沛齊 (PAYX) 2004 Q1 法說會逐字稿

Welcome to the Paychex first quarter fiscal 2004 earnings results conference call.

I would like to introduce your host for today's call, Mr. John Morphy, Chief Financial Officer.

Sir, you may begin.

Thank you for joining us today for our first quarter press release.

Also with us today is Tom Golisano, our Chairman, President and CEO.

On the completion of the review of our financial results, we will conduct a Q&A session.

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

If you need a copy of the release, it can be obtained by accessing our Website at www.paychex.com at our Investor Relations homepage.

We have filed a form 10-Q for the first quarter ended August 31, 2003, and 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 October 1st, 2003.

Please refer to our Website for access to all recent news releases, current financial information, related SEC filings and Investor Relations presentations.

Paychex is off to a good start in fiscal 2004.

First quarter revenues, expenditures, operating results, net income and earnings per share were all in line with the expectations we established last spring in our budget process.

We continue to see some encouraging signs in the small-business economic environment, and in the first quarter, we slightly exceeded most of our new unit sales.

The earnings release is summarized as follows.

For the first quarter of fiscal 2004, total revenue growth was 22 percent, which in turn generated an increase in net income of 6 percent.

Quarterly earnings per share were 21 cents versus 20 cents a year ago, up 6 percent on an unrounded basis.

Operating income was up 12 percent in the first quarter.

Operating income growth continues to be negatively impacted by lower average income straights earned by the Funds Held for Clients portfolio.

Operating income excluding interest on Funds Held for Clients in the first quarter was up 14 percent year-over-year.

Our results of operations for the first quarter of fiscal 2004 were impacted by the fiscal 2003 acquisitions of Advantage and InterPay.

These two acquisitions provided Paychex with over 80,000 new clients.

Our results of operations for the first quarter of fiscal 2004 include the results of Advantage and InterPay for the entire period.

Financial results for the prior year first quarter do not reflect the acquisitions, as they had not occurred yet.

These acquisitions contributed 31.6 million in revenues for the quarter ended August 31, 2003 and Service Revenues of 29.9 million and interest on Funds Held for Clients of 1.7 million.

The results of Advantage and InterPay were nominally accretive to net income for the first quarter and are expected to be nominally accretive in the future.

The integration of the Advantage and InterPay acquisitions is well underway and progressing quite well.

The sales forces related to both acquisitions have been fully merged into the Paychex sales forces.

Advantage branches have been reduced from 21 to four.

The Advantage core system will be retained to service clients affiliated with independently owned associated offices in Advantage co-branded products.

Accordingly, the Advantage clients will be converted to the Paychex system over an extended period of time.

InterPay branches will be reduced from 12 to 4 by the end of the calendar year, and the conversion of InterPay clients is already being executed in many branches.

We expect that approximately one-third of the InterPay clients will be converted to the Paychex software platforms by December 2003 and that the remaining clients will be converted by December 2004.

The success of the integration process is beginning to significantly diminish our ability to individually measure the financial results of Advantage and InterPay.

Going forward, we will provide limited, if any, data related to the ongoing financial results of these acquisitions.

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

Total Service Revenues increased 24 percent in the first-quarter to 295.9 million.

Service Revenues include service fees earned from our payroll and human resource and benefits product lines.

Payroll service revenues for the first quarter increased 24 percent to 254.6 million.

The increase is related to the acquisitions of Advantage and InterPay in fiscal 2003, organic client base growth, increased utilization of ancillary services by new and existing clients, and price increases.

In the first quarter of fiscal 2004, we experienced a .1 percent year-over-year decline in checks per client -- that excludes Advantage and InterPay -- compared with 1.7 percent decrease in the first quarter of fiscal 2003, a .3 percent decrease in the second quarter of fiscal 2003, and a .1 percent decrease in the third quarter of fiscal 2003.

An increase in checks per client of .3 percent was experienced in the fourth quarter of fiscal 2003.

The .1 percent decrease in the first quarter was not unexpected, as we anticipate this statistic will remain relatively flat over an extended period of time.

This is what happened throughout most of the '90s, except during the early '90s recession.

We tend to sell new clients at a lower number of employees than our average of 14, and in favorable economic conditions, this is offset by hiring expansion in our recurring client base.

As of August 31, 2003, 88 percent of all clients utilized our tax filing and payment services, and 61 percent utilized the employee payment services.

More than 90 percent of new clients purchased our tax filing and payment services, and approximately 70 percent of new clients purchased employee payment services.

Major market services revenue increased 43 percent for the first quarter to 31.6 million.

Approximately one-third of our new major market services clients are conversions from our core payroll service.

Human resource and benefit service revenue increased 22 percent for the first quarter to 41.3 million.

The increase is primarily related to growth in Retirement Services clients and in client and employees served by PAS and PEO bundled services.

Retirement Services revenue increased 15 percent in the first quarter to 17.9 million.

At August 31, 2003, we had over 27,000 Retirement Services clients.

Paychex Administrative Services, PAS, and the Professional Employee Organization, PEO, 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 benefits costs.

Sales of PAS and PEO products have been strong with administrative fee revenue from these products increasing 31 percent in the first quarter of fiscal 2004.

As of August 31, 2003, our PAS and PEO products serviced over 109,000 clients and employees.

Interest on Funds Held for Clients is flat in the first quarter of fiscal 2004 compared with the prior year quarter.

Lower average interest rates earned in fiscal 2004 were offset by an increase in net realized gains and the sale of available for sale securities and higher average portfolio balances.

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

Average daily portfolio balances for the first quarter of fiscal 2004 were 2.3 billion compared with 1.9 billion in the prior year quarter.

The Funds Held for Clients portfolio earned an average rate of return of 1.9 percent for the first quarter of fiscal 2004 compared with 2.5 percent for the first quarter of fiscal 2003.

Net realized gains on the sale of Available for Sale securities included an interest on Funds Held for Clients increased to $2.7 million for the first quarter of fiscal 2004 compared with $1.6 million for the respective prior year period.

Consolidated operating, selling, general and administrative expenses increased 29 percent in the first quarter over the prior year.

This is due to additional costs resulting from the acquisitions of Advantage and InterPay and investments in personal, information technology, and facility costs to support the organic growth of the Company.

In the second and fourth quarters of fiscal 2003, we made investments in our direct sales force as we integrated the sales forces of Advantage and InterPay.

Also, as a result of the acquisitions, amortization of intangible assets increased to 4.1 million in the first quarter from .6 million in the prior year first-quarter.

The impact of the acquisitions and the investment in the sales force on expense growth should moderate quarter over quarter as fiscal 2004 progresses.

There were approximately 8950 employees at August 31, 2003 compared with approximately 7450 at August 31, 2002.

Operating income increased 12 percent for the first quarter to $115.1 million.

Operating income excluding interest on Funds Held for Clients increased 14 percent on a year-over-year basis.

Investment income net decreased 53 percent for the first quarter due to a decrease in average daily invested balances, primarily from the sale of corporate investments upon the acquisitions in 2003.

Lower average interest rates and lower net realized gains on the sale of Available for Sale securities.

Average daily balances invested were $386 million in the first quarter of fiscal 2004 compared with $749 million for the prior year period.

The corporate investment portfolio earned an average rate of return of 2.8 percent for the first quarter of fiscal 2004 compared with 3.3 percent in the prior year period.

There were $1.5 million in net realized gains for the first quarter of fiscal 2004.

This compares with net realized gains of $2.4 million in the fiscal 2003 first quarter.

Use of corporate investments to fund the two acquisitions resulted in a reduction of investment income in the first quarter of fiscal 2004 of approximately $3.7 million.

Our effective income tax rate was 32.5 percent for the first quarter of fiscal 2004 compared with 31.5 percent for the same period last year.

The increase in the effective tax rate is the result of lower levels of tax event income on Funds Held for Clients and corporate investment.

The full year fiscal 2004 income tax rate is expected to approximate 32.5 percent.

We have based our future expectations on current economic and interest rate conditions continuing with no significant changes.

Our expectations remain virtually the same as we expressed last June when we closed out fiscal 2003.

Accordingly for fiscal 2004, we project payroll service revenue to grow in the range of 15 to 17 percent, and Human Resource and Benefit Service revenue grow in the range of 20 to 22 percent.

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

We expect interest on Funds Held for Clients, including realized gains, to be flat in fiscal 2004, while Corporate Investment income is expected to be down approximately 45 percent primarily due to the sale of investments to fund the acquisitions in fiscal 2003.

Based on these factors, we anticipate achieving record total revenues in net income in fiscal 2004 with estimated total revenue growth to be in the range of 15 to 17 percent accompanied by net income growth of approximately 10 percent.

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, for the year fiscal 2004 will be in the range of 15 to 20 percent.

Moving to page 5 of our press release, our balance sheet since May 31, 2003 reflects our growth during the first months of 2004.

Cash and corporate investments have grown to $438 million.

Our total available for sale investments, including Corporate Investments and Funds Held for Clients, reflected unrealized gains of $22.7 million at August 31, 2003 compared with unrealized gains of 45 million at May 31, 2003.

The increase in interest rate environment for intermediate-term securities has driven the reduction in the market value of the Available for Sale portfolio.

The volatile interest rate market has resulted in significant changes in the market value of our Available for Sale portfolios.

During the first quarter of 2004, the unrealized gain position ranged from approximately $21.8 million to $49.6 million.

The unrealized gain position was $30.1 million at September 19, 2003.

So you can see that this market is relatively volatile, $22.7 million at August 31st, and we are already back up to 30 million as we speak today.

Our net property and equipment balance activity during the three-month period reflected capital expenditures of approximately $11 million and depreciation expense of approximately $10 million.

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

The Company recorded almost 400 million of goodwill and $95 million of intangible assets from the acquisition of Advantage and InterPay.

Intangible assets primarily represent client list and license agreements with associate offices, which are amortized over periods ranging from seven to 12 years using either accelerated or straight line methods.

Intangible asset amortization is projected to be in the range of $16 million to $17 million for the full year fiscal 2004.

Goodwill recorded from the purchase of Advantage and InterPay will not be amortized but instead be tested for impairment on an ongoing basis assuming Paychex operates as a single reporting unit.

Total stockholders equity increased to $1.1 billion at August 31, 2003 with $41 million in dividends paid during the first quarter of fiscal 2004, a payout of 52 percent of net income.

Our return on equity for the past 12 months was 28 percent.

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

Please refer to our form 10-Q which was filed with the SEC this morning under the section entitled, "Market risk factors for further discussion of interest rates and related risks."

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 Three of the press release for our discussion of forward-looking statements and related risk factors.

To let you know, our second quarter earnings release is now scheduled for just after the close on December 18, 2003.

We expect to have a 10:30 Eastern Standard time teleconference on December 19th, 2003.

At this time, I will turn the meeting over to Tom Golisano to provide his comments, and then we will answer some questions.

Good morning everybody.

This is Tom Golisano.

The first thing I would like to say is Paychex just enjoyed its 20th anniversary of being a public corporation on August 26, 2003.

I guess this makes this just about our 80th earnings release on a quarterly basis.

For whatever that is worth, I just thought I would mention it.

The first thing I want to comment on -- John hit on it lightly -- has been our excellent sales results during our first fiscal quarter.

In fact, it has been our strongest sales quarter in about four or five years.

The thing that makes this unique is also the fact that because of the Advantage and InterPay acquisitions and many of our formulas for new client numbers are based on the number of clients we already have, we had a very high bar established because of these acquisitions, and we had been very successful, not only in our core payroll sales but also in MMS and our HR products.

A couple of small notes.

You know we have had an online payroll product for a little over a year now.

We have got over 4000 or 4500 clients utilizing this service, and we have really been selling it or offering it on a limited basis.

We feel very comfortable now in expanding that to the rest of our sales organization.

In fact, it was announced at our national sales conference in Hawaii last week, and it was met with a lot of enthusiasm.

The other interesting product notation is also a release of a fully integrated utilizing the Web HR product with our MMS services.

What I mean by utilizing the Web is a client can utilize the Web in making changes to personnel files such as rates, exemptions, addresses and so forth, and at the same time, those changes will be integrated into our payroll system so that when the employees pay in the next pay period, the changes will be reflected.

The sales enthusiasm around this product is particularly high as well.

A third small note, the AICPA, the American Institute of CPAs in the United States of America, has named us their only preferred vendor for Payroll Services in the United States, and we are quite proud of that achievement.

Our client retention, also we set a very high bar, and we are very close to maintaining the quota level on client retention.

The numbers look very good considering the economy.

Our sales rep turnover this year for core payroll is running much better than it did last year, and for those of you who remember the numbers we generally operate in, we are running our turnover rate on an annualized basis is in the very low 30 percent range.

Our operations turnover for payroll specialist maintains record levels again, and we are quite happy with that.

We have announced that we are opening up in Germany.

We have made a hire.

We are beginning from scratch.

The important thing is here you will see no material impact cost-wise, revenue-wise or any other wise, at least for a year or two, but we are getting the process going.

So other than what I mentioned, Paychex activity has been business pretty much as usual.

We are still dealing with the interest rate thing, and I am sure most of you will understand that.

So at this point, we will open up for questions, and John is available, too.

Our first question comes from Adam Frisch with UBS Warburg.

Thanks.

I just wanted to start off asking about the German expansion.

If you could just give us some idea behind how you decided on Germany as the first foray into Europe, and how big you think it might be able to get by the end of this fiscal year, and perhaps what are the next steps in terms of thinking about other countries beyond Germany?

First of all, its impact this fiscal year will be minimal.

Probably all we will have is expense, very little income if any.

And as I said, Paychex historically has opened all their branches from scratch.

This is the way we look at Germany.

We know it is going to be slightly more expensive than doing it here in the United States, but we look at this as planting a seedling for the future.

We picked Germany initially -- it was between Germany and France -- probably because of the higher availability of personnel for what we wanted to accomplish.

We have identified some people in Germany that have a strong payroll experience, especially in the low-end marketplace.

They have been through it before, and they seem exceptionally qualified.

So that gave us the confidence level to start in Germany.

Also, the German administrative process around being an employer is probably tougher than it is here in the United States.

That was one of the other factors in deciding on Germany because of the relationship between the employer and the employee is very complicated and comprehensive in Germany.

But it's not going to have a material impact on our financial results, either in a positive or negative manner, and I am going to say not just for year, but maybe even three or four years before we start to see any real impact on statements.

Or even real strong encouragement for the future.

In other words, think of this as just a seedling business starting out in Europe, and obviously we are going to do the best we can, but no material impact on financial statements for the next few years.

Do you have a target as to how many clients you would like to have under your belt before the end of the fiscal year, say, or a couple of years out or anything out?

I think if we have the ability to sell somewhere between 500 and 1,000 clients in the first year to 18 months, I would say we were doing pretty well.

The revenue per client basically is going to be about what we anticipate here in the United States, somewhere around $1500 a year.

So you can see in a dollar perspective it is not material.

Now as we become successful and confident, then we will start expanding the sales organizations in Germany.

I think initially we are going to start out with about four people in a fairly concentrated geographic area.

Okay.

That is great.

If I could just come back to the U.S. for a minute in terms of competition, are you guys seeing anything incremental from Intuit?

I know obviously they have been lurking up there for some time and have their own product set and the (inaudible) execution trying to sell QuickBooks to customers.

But do you guys feel any deep commitment, or just they are still too small?

We don't feel anything significant from Intuit at this point.

Thank you.

Our next question comes from Adam Waldo with Lehman Brothers.

Good morning, Tom and John.

If I could start out on the operations cost structure and the revenue side, John.

Anything unusual in the quarter in terms of revenue impact or float balance impact from the implementation of the new tax laws signed by President Bush effective May 26.

Not really.

There has to be a little bit less of a holding than there was.

When we go calculate it out, it is not significant.

The only thing you have to remember when you are on the end that we are on, a lot of the tax withholding is FICA; it is not just federal holdings.

Okay.

So it might have slightly adversely affected the float on a sequential basis and maybe helped you out a little bit on the Service Bureau revenue side; is that fair?

I think we get a better economy, and you know what that does.

Whether the tax cut had anything to do with that, I don't know.

But this thing really tosses a no event, but by the same token, we continually talk about the fact that we would much rather have a strong economy than high interest rates.

Okay.

Let me jump in there.

One of the things we have noticed, though, is that a higher percentage of our new clients, and I said our sales line has been very strong, have been from new business startups.

I think there is probably a better perception out there, a better outlook, for entrepreneurs to be starting small businesses now than there was a year ago, at least as evidenced by our sales numbers.

As you look at the NFIB indexes, for example, in the last three or four months, is that also causing you some encouragement, Tom?

NFIB?

National Federation of Independent Business confidence surveys.

I haven't seen them, so I don't know.

Switching to the new client sales side, obviously a strong first quarter of new sales.

Could you maybe quantify for us a little bit what kind of year-over-year net client growth you saw in the quarter?

I know you typically don't give that out but annually, but I wonder if you can maybe give us a sense for how that is tracking versus your 5 percent net plan?

We've typically don't and we want.

I will make the statement that the sales growth in the quarter was higher than the growth in the sales force, and we expand the sales force a little more rapidly.

So we're pretty pleased with the first quarter, but the real time it is going to be important is December, January and February.

But we are off to a good start.

We just had a sales meeting in a nice place, and the sales force is pretty pumped, so we will see what happens.

That is a good start.

Finally, on the Advantage payroll cost base consolidation, are you still on target to close down the Auburn main headquarters by the end of November, and if you are, could you quantify for us what kind of annualized impact in terms of benefit to cost base you would expect from that?

We've never said we were closing Auburn.

I don't know where that idea came from.

Auburn will continue to exist.

We've taken locations and branches down significantly.

The branches have been encompassed in ours, so there is no threat to the people.

The Auburn thing is consolidated.

That software has to stay in place because it's a good situation for the associates as well as the [Nebs] deal, so I am not sure where you got that from.

Things on the integration are proceeding exactly as we had hoped for.

We have had no surprises on either one, and the costs are gradually coming out.

Our next question comes from Randy Mehl with Robert W. Baird.

Good morning and congratulations on the 20 year AICPA and the results in the quarter.

I just wanted to pursue a couple of items here.

First is the PAS product.

Those numbers, the PAS/PEO segment came in very strong.

I am wondering if you can quantify number of clients in PAS, though not including PEO and then maybe speak to growth expectations for the year in that unit?

I think we've said what the growth expectations will be, and right now PAS is doing better than we hoped.

Most of the growth has passed.

The PEO in Florida is not; it is normal stuff.

PAS is quickly going by, so you can assume that the PEO does not impact that much.

I don't have the two of them broken out at the moment.

As a point of interest and I am sure you know this, we were probably the most aggressive with our PAS sales organization this year than we were with any of our other sales organizations for a number of people.

Also, the quotas were set significantly higher.

We're very pleased with where we are with the results of that.

I cannot give you an exact number off the top of my head either.

I assume we are in excess now of 3000 clients.

How much of that is market adoption rate versus just a more aggressive stance on the sales side and maybe versus product quality?

Are all those contributing, or is this just a matter -- I should say product stability -- of your getting the product stable and now just being aggressive about pushing it out into the market?

I would go with the latter there.

We feel very comfortable now about the product and its pricing and its stability, particularly the integration of the human resource professionals.

So now we feel it is time to put the all-out effort on the sales side.

As you know, most of the clients -- I think it is between 80 and 90 percent of our new clients -- for PAS come to us from the payroll group.

So now expanding the number of sales force means that more people that our clients will be called on and offered the service than have been before.

So it's just a matter of expanding the number of salespeople and having make the added number of sales calls and presentations and our conference on the product.

Randy, to put it into perspective, during this quarter the number of clients in PAS went by the PEO for the first time, and the PEO was around for quite a while.

The number of PAS clients is just a shade under 3000.

The PEO is around 2500.

Just one follow-up question related to cost.

John, what were the integration related costs in the quarter?

We don't really have much integration related costs.

We booked the original time of the acquisition through some of the lease we have closed on we booked for.

We booked the severance.

We are consolidating things up.

I would not say we have significant cost.

The cost structure is consolidated down or the people go out, but we don't really have anything highly unusual in here.

The only thing that happened in the first quarter that was a little unusual was we went into the quarter with most of our people.

We also did a good job of getting the sales force manned along with his managers, so we were not short on territories.

That contributed to the results.

Normally in the first quarter, we get some under spending on the budget.

People executed very well this quarter, so while I like the underspending, I really like the execution a lot better.

So everything was pretty much as we expected.

There really was not a lot of unusual of anything.

Okay.

So just the amortization, that is where the incremental...?

Right.

Cindy Shaw with SoundView, you may ask your question.

Congratulations on the quarter.

A couple of questions.

One, CapEx, looking at what was done in the first fiscal quarter and the expectations for the full year, it looks like you are planning on having that step-up, and I was wondering if you can offer some color around that?

I had seen it drop-off after you finished building off the data center last year.

To follow-up on the Intuit question, listening to Intuit, it sounds like they have not really stepped-up their efforts yet, but they are talking about targeting QuickBooks customers.

They have about 300,000.

I was wondering what the overlap, if you have any idea what your client base is, and once they do step-up their efforts, if you think you have any exposure?

I will take the CapEx, and I will let Ton talk about the Intuit question.

CapEx for us is usually a little bit accelerated in the first half as we get facilities ready for year-end and we get computers and all those types of things ready.

We still feel that what we spend the first quarter was typically what we expected.

At this moment, we are not looking to change the number for the year.

The only thing that would change it is if a project came us because we approve them as they come ongoing, but right now we think we're going to stay pretty much in the target to where we were.

So I don't see much change.

As far as Intuit, I mentioned earlier, we have seen no impact whatsoever that is material anyplace around the country.

But we know Intuit is excited and interested in the payroll processing business.

I mean I think the bit biggest obstacle that they have to overcome, and maybe they will over time, is the branch infrastructure and sales organization infrastructure.

Paychex's sales organization has been the most productive on a per rep basis in our entire industry, and we have 1000 of those people.

Intuit is in a beginning stage, and the market is so large that my guess is that if they do a good job over time that they will be significantly successful, but there is no reason why it should impact or infringe on our success.

The fact that they have the QuickBooks user, I would assume out of our 500,000 clients, probably 80 percent of them could be QuickBooks users.

I don't think the sales is that related.

Generally most companies that have 20 employees or less do financial statements once a year.

The accountant does their general ledger entries, and there is really not a lot of inter relationship between payroll and general ledger, at least at this point.

So we wish them well, but at this point, there has been no material impact at all.

Can I ask a follow-up?

You mentioned 500,000 clients.

The last number I heard was 490.

Rounded.

I rounded.

Stephen Weber with the S.G.

Cowen, you may ask your question.

Good morning.

A couple of questions.

Obviously you had very good sales quarter.

Do you think that you are taking market share from the guy with three initials in New Jersey, and if so, why do you think that is happening?

Is it just the growth in the sales force, or do you have some sort of product advantage that you think is coming to fore?

I have no way of determining how ADP is doing.

All I know is that we have increased the size of our sales organization by a significant percentage, and their productivity during the first quarter has been far superior than anything that has happened over the last three or four or five years.

If you ask our sales organization why it is happening, they will tell you they are focused on the turnover issue; they are focusing on training; they are focusing on presentation and closing skills, and they are working hard.

As the ratio of ADB client conversions change dramatically, they would say we're taking market share?

Not that I have seen.

I think the biggest thing that is helped us, quite frankly, has been new business starts.

Okay.

A second question.

When you look at the portfolio and the net unrealized capital gain, is there a comfort level -- you need to take capital gains to hold the float income flat, at least the way it looks now, etc.?

What is your behavior going to be if interest rates continue to edge up a little bit to shrink that net unrealized capital gain?

Obviously we have watched this very closely, and we've got an environment that is changing rapidly.

Unrealized gains started the quarter at 45 million, reached the low of low 20s, and just the other day -- and I don't know what they are today -- we were back up to 30.

So this thing bounces around a lot.

We said we would try to take enough gains to keep float income year-over-year equal, but we have gotten a little bit of bad break, but not a big one, in the fact that long-term rates have edged up a little bit; that is favorable long-term.

At the same time, the short-term rates are stuck down below and actually went down 25 basis points.

But when you get down to the whole thing, we need to take gains somewhere between 8 and 12 million to hold it flat.

It might be a little bit more now.

Where the portfolio is right now, I still feel comfortable.

We could get to the end of the year and miss by a little bit, but I don't think it will be a big number.

But I also know that whatever I say today will be different in three months, and it will be different again three months after that.

So right now, I don't think this is a big deal.

If we miss by a couple million dollars, I suppose it is possible.

It probably won't go over by a couple million because we won't take the gains if we don't need them, so that's a quick overview.

If I can just follow up on that.

If you take that much gains and you shrink it down, then you obviously don't have it for FY '05.

Would you modify your thinking to try to smooth that between the two years?

I might in the last half, but right now I don't know enough about rates.

Long-term rates go up, that's going to help me.

The reinvestment rate did pick up.

They can't leave the short-term rates were they are forever.

I think you're not likely to see them move too much before the election, but they can't stay where they are forever.

I think if they get some improvement in the economy that they think is sustainable, you are going to see those rates go up.

Bryan Keane with Prudential, you may ask you question.

Good morning.

The first question, just a clarification.

The turnover rate was in the 30 percent range.

What was that exactly?

Low 30's, very low 30s.

That is typically about 20 to 25 percent turnover rate?

Turnover rate in our sales organization is (inaudible).

Just sales organization, yes.

It has been traditionally in the mid to high 30s.

Okay.

So it was actually lower.

The retention rate, that is what I got confused on.

That is typically 20 to 25 percent churn there on an annual basis.

Was in that range for this quarter?

Generally we are between 21.5 and 23 percent, and we were in that range toward the lower end.

Okay.

Finally, just because it is so critical, the new sales growth, I just want to make sure I understand how the sales force -- I know you increased the sales force there rapidly -- what was the growth of that, and what are the plans to continue to increase that, and where are we going for a total number of sales force by the end of the year?

We've increased the size of the sales organization by about 8 percent, and I think that brings us to around 960 to 970.

That will stay constant probably through February or March of next year, in which we will start increasing the number at that point.

In other words, we are going to operate with about 960 to 970 people.

This is core payroll sales only now through February and March, and then we will start probably expanding that by a like percentage again.

If you want some exact numbers, you just simply go to our Investor presentation, the number of salespeople broken out by detail, and the sales force is all there.

But we can infer if the sales force is growing 8 percent and your comments said that the actual sales units were higher than that, then you're probably closer to your long-term range of maybe 7 to 9 percent instead of where 5 percent has been the average.

You can't comment on client growth.

You have got acquisitions in here which make the sales numbers go up, and you've got acquisitions that make the total loss number go up.

I don't mind talking about this, but we've talked about client growth this year being in the 5 percent range.

Last year was 5 percent.

That was a great year because ADP was negative. 5 percent this year will be very good, and Tom will through a few more comments on this because, in fact, we acquired 80,000 clients last year that do not refer us at the same rate that a Paychex client would refer us.

We've added some goals, and I will let Tom add a few more comments.

But 5 percent growth next year would be good.

Obviously we would like it to be higher, but John made the point when you add 85,000 clients onto a base and you have not had total control and maneuverability within those 85,000 clients, to get the same level of referrals that you have gotten from your existing client base, at least initially, is not easy.

But we did set a very high goal, considering the extra 85,000 clients, and our sales forces have performed very well against the goal.

But to stretch that into higher client growth than we have been talking about, I think is way too early and would be a mistake.

In your comments, though, that it was the strongest quarter in four or five years, that is basically you think mostly due to new business starts in the economy?

That is why we have seen.

We look at source of business on a regular basis.

We noticed during this first quarter that a higher percentage of our new clients were brand new businesses.

That is very positive.

It also evidenced by CPA referrals being up, so we have a few ways of looking at this.

Tien-tsin Huang with J.P.

Morgan, you may ask your question.

From a macro standpoint, I think it's good to hear that business starts are trending up.

I am curious to know if there has been any change in the number of lost clients due to bankruptcies?

We have not seen dramatic changes in bankruptcies in the whole cycle.

Bankruptcies are higher than they were, but nothing that I would go and say is unbelievably alarming.

We're seeing some things that we are seeing.

Remember our client base is way in the low-end, so when you look at some other government statistics, you might see something different, but that is going to be affected by what large business America is doing, which we are nowhere near that stuff.

Anything to read into on the sequential decline in checks per clients?

No.

We have stated ever since we saw the positive, we expect the statistic will move up-and-down.

We had the quotes or comments in my opening comments.

We don't think you should read anything into this.

It's a calculation.

The number was actually rounded up.

It was .0007.

This really is not a big deal.

We look at it.

We know also as we convert the InterPay clients in, it's going to make that statistic head the other way.

I think the thing to look at which is really more important, a decrease of .1 the third quarter last year; a little stronger in the fourth .3 up; now .1.

The good news is we think this is back to flat which is what happened through most of the '90s.

Very good.

Thanks a lot.

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

Can you comment on the implications as you move more clients to the Web in terms of the cost of service or your operating margins going forward?

It seems like a big opportunity.

No.

It is not.

Let me qualify that a little bit.

Definitely your cost of converting the client to an in-house system or a competitor system or even from your own system to Web initially is very expensive.

There is training of the client.

There is computer compatibility issues that must be dealt with.

The client will traditionally make more mistakes than a payroll specialist would working with the client on the telephone, so you have more corrections and that type of thing.

After the client is established and utilizing the system for some period of time -- by some period of time, I mean like three to six months -- then the process gets a lot smoother.

There might be some small economic benefit for the processor.

But I can tell you it is not significant because the outfront costs in getting the client on are more than they normally would be if the client was traditionally using fax or telephone.

You might say Paychex goes from 4000 clients online to 25,000 clients in five years or three years.

There might be some small economic benefit, but not much you can take to the bank at this point that I would get excited about it.

One last question.

The company in Jersey was talking about talking about bundling products more aggressively which sounds like getting more aggressive on price.

What is your reaction to that?

You know we have seen ADP more aggressive on price the last three or four years than in our history.

We also recognized it varies greatly by geography, and their branches work pretty autonomously.

But I have seen nothing outside of the holiday season back about two years ago that I would say is extraordinary.

The sales organizations are both very competitive, and we think we do very well against them.

But is there anything unusual in their competitive pricing scheme outside of the ordinary in the last three or four years?

I would say no.

The other thing to realize on bundling, and it's just a matter of words sometimes, 90 percent of our new clients take tax pay and 70 percent take employee pay, so you take those ancillaries, the bundling is already happening.

David Grossman with Thomas Weisel Partners, you may ask your question.

I've got two questions.

One is, Tom, as you look out going forward and you look at the economic cycle, would you expect the non Payroll Services to call a different growth trajectory than the core payroll business, not necessarily in percentage terms?

Obviously they have a much smaller base, but would it accelerate at a different rate based on different metrics, or do you see it following the same general pattern as you would with the core payroll business?

You know I don't think we are smart enough to know the answer to that question.

I would be very concerned about trying to answer it.

I think the factors that will control or impact our growth of HR services, for example, are more the number of salespeople in our level of aggressiveness internally rather than specific market conditions relative to those products.

I think if HR or MMS grows faster than it has been, it is probably going to be because we have made the decision to grow it faster by putting more sales and marketing resources towards it more than it just naturally happening.

So would you look at the sales results in the August quarter as being particularly encouraging?

It is certainly encouraging for core Payroll Services (multiple speakers).

MMS and HR groups did extremely well as well.

So I know this wholesales organization is working very hard out there, and I think the results of that are showing, much more so than what market idiosyncrasies may be causing.

So is there any kind of lagging effect where you are selling a lot of new core payroll business, and that ultimately translates into non Payroll Services six to nine months out in such a large percentage of your --?

Let us take a look at that.

We have 25,000, for example -- I am rounding this off -- 401(k) clients and almost 500,000 payroll clients.

If we had another 1000 core payroll clients, would that make a significant impact in the number of 401(k) sales we have?

The answer is no.

What will have a significant impact is how many salespeople are we going to apply toward selling those 490,000 clients a 401(k) system is more important than the number of core payroll clients we actually have.

One other competitive question.

I guess ADP a couple of weeks ago was talking about, putting more effort into targeting this CPA channel.

Is that something you have seen or is that something you have thought about in the context of them becoming more aggressive in that channel?

With all due respect to ADP, we have been competing in this market for 23 years now head-to-head against each other.

Probably one would say that Paychex has been more successful in dealing with the CPA market than they have.

But each organization, and particularly ADP, has what I call volleys of effort toward the CPA market.

Again, they vary greatly from part of the country to part of the country.

We see no extraordinary impact or even effort with ADP relative to CPAs.

One last question for John.

Is there anything other than typical seasonality that would affect the growth in expenses throughout the fiscal year?

No.

We have a budget.

People spend pretty close to the budgets.

As I said, this year was a little bit different because people had people in place going and the year a little bit higher than normal, so they stayed right there.

But, no.

What we think is going to happen, what we have predicted is in the expectations.

We think we will be pretty close.

David Farina with William Blair, you may ask your question.

You were approaching 61 percent penetration rate on the payment services, and you are selling at about 70 percent rate.

Tom, what do you think that can peak out at?

I know there was a similar we saw with the tax pay, and you guys managed to push it up to 90 percent.

You think you can get it that high, or is the 70 percent level kind of a threshold we should think about for saturation for that program?

I would not go to 90, but I think we will surpass 75 or 80.

I would never touch 90 with it. 75 to 80 is a much safer range.

The other thing in this one, is the 61 really is not 61.

In tax pay, we basically just have a set fee plus float.

In an employee pay, what you have is a set fee, plus transaction fees, plus float.

The transaction fee penetration is much less than 61 percent.

So we have got some other upside there on revenue.

So that one is a little bit better than what it looks like, and I think it will go past 70.

I don't think it will get into the '80s.

If I can translate what you just said, are you telling me that you have not sold all the employees?

We have not sold all the employees.

There are still an awful lot of checks that are signed by the employer themselves, which we do our best to discourage.

But it does happen.

Do you understand that, David?

In other words, we could be selling direct deposit to a client, but the employer is still signing the rest of the checks for the employees who are not on direct deposit.

Once we move that client into signing the checks on an automated basis, now we get the full impact of that revenue which reflects the 61 percent.

I got it, Tom.

I understand.

Thank you.

Mark Marcon with Wachovia Securities, you may ask your question.

One thing, I know how you calculate your checks per client and you are signing more small clients so that impacts things.

Are you seeing any evidence among your existing clients that may be hiring is picking up in the small-business market at all?

We have seen some indication of hiring but nothing dramatic, but it is better than it was.

But it isn't unbelievable.

Better than the other way?

We like what it is doing and would like more, but we saw that.

We saw some signs of that in the fourth quarter that hiring at our end was starting to be a little bit better.

It is not unbelievable, but it is slightly positive.

Can you talk a little bit about the potential profitability of InterPay and EPay (ph)?

I know you're not going to split it out, but clearly those organizations have lower profitability levels.

It looks like you're making great steps towards integrating them.

How should we think about those elements?

Give us about another year to a year and a half and we should be up to full profit margin on all of those revenue bases, Advantage and InterPay.

The charges that InterPay and Advantage charge their clients traditionally were lower than what we charge.

Okay?

That would say, well, we are not going to get the profitability growth out of those clients.

Over time we will move those clients up and get them up to the regular pricing.

But in the meantime, the incremental revenue that those are bringing in will obviously force our margin levels up in whole dollars and in some cases, depending on the branch and the quantity, in percentage.

So even though initially we don't get the full margin percentage as we are used to it in our core Payroll Services, over time we will be there.

But the incremental income in dollars is, of course, significant because of our low operating costs, and the new revenue is extremely incremental, of course.

Great.

Can you talk a little bit about the fully integrated HR offering, what the economics of that are, and how much you are charging?

Initially I don't think there is going to be a segregated charge for this product.

But basically what it does from a competitive perspective is gives the client the ability to access information on their employee database utilizing the Web.

Now they can also in some cases designate the employee if they want to give the employee access.

Let us say for example, you have got an employee who you want to change his rate of pay.

You input that in over the Web application and update the personnel record, and that automatically updates the payroll records.

It gets utilized obviously for new employees, for changes in deductions, for changes in exemptions, marital status, address and all those types of things, so it give the client the ability to only have to maintain one personnel file and automatically update his payroll records.

They use the Web, his payroll is still processed using his PC input process.

So it is additional feature functionality that makes easier for the payroll manager and gives you another selling weapon relative to the competition?

Absolutely, and it is a very strong selling weapon.

Greg Gould with Goldman Sachs, you may ask your question.

A clarifying question on the new bookings.

If you exclude the benefit of the acquisitions, did the number of new clients were they still at a record level?

First of all, we keep growing, so there always are going to be record levels.

We definitely saw better sales performance in the fourth quarter.

We integrated the sales forces, so it is hard to answer that question in much detail.

But when you look at it, it looked pretty good.

John, what about attrition in the InterPay and Advantage customer bases --?

Attrition is what we expected.

The losses go up because you have the acquisitions compared to the first quarter where last year we did not have them.

A lot of the gross number did go up.

The losses within the Advantage and InterPay organizations, those client basis are pretty much in line with our expectations.

Even though we are going through a high-level of (technical difficulty) -- rate on the InterPay, we are very happy with the retention rate.

In some cases, our competitors -- and I won't mention the one that has been mentioned several times today -- have been very active in going after those client bases, but we have been very happy with where we are.

To make us feel good about this and I will try to give us another perspective, the losses in the client base, they are going to be what they are going to be.

You do all you can to make them better, but they are.

On the sales force, what you have to realize is the total combined sales force that we have right now is less than it was if we would have taken our sales force, Advantage's sales force and InterPay's sales force.

So actually when we are saying we are getting a little better results, we are getting it with a smaller sales force.

That is also what allowed us to get incrementally accretive right away.

Our pricing is higher than theirs, and that will leverage over time.

Operating costs weren't much different, but one of the areas we used for improvement was better leveraging of our sales force across our total client base.

Robert Tung with Smith Barney, you may ask your question.

With regard to new client signings in the quarter, if you had to give a rough split between how much came from new business starts, how much came from those doing in-house, and how much came from competitive wins, what would be the rough split?

New business starts are slightly over 40 percent, and competition of all processors is probably 10 percent or less.

And from in-house?

Is a balance.

And among competitive wins, is that more on the smaller regional guys or the ADPs?

I cannot answer that specifically.

We don't think the competitive landscape changed dramatically in the last couple of years.

In Germany, how penetrated is that market with Service Bureau payroll, and what do you think are the challenges for a U.S. company in that market?

The penetration rate at the low-end 1 to 200 employees is extremely low.

Hardly anybody has attacked that marketplace.

What would you roughly estimate penetration is?

Less than 3 percent.

How about --?

It is hard to calculate it.

It is so low, I don't know if it is even calculable.

What was the second part of your question?

Just the challenges for a U.S. company getting into that market and doing payroll and all the labor?

I think the first challenge is going to be to understand the employer or employee culture because there are tremendous differences.

Obviously someone looking at it from the United States would look at that system and say it is very socialistic.

The payroll process itself is more complex, so there is a significant learning curve for us.

Obviously with the background of people that we have and so forth, we have a heads-up start over somebody that is new to the business.

There are some other challenges.

Most people get paid monthly over there as opposed to biweekly or semimonthly in the United States.

Almost 95 to 100 percent of the people get paid through direct deposit as opposed to the combination of check and direct deposit here in the U.S..

The revenue per check produced or per employee per month -- let me use that term -- is higher in Germany than it is here, even though we process twice as much here than we would over there.

So that is sort of a candid list of the idiosyncrasies, and like I said earlier, we are going to take it slow and go through the learning process, but we are confident we can be successful there.

If I may just follow-up on the sales force ramp up.

I think as of last quarter when I looked at the numbers year-over-year for fiscal '04, by year-end I guess you guys were looking at a total of 12 percent sales force growth.

In this quarter, you said something like 8 percent.

Again, we were talking about the core payroll sales growth.

You've got to put the others in because those were growing faster, and (inaudible) the number is right in front.

The best place is go right to the web site, and you will see the number.

What we said last time is what we did.

For example, our past sales force we increased by 40 percent.

You have got to look at it as a whole.

Jennifer Dugan with Merrill Lynch, you may ask your question.

I have a question about 401(k) sales.

I know those were a little bit slower than you had been hoping for.

Last quarter it sounded like it was a bit of a productivity issue.

I just wanted to know if you saw some improvement there this quarter?

Yes, we have.

Not significant, but it definitely has improved the environment a bit, and I think it has been a management issue as much as anything recently, and things are definitely on the upswing with the 401(k) situation.

I think there is a little bit better feeling, and maybe part of the reason for it is in general community about the future of the stock market.

I think that helps us.

Michael Millman with Millman Research Associates.

Can you give us some additional color on where new clients from?

You have talked about existing client referrals and accountants, and maybe you can give us some rough approximation of the importance of the different areas?

And also, in the same vein, the new clients, the new business clients that you picked up recently, do they typically get sold; do they typically come to you by referrals, or some color on that as well?

Could you give me your name please again?

Michael Millman.

From what organization?

Millman Research Associates.

Michael, about one-third of our new clients come to us from CPA referral, about 1/3 come to us from client referrals, and the balance comes from all the rest of the sales and marketing methods such as telemarketing, direct-mail and Yellow Pages and so forth, even some direct calls by our sales organization.

That has not changed much in the last few years, except for in the last year or two because of the economy, we have seen a slower rate in CPA referral.

That is because less new business has been formed.

Traditionally what happens when an entrepreneur starts an enterprise, they find an accountant and the accountant says, now how are you going to do your payroll?

And the entrepreneur says, well, I am not really sure.

The CPA says, well, you should use an organization like Paychex.

So the more new businesses that are started in the community or in the country, the more CPA referrals we should be getting.

I think that has been reflected during the last 60 to 90 days.

But other than that, the sales method and mentality of how we sell our products really has not changed.

We focus on CPA referrals and we focus on client referrals.

Typically on a new business client, do they interview a couple of different firms, or do they tend to -- like the salesperson, they don't shop around?

In the case of referrals, either our CPA or client referrals, traditionally they have a tendency to be only one organization involved.

Very seldom does a CPA say, talk to Paychex; talk to ADP.

They will either say talk to one or the other.

So they become noncompetitive.

Glenn Greene with ThinkEquity Partners, you may ask your question.

I just wanted to ask a question related to the discrepancy and pricing for the acquired customer base.

I wanted to get a sense for how much progress you've made increasing the pricing for the acquired customers and the game plan to get it back up to the core Paychex levels, what timeframe?

We found the range to be between the low-end 20 percent and the high-end about 35 percent.

I think on average it is probably going to take us somewhere between four to five years to get that back to a pricing scheme that was very similar to ours.

Obviously, as you have client turnover and you lose clients for whatever reason, but you sell new clients, they come in at the full pricing right away.

So if you were to look at the clients that exist because Advantage and InterPay and the clients that they will generate, all new clients that will be generated because of their existence will come in at full pricing.

So it actually happens a lot faster than four or five years.

Then a question on the sales activity.

Was the degree of strength you saw in the quarter the same for the major market services as the core payroll, or is the core payroll somewhat stronger because of this small-business formation?

MMS was strong, but our biggest surprise was in core.

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

A quick follow-up if I may.

If you look at the total corporate staff headcount of about 8950 at the end of the quarter, how should we think about your plans for further headcount additions at the enterprise overall over the balance of the fiscal year?

I think it will be relatively minor.

The way Paychex operates, particularly in its sales organization and its IT organization which is a large (inaudible), is we generally make the distinction as to how many employees we want to have in each group, and those people are generally put in place by the end of the first calendar quarter.

I am sorry first fiscal quarter.

So I don't think you will see much growth at all in our employee base during the next six to nine months.

So as you finish rationalizing the InterPay branches and so on, you still expect to keep headcount essentially flat sequentially?

I would say pretty close to flat.

Brandt Sakakeeny with Deutsche Bank, you may ask your question.

Two quick questions.

First, I wanted to follow up on the prior question about pricing.

Do you think that you can achieve margin parity between InterPay, Advantage and the core Paychex business just through incremental pricing and increases at InterPay and Advantage, or do you sort of need to sell additional non-Payroll Services to InterPay and Advantage clients to achieve that parity?

Most of it is pricing because most of them take direct deposit and Taxpay because it was given to them.

We will get human resource things, but I got to tell you that you guys focus more on these margins getting to their levels or our levels than we do.

We got these businesses.

We put them together.

We do a plan.

We drive for margin improvement.

We do know how to get it, and as I mentioned earlier, these businesses even now are getting so you cannot really separate them.

You can separate Advantage a little more because of the customer base, but InterPay is going to disappear rather quickly, and Advantage eventually.

Once the InterPay conversions are done, we already started some Advantage ones just to see how they will go.

But eventually this becomes all Paychex, and we just work on everything.

The second question is I think you said earlier, John, that your client losses of 21.5 or 22 percent.

What percentage of those client losses are going to competitors versus going bankrupt, and can you give us a sense as to how that has changed over the last several quarters?

I don't think there has been significant change in the last several years, much less quarters.

Our percentage of losses going to competitors has got to be less than 10 percent of that number.

It is not 10.

It is less than 10 of the number. (multiple speakers).

Less than 10 percent of the losses, not 10 percent of the clients.

Marta Nichols with Bank of America Securities, you may ask your question.

Just a quick follow-up on your payroll sales growth.

I think your slides actually say that you guys overall in payroll are going to go up roughly 12 percent to something (inaudible).

Is that a number targeted for year-end, or is that number already --?

We have targeted and achieved already early in the year if not on May 31st.

So the increases you're talking about in the February/March timeframe are going to be relatively negligible?

They will be for next year.

What happens is we cannot realistically change the sales force very much during the year because we assign territories.

We've got everybody working.

One of the reasons we are so successful at this and our productivity is better is the salespeople have very well defined goals and what our expectations are.

We have a great process whereby you have year-end, and our year-end is May 31st.

We have a nice sales conference they are all highly motivated to go, so we have a lot of things that drive their objectives.

The best way to maximize that is to make sure you are not doing very much with territories during the year.

So we don't do much, so we've got to get these things set up.

We've got to get off on June 1st.

So when we are talking about next year late, we are really talking about getting ready for the next year's selling season.

Is it possible at this point to measure what the check per client at Advantage and InterPay are right now, or is there too much flex in that base to be able to know?

We knew Advantage was around 15 and InterPay is around 10 or 11.

Okay.

So it is much better.

Advantage is slightly bigger than our 14, and InterPay is smaller.

I am sorry.

But in terms of the actual increases happening relative to where they might have been a year ago?

We have no clue.

No idea.

Finally, I am curious on the Germany front.

If you guys roll out in Germany and you are obviously planning on taking it relatively slow, can you give us any thoughts about how you would plan to roll out in Europe?

Would you stay in Germany for five years, or once you actually get it established over a year or two, will you start looking at other countries?

It is going to depend on our confidence level.

My speculation would be we are going to open up Germany with an operation specialist, payroll specialist and that type of thing and probably four or five salespeople.

When we start getting confident from that point, you'll see an expansion of the sales organization.

I would think a country like Germany within three to five years could handle 50 to 100 salespeople selling the Paychex product.

Sometime during that time period, I am sure we will be looking at other countries.

But the first thing will be four or five salespeople in Germany, start building it from there based on their success level, and then make a decision at some point when to go into France or Spain or what every other country is going to be after that.

Greg Cappelli with Credit Suisse First Boston, you may ask your question.

I wanted to ask you a quick strategic question on your longer-term outlook.

With the integration of Advantage and InterPay in good shape, have you thought about or said or just reevaluated your longer-term growth goals for the company, just top and bottom line thinking three to five years out?

Is this something where you thought about being at a 15 to 20 percent level, 20 to 25 with maybe Europe coming on.

I want to get your thoughts on that, if you have any.

You guys all seem to want to accelerate us.

I am only kidding.

We stated some goals, 15 to 20 on the operating income and hopefully get interest rates to come back in line so net income is there.

Eventually that will happen.

But when we look at the size at the company and the things we're taking on, I think we look at Germany and Europe out five years before it is going to be material.

I see that as something that helps keep this growth rate going.

I think when you look at a company our size in the service business, we feel real good about what we are doing, and we wish it was a little bit better because the economy and the interest rates.

But we think that we could do a growth engine that would be between 15 and 20 and maybe occasionally get a little over 20.

That is where Tom and I differ.

I am maybe a little less optimistic maybe than he is.

It is just the difference between the CFO and CEO.

We think those are pretty good numbers.

One quick follow-up.

You guys have had a lot of success building out the complementary services.

You talked about retirement workers comp.

As you look at the growth of these going forward, where do you get the highest incremental margin?

Where do you guys see the best opportunity in those areas?

I guess I left out PEO as well.

They are all individually strong opportunities.

But I think if I were to pick out the one that has the most potential but is also at this point the most untested, that is the PAS product.

As you know, we get full retail price for all our services plus a new profit center called a Human Resource Services Person or Consultant.

If you look at the average revenue per client, it takes it from a typical payroll client of around $2000 up to between $10,000 and $11,000 for the PAS client.

And when you think of the marriage potential of our MMS client and the PAS product, it really gets you excited because it would definitely serve the marketplace that has a real need and has the resources to satisfy that need.

So we are excited about all of our products.

If I were to have to isolate one, I would probably jump on PAS, and that is probably why, quite frankly, I encourage the greatest expansion of the sales force this year over -- percentage wise -- the rest of the organization because we have been much confidence in the PAS concept.

Mark Marcon with Wachovia Securities, you may ask your question.

One quick follow-up.

Your dividend payout rate got up to about 58 percent last year.

What are your expectations, Tom and John, in terms of where the dividend payout ratio should be?

We are very comfortable with around 50.

If it went up to 60, it is not the end of the world under certain circumstances based on where we are.

We have a board meeting coming up, and I think it is next week we have our annual meeting, and I am sure it will be discussed there.

That is typical when we look at it to make a comment now to say what we will do I think is ahead of time, but it will be discussed in detail.

Steven Weber with S.G.

Cowen, you may ask your question.

Just quickly, are there any distortions in the number of days in each quarter to the rest of the year, both versus the first quarter or versus the prior year?

I don't believe so, but I would have to go check.

My people usually talk to me when there is, and they haven't talked about it.

At this time, I show no further questions.

First off, I want to thank you very much for participating with us today.

We appreciate your interest in Paychex.

We hope you all have a wonderful day and things keep going like we hope.

So take care.

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