the reason is.

You also wind up with some of the Advantage Interpay expenses.

Some of them you can break out.

Some you can't.

But we don't see any distortion here.

The focus on margins is still there.

When you add to acquisitions this size, we did, you know, change things temporarily.

We'll get those costs over time.

Looking forward when we did the plan, we feel very good about where we're headed and back to leveraging margins, similar to what we have in the past.

So would you expect that the outback line then to see the leverage in '05?

The cap-ex line, you know, talking about $60 million this year.

Next year, talking about less.

The following year to me it would be in the -- I mean, a real guess.

It would be in the 45 to 55 million mark again.

I don't think we see any real need for extensive investments.

Unless something comes up that says it's time to invest.

On the ancillary services, specifically human resources.

The one we're most aggressive now percentage-wise, not whole dollars but percentage-wise, is the Paychex administrative services product.

We're taking the sales organization from about 45 people up to almost 80 people.

And that mean we're going to get much better market coverage.

It also implies and is certainly true that we feel the viability of this product and salable of the product and client retention of the product are all improving and looking very good.

We feel that the Paychex administrative services is going to be -- I feel -- is going to be a real foundation builder over time with Paychex.

But what's changed in that product?

You said that you've become a lot more comfortable in the last 12 months.

Well, I -- the major thing that changes is you have to find the balance between the customer's expectations and your ability to deliver.

And it has to be over time proved that it's of value.

We've been working hard on that.

Probably the biggest area we've been focusing on is the quality and skill set what have we call our customer services representatives.

And these are the people that have the direct client relationship that go out to the client's office and visit them and helps them deal with specific issues.

We've been working really hard on upgrading the position.

And I think the success is really starting to show.

Great.

Thank you.

Sure.

Randy Mehl of S.G. Cowen.

You may ask your question.

Hi.

Randy Mehl from Robert W. Baird.

Congratulations --

Randy --

Yes.

Congratulations Tom and John on a good year in a tough environment.

I want to pursue the operating margin question from the last questioner.

You had a decline in the organic sea margin on your basis which is unusual.

John, I heard you mention lost day.

There were some data centers.

First of all, how much was the impact of the lost day and then what else was there other than those two?

That day is about a couple million bucks.

What you've got is in this particular quarter for now real reason more than just coincidences, there's three or four things that kind of went the other way.

Missing a day, the data center we knew we were going to turn on the acquisition costs and that.

We started, having great success with that.

But those costs bubbled up.

A year ago in the fourth quarter, we were probably a little abnormally high.

The year ago, some of the sales force hiring took place little later in the year.

This year was a little more in the fourth quarter because they felt comfortable with where we are.

There's lots of little things.

You throw the Interpay Acquisition in.

In Interpay, while we tried to back out all of the expenses, there's no doubt some of the Interpay sales force that we integrated in, that we hadn't let go, some of the money wound up in Paychex organically, as you would call it.

There's a lot of little things here.

Nothing that is a cause of concern.

It's just those things went a different way this time.

They're not anything that's concerning us.

Okay.

On the organic unit growth of 5%, do you know how much of that was related or contributed by Advantage salespeople?

That did come over?

Oh, very little.

Very little.

Okay.

So -- so the sub-5% is a pretty good number, you know, organic --

It's solid.

Sorry --

It's solid.

Okay.

Then you didn't talk a lot about the Interpay channel.

And some of the success that you expect from that.

What is the status of that, meaning are you getting good referrals, are you happy what you've seen so far?

Yeah.

A significant percentage of Interpay sales came from bank referrals from Fleet Bank because Fleet was 100% owner of Interpay.

And obviously when we made the acquisition, one of the concerns we had and questions we had was was the flow of referrals going to continue at the same rate that they had flowed from Fleet Bank to the Interpay processor.

And our results, early results so far have been pretty good.

They're not up to the level they were before.

But considering all of the changes in the sales force and so forth, that's -- to be expected.

Our sales organization including the Interpay people that are with us are going to continue to build that relationship.

Talk to the management of Fleet, and they'll -- in the last two weeks, and they're very high on the relationship.

We think it's going to produce good results over time.

Okay.

Good.

Thank you very much.

I appreciate it.

Okay.

Stephen Weber of S.G. Cowen.

You may ask your question.

I'm still working here.

How you doing, Steve?

You're always still working.

A couple of questions.

One, John, what was total amortization expense last year including the intangibles, etc.?

And where does that go in 2004?

Can you just give us a feeling.

I know there's the acquisitions, but there's also software and other kinds of things that you do --

I -- right now, I have no way to answer this.

What I will do is -- the best place to put it so it's in a public document, I will get it in the investor relations presentation.

Okay --

And change the 8-K.

I'll get something in there that there will be -- I don't know the answer to that question.

Okay.

Secondly, John, given what's happened to float income, tax-exempt income, I would have -- I tried to back this out.

It seems like your tax rate guidance implies a drop in the kind of underlying tax rate from what it was in fiscal '03.

Is there something going on there or --

We adopted some pretty good tax strategies about a year ago.

And they don't come all at one time.

So our tax strategy isn't just off exempt.

Usually the rate would have been higher than that.

Those tax strategies are going to help minimize it somewhat.

Can you -- can you put a little color on that.

No, we're not going to put any color on them.

They're --

Okay.

The last question is, Tom, you mentioned earlier that Intuit is more aggressive.

Can you give us any feel for what you see or expect?

I didn't say they were more aggressive.

I said they've evolved.

They have approximately 40,000 clients.

The majority of it coming from two acquisitions.

Our sales organization nationally just doesn't consider Intuit an issue at this point.

Obviously the fact that they made two acquisitions surely would indicate that they have plans or dreams or desires to, you know, be a bigger player in the payroll processing market.

Okay.

Thank you very much.

Sure.

Greg Gould of Goldman Sachs.

You may ask your question.

Thanks.

I know it's hard to talk about fiscal '05, but is there -- should we expect the services revenue growth and E.P.S. growth to narrow or the gap between them narrow as the float drag goes away, and so therefore 15%-plus E.P.S. growth returning in '05?

I don't know whether it will go all the way from 10% to 15% in one year.

As I sit here, I would hope it would -- half of that would narrow.

I really don't know.

You know, the rates are on a much more -- don't have much more room to go.

One thing that would impact that is if rates started to move up as opposed to flat.

Although the gain situation would mitigate some of that because the gains turn to losses.

Too early to say, Greg.

But I think they will come back together.

The reason, there isn't any more room for rates to go down.

We commented briefly, nobody's asked the question.

But the Fed can move rates today, but it's not going to impact us very much.

Okay.

And then, on M.M.S. , the 40% revenue growth was terrific this year.

You're increasing the sales force by 25%, I think it was mentioned earlier, for fiscal '04.

Should revenue growth be in line with the sales force growth? '04, or could it be faster?

I -- I think for the purpose of speculation, Greg, I don't think I'd go much higher than the sales force growth.

No, and the other reason is that M.M.S., the base gets bigger.

What the new sales force is adding to the base is actually less.

But you're not going to get much above 30% to 40%.

Okay.

Can't accelerate.

Getting too big.

Right.

The most successful thing here is talk that about a lot of areas.

They want over $100 million this year.

Right.

Is -- on the pricing for Advantage and Interpay, would you expect price increases for the next several years to be, you know, well ahead of the core?

And, therefore, they should converge overall pricing should converge in a few years?

Greg, without having the perspective of taking these clients through their first price increase over 3%, I would say that chances are you're absolutely right.

But if we get any unusual pushback, that may modify our thinking.

Okay.

Thank you.

Thank you.

Mark Marcon of Wachovia Securities.

You may ask your question.

Good morning.

With regards to Interpay and Advantage, first on Interpay, can you split out what the contribution was this quarter.

No.

We disclosed what we did combined, we think we give more than most people do.

The contribution was -- is not meaningful.

I meant -- In terms of revenues, John.

Just, what did Interpay do this quarter?

I don't have it in front of me.

Since I didn't make it, I'd rather not.

It's not significant.

I can speculate.

It's going to be 1/4 of the revenue when we bought it.

Probably around $12 million.

The only thing you can do is I got 50,000 clients from one, 33,000 from the other.

You could pro-rata what I gave you and you wouldn't be that far off.

Okay.

When would you expect A-pay and Interpay to hit Paychex's profitability levels?

Well, as we merge their clients onto our processing system, they should expand their margins because even though they're not priced at the same level as Paychex's core clients, there's still incremental revenue.

And percentage-wise, the incremental revenue is generally higher than the existing revenue.

Even though they're priced below us, we think they're going to help us expand margins.

At least in our branch level.

And so over time, over a three or four-year period, whatever it takes, it just makes them look that much better.

But they will not hold down our margins because they're at lower prices.

You think in three years it will be equivalent?

Like I said in the prior question, it -- without the benefit of seeing what happens this first go-around, I would say in three or four years they should be consistent with ours.

But if we get some pushback, you know, then we might want to modify our position on it.

It's more important to retain the clients than to get -- than to get more price out of them.

That's absolutely correct.

Sure.

When you gave your guidance for this quarter, you indicated that you thought the Advantage integration may end up costing a penny per share.

Was that in fact the case?

The Advantage probably close to a penny could maybe not quite that.

Then Interpay got in there.

So it was pretty close.

And can you give us a feel in terms of what yield you're assuming both on the E.M.S., as opposed --

What do you mean yields?

Effective yields in terms --

You got to go into the 8-k and look at the rates and the reinvestments rate is there.

We assume it's going forward.

It will be the same as what --

Not exactly the same.

When I have things mature in the long-term portfolio, they got reinvested at the lower rate.

I think the guidance we gave you here, though, is that our goal next year on the EMS float funds is we will use gains to try and keep the income flat.

We're not going to let it go up.

Probably going to try not to let it go down.

It's going to take gains.

That's how different our posture was three or four months ago, is that we just don't want to see a year-over-year decrease in EMS funds.

We don't think interest rates got too much further they can go.

We're not betting on rates going up.

We're not betting on rates going down.

And we'll try to moderate that.

The portfolio has jumped up to $45 million of unrealized gains now.

I would have never thought that was possible coming off where we were last year.

Okay.

Great.

Thank you.

Glen Green of Think Equity Partners.

You may ask your question.

Thank you.

One -- one question.

On the payroll services line, obviously the major market services was great, growing up to 40%.

If we sort of adjust for that as well as as well as the Interpay and Advantage acquisitions, it looks like the core business declined sequentially, you know, fairly sizably.

And I don't recall that in the last couple of years.

You got to realize that 30% to 35% of the major market revenues are core revenues.

That transferred over.

You can't do the calculation you're trying to do.

I realize that.

But it seems like it's -- fell more precipitously than it has in present quarters.

As we blend going forward, we probably add to the problem by giving you the major market revenue number, you can't separate the two.

Okay, the bottom line is we shouldn't read too much do it?

No.

And maybe part of the reason was the one less billing day.

One less would affect core a little more.

It really is to show we're successful in the major markets product line.

As time goes on, there's more clients that want that sophistication.

Some of the clients in the under-50 market also want it.

There really is -- as a matter of fact, I don't look at the stats and checks separately anymore because it distorts things.

Okay.

Thank you.

The only solution I have is not to give you the major markets revenue number anymore.

I probably got a few people on the phone that don't want me to do that.

Thank you.

Okay.

Adam Waldo of Lehman Brothers, you may ask your question.

Hi, Tom and John.

A couple quick questions about the quarter itself.

I wonder if you can give us a little more specificity as to the rate of year-over-year change you may have seen in sales force compensation in training expense during the quarter, given that the expense base was, I think, higher than we all expected.

On the one hand.

On the other, you added a lot of head count.

Could you maybe quantify that for us more in terms of what happened in the May quarter?

Insignificant.

Remember, we had some salespeople and termination arrangements for salespeople that we had on this deal with.

And -- proportionally, new sales trainees and training costs and all that, it's insignificant difference percentage-wise.

Okay.

So you would say, Tom, no effect on core business then in the quarter, in terms of 33%.

Very small.

Turning to the F.Y. '04 guidance, John, I want to expand on something from another questioner's line of questioning.

Are you basically saying then that in F.Y. 2004, in the E.N.S. investment income guidance you've given, you have marked the market for current sort of two, three-year maturity yields in your current asset mix.

You're assuming constant duration, then you're intending to basically book some of the unrealized portfolio gains of 4 $45 million to manage that line in F.Y. '04 in the 10% income guidance?

Yes.

Are you thinking about extending duration?

No.

Okay.

And then as you think about -- Sorry, pardon?

I'm sorry?

We thought about it.

We don't know how you extend duration in this environment.

Okay.

And are you thinking at all about in terms of the reinvestment rate?

Can you give us more sense as to what your reinvestment rates currently to each other portfolios?

Disclosed in the 8-K.

My mistake, sorry.

You should know what they are.

You know what the market is.

Sure.

I wanted to see if you were getting anything different because of asset quality mix.

No, you guys actually probably know it better than I do.

Fair enough.

We're going to try and hold this thing constant.

That could change as we get to the year based on what the Fed does or the -- I don't know if they've got much more room to go.

We want to hold it there, and we don't really -- again, we had a meeting with our -- the investment managers here 30 days ago.

And that's Merrill Lynch, McDonald's, used to be Van Kampen, and we talked about the extended duration, do you go -- do you shorten the duration, but to not invest the long-term money long term at all, that's a pretty big basis point hit.

We decided we're not going to project where the rates go.

We're going to do what we've been doing, which is -- we've been successful.

We're not going to hedge.

The guy that's hedged when it was going down all look great.

Eventually the hedges have to come off.

There's going to come a time when some somebody -- somebody's going to be hedged and it will go the other way.

I can't tell you when it will happen.

Then it will be a different game.

We're going to continue to kind what have we've been doing.

A little conservative.

We are going to try to do what we can to have float incomes stay even year over year.

So just to summarize, investors should infer that you've basically given your approximately 10% net income growth guidance for F.Y. '04 predicated on the yield curve as it stands approximately now, before Fed action but effectively pricing in the yield curve 50 basis points by the Fed today?

No change in duration, and an expectation that you'll use unrealized gains on the bond portfolio to manage reported investment income beyond that, is that fair?

Yes.

Okay.

And then one last quick question, if I could.

As you look out to F.Y. '04 guidance again of 10% net income growth, does that build in any expected accretion from Advantage Payroll and Interpay?

Not anything significant over what we've seen.

Nothing significant.

Essentially E.P.S. neutrality, would that be a conservative assumption?

The guidance?

Yes, that's what we said on those two acquisitions.

It would be slight accretion but not significant.

Fair enough.

Tom, if you could comment on your thoughts on dividend policy.

A couple of quarters ago you said given some of the contemplated changes in tax law, that you were contemplating potentially taking up the dividend payout ratio.

I think the way you put it was you know one large shareholder would like to see a bigger payout ratio.

Can you update us --

Why did you ask him that question?

Sorry, John.

I know you're a big shareholder.

But he's a little bigger.

I am going to try to speak for the board of directors now rather than myself personally.

I think the board is in a very comfortable place at this percentage of earnings.

And unless I hear differently in the next board meeting next month, I don't anticipate a change in our --

Thanks a lot.

Okay.

Robert Mana of Copper Beach Capital, you may ask your question.

Quickly, can you give us the sales head count numbers if you would be willing to share that, break --

I will give you a better thing.

We have redone the Investor Relations presentation completely.

It's on the web site.

It was used at the Blair Conference yesterday because it was on the web site.

All that stuff is right there.

Rather than us sit here and kind of give you one number or two numbers.

I appreciate it.

Thanks.

Sure.

Karen Young of Allstate, you may ask your question.

Good morning.

I think you gave what your projections were for new client growth.

New -- revenues from new services and pricing.

Could you give what it was for '03 for the three items.

When -- basically we did not give projected client growth for next year.

Revenue guidance, we told you what the client growth organic was for the past year.

We do not speculate going out --

Could you give me what -- I think you said long term you expect 6% to 8%, organic growth from clients. 6% to 7% service revenue from new services and the pricing 3% to 3.5%?

Correct.

I want to know what -- what -- what those figures were for 2003?

You said that client growth was just under 5%.

But I don't know what pricing and services was.

I -- well, the organic growth and clients was 5%.

The pricing was 3%, 3.25%.

But don't forget, we've got the acquisitions of Advantage and Interpay mingled in there, too.

Their revenues are included in the revenue --

Sure.

Except -- except for the client growth, we were very -- we were close to what we -- what we expect on an ongoing basis.

Okay.

The place we're getting hurt now is two places.

One is checks per clients kind of stopped.

Interest rates still sit there.

And the client growth is little less than what we would ideally like because of the environment.

When you take pricing, hasn't been affected too much.

And growth and ancillaries has not been affect too much either.

Okay.

What do you think -- you have seen improvement in your check per client.

What would be a decent run rate to assume for checks per client maybe going out a couple of quarters?

Actually, we're on -- we're -- while we've seen this and on optimistic, we believe over time this isn't going to change much.

In the last recession, the drop that took place did not get replaced.

What will happen here is the economy picks up.

We will sell more clients below the average of 14 because that's where the underpenetrated mark is.

That will get offset hopefully by hiring.

We're not projecting any big recovery in this.

So two things we don't do when we look forward.

We don't project the big increase in checks per client.

And we don't project what interests are going -- interest rates are going to do because we don't know.

On interest rates, there will be times when we're kind of undercompensated, which what I would describe today.

There will be times when we're overcompensated, which actually happened back in 2001.

But we don't -- don't factor those in.

You people can look at that just as easily as we can.

Okay.

So -- is it because of the way the business picks up that the checks per client doesn't grow -- isn't --

Yes, it did not grow in the 1990's.

Okay.

Okay.

And then last, just in terms of the improvement that you've seen and in checks per client, are you seeing any difference among employers of different size, and then separately, by industry?

That would be notable?

You got to be careful.

Remember, it's .3% we're talking about here.

We're not talking about a big move.

Plus --

I'm thinking of actually the .3 which is up from maybe through quarters ago of down 1.7.

Looking out maybe over the last, you know, six to nine months.

First of all, we don't do anything -- we don't break it down by industry or client segment.

The major markets and core payroll clients are grouped into one category.

All of the measurements are done strictly on that one number.

Can't answer your questions about by category.

Either by geography or by business description.

Okay.

Thank you.

Thanks.

Greg Gieber of A.G. Edwards.

Yeah, I want to follow up on the last answer there.

You said you thought that on -- your interest earnings on float that you were somewhat undercompensated now.

And that in '01 you had been overcompensated which is fair.

I wonder if you could quantify with -- what you consider to be fairly compensated in the way of an interest rate without saying just, you know --

More than I get now.

More than you get --

Less than we had three years ago.

I guess, you know, the real question comes down to with concerns of deflation and continuing or possibly just continued low interest rates, not significantly higher than we have today.

When do you start thinking about changing your pricing model?

We will not change a pricing model for interest rates.

It would have to be pretty extreme.

We'll tell you why.

Most clients don't even understand they're paying as part of price.

Once you educate them and change the price model for changing interest rates, in fairness I think you are compelled to adjust the pricing model later when it goes the other way.

There's an awful lot of companies, you know, when commodity prices go up, they raise the prices.

When the commodity prices drop, they kind of forget to tell everybody about that.

And so right now, we are where we are, we like float income.

We know we don't control it completely.

We're a pretty profitable company the last I knew.

We're not going to go through that process.

For the benefit of shareholders, the best thing we could ask for is consistency.

I don't think John or I care much whether or not the interest rates go up.

What we would like is consistency so that year-over-year comparisons make sense.

We know the size of our portfolio will continue to grow.

Thank you.

Sure.

No further questions at this time, sir.

Thank you very much.

We're always happy when we hear that.

You know, I shouldn't say that.

First of all, we do appreciate your interest in what we're doing here and your interest in Paychex.

So we thank you for doing that.

We hope all of are you enjoy something good weather in some places.

Here we are, for the first time in who knows how long it's not raining.

Before we close I want to mention one thing.

We close in September.

We expect the press release date to be the 23rd or 24th of September.

That's a week later than normal.

I don't want to start any rumors.

It's only because of some scheduling conflicts here at Paychex.

We have a sales conference that is a week before.

It's going to make the release more difficult.

If we can move it up, we're going to.

Right now, we want to inform you that's the week we'll do it.

Nothing really unusual.

At this point, I would also remind you that the webcast can be archived.

It's only on there for a week.

And we hope you all have a great day and a great summer.

And we'll be talking to you soon.