沛齊 (PAYX) 2004 Q4 法說會逐字稿

Welcome.

And thank you for standing by.

At this time all participants are in a listen-only mode.

After the presentation we will conduct a question-and-answer session.

To ask a question please press star, 1.

Today's conference is being recorded.

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

Now I'll turn the meeting over to Mr. John Morphy.

Sir, you may begin.

Thank you for joining us today for our fourth quarter and fiscal year end press release.

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

Upon 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 May 31, 2004, yesterday afternoon after the market closed.

It can be obtained by accessing our Web site at www.paychex.com at our Investor Relations home page.

We have also now filed our Form 8-K with the SEC, which provides additional discussion and analysis of the results for the past three years.

This filing is available on our Web site in addition this teleconference is being broadcast over the Internet and will be archived and available for access on our Web site until July 26, 2004.

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

Before we get into the exact specifics of the press release we would like to provide an overview of the year end and our guidance for fiscal 2005.

By all measures fiscal 2004 was an exceptional year.

Our 14th consecutive year of record revenues and more importantly record net income.

The litigation expense is unfortunate but we inherited a difficult contract situation when we purchased Rapid Pay in 1996 and will continue to work through it in the best manner possible.

Fiscal 2004 reflected some of our best sales and client retention activity in many years.

We achieved -- we exceeded the 500,000 mark in clients and served 505,000 clients at May 31, 2004.

Year-over-year client growth was 3.1% but sometimes the numbers do not reflect the real picture.

The purchase of Advantage and InterPay added an unrealistic challenge to our traditional net client growth metric.

Approximately two-thirds of our new client sales come from CPA and existing client referrals.

Neither the Advantage or InterPay acquisitions had an effective CPA network and since Advantage and InterPay clients were not using the Paychex payroll system they were somewhat unwilling to refer Paychex product to other potential clients.

We have performed a detailed review of what client growth would have been exclusive of these acquisition and we estimated it would have been in the just under 7% range which would have been the best client growth we had seen in many years.

Client retention was slightly less than our best-ever levels and our client satisfaction surveys did achieve levels we had never reached before.

Over time the effects of acquiring 80,000 clients in one year will diminish.

Our goal for net client growth in fiscal 2005 is 5%.

And in line with our long-term expectations.

The integration of Advantage and InterPay continues to go extremely well.

Taking on 80,000 clients across America was no simple task.

Thousands of people in the field and in Rochester have been responsible for making sure these acquisitions have gone smoothly.

We look forward to September 2004 when all of the InterPay clients will be on the Paychex 4 or MMS platforms.

We will then finalize our plans for the Advantage conversion process.

The Advantage payroll system will be retained in order to service clients affiliated with independently owned associate offices and Advantage cobranded products.

Major market services continue to flourish.

MMS revenues grew 37% to just under 140 million.

We saw increase in acceptance of our Paychex administrative services products that now provide services to well over 100,000 employees.

We sold over 7,500 new 401(k) record keeping accounts.

We also expanded our time and attendance offerings with the acquisition of Time in a Box.

Our growth objectives are based upon 5% client growth, approximately 3.5% price improvement, and approximately 3.5% ancillary revenue growth, or in total 12% plus service revenue growth.

Accompanied by continued leveraging of our infrastructure and the higher profit level of ancillary revenues our goal is for operating income exclusive of float remains in the 15% plus range.

In fiscal 2005 -- actually, in fiscal 2004 the net client growth of 3.1% will affect 2005 revenue growth but is expected to be more than offset by benefits derived from further integration of the Advantage and InterPay acquisitions.

Yes, all in all looking back we felt 2004 was a great year.

Looking ahead to 2005 we're extremely optimistic and our guidance is summarized as follows.

Payroll service revenue growth is projected to be in the range of 9% to 11%.

Human resource and benefit service revenue growth is expected to be in the range of 12% to 14% reflecting the impact of the net incremental PEO revenue benefit recorded in fiscal 2004.

Total service revenue growth is projected to be in the range of 10% to 12%.

Interest on funds held for clients is expected to decrease approximately 10% to 15%.

Total revenue growth is estimated to be in the range of 9% to 11%.

Corporate investment income is anticipated to decrease approximately 25% to 30%.

Net income growth is expected to be in the range of 16 to 18%.

Growth in operating income, excluding interest on funds held for clients, the expense charges related to the pending legal matters of 35.8 million last year, and the net incremental PEO revenue which include a 6.4 million refund from '93 is expected to be in excess of 15%.

These projections are based on current economic and interest rate conditions continuing with no significant changes.

For those of you, if you feel went through these numbers a little quickly these numbers are all summarized on the 8-K that is now on our Web site.

Moving on to the year-end release.

The year-end earnings release is summarized as follows.

Fiscal 2004 represents the 14th consecutive year of record total revenues, net income, and earnings per share.

For the fourth quarter and fiscal year ended May 31, 2004, total revenue growth was 14% and 18%.

Net income decreased 14% for the fourth quarter and increased 3% for the fiscal year.

Quarterly earnings per share were 16 cents versus 19 cents a year ago, down 14% on an unrounded basis.

Year to date earnings per share were 80 cents versus 78 cents a year ago, up 3% on an unrounded basis.

Operating income decreased 11% in the fourth quarter and increased 8% for the 12-month period respectively.

Fiscal 2004 results were impacted by expense charges to increase the reserve for pending legal matters at Rapid Payroll, Inc., a wholly owned subsidiary of Paychex.

These charges were 9.2 million in the third quarter and 26.6 million in the fourth quarter totaling 35.8 million for the fiscal year.

Exclusive of these unusual charges diluted earnings per share would have been 21 cents for the fourth quarter ended May 31, 2004.

Excluding litigation expense we would have achieved our EPS guidance for the fourth quarter and the year ended May 31, 2004.

Operating income after adjustments for the litigation reserve and the other matters we've talked about would have been strong at about 20% for the fourth quarter fiscal 2004 and 17% for the year ended May 31, 2004.

Again, right in line with our long-term objectives.

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

Total service revenues increased 15% and 19% in the fourth quarter and 12-month period to 318.5 million and 1.24 billion respectively.

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

We estimate that organic service revenue growth was approximately 15% for the fourth quarter and 13% for the full year fiscal 2004.

Payroll service revenues for the fourth quarter and 12-month period increased 11% and 16% to 262.1 million and 1.042 billion.

The increases are related to the acquisitions, organic client base growth, increased utilization of ancillary services, and price increases.

As of May 31, 2004, 89% of all clients utilized our tax filing and payment services and 63% utilized the employee payment services.

More than 90% of new clients purchased our tax filing and payment services and more than 70% of new clients purchased employee payment services.

Major market services revenue increased 31% and 37% for the fourth quarter and 12-month period of fiscal 2004 to 37.1 million and 139.7 million respectively.

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

Human resource and benefit service revenue increased to 56.4 million and 197.7 million for the fourth quarter and 12-month period of fiscal 2004 respectively.

The increases reflect growth in retirement services clients and in client employees served by our past and PEO bundled services and higher net PEO Workers' Compensation revenue and Workers' Compensation Pay-As-You-Go revenue.

Excluding the 6.4 million in net incremental PEO revenue previously discussed human resource and benefit service revenue increased 29% for the full year of fiscal 2004.

Retirement services revenue increased 23% and 18% in the fourth quarter and 12-month period of fiscal 2004 to 21.1 million and 79.0 million respectively.

At May 31, 2004 we had over 29,000 retirement services clients compared with over 26,000 at May 31, 2003.

Paychex administrative services and the 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 benefits cost.

Sale of PAS and PEO products have been strong with administrative fee revenue from these products increasing 40% and 34% in the fourth quarter and 12-month period of fiscal 2004.

As of May 31, 2004, our PAS and PEO products serviced over 157,000 client employees compared to over 103,000 at the end of May 2003.

Interest on funds held for clients decreased 10% for the fourth quarter of fiscal 2004 to 11.9 million and increased 2% for the 12-month period of fiscal 2004 to 54.3 million.

The decrease in the fourth quarter is attributable to lower average interest rates earned in fiscal 2004 partially offset by higher average portfolio balances in fiscal 2004.

The increase in interest on funds held for clients for the full year period is due to higher net realized gains on the sale of available for sale securities and higher average portfolio balances offset by lower average interest rates earned in fiscal 2004.

The higher average portfolio balances were driven by the acquisitions of Advantage and InterPay and from organic client growth.

Average daily portfolio balances were 2.9 billion and 2.5 billion for the fourth quarter and the first 12 months of fiscal 2004 respectively compared with 2.5 billion and 2.2 billion in the respective prior year periods.

Funds held for clients' portfolio earned an average rate of return of 1.5% and 1.7% for the fourth quarter and 12 months of fiscal 2004 compared with 1.9% and 2.3% for the respective prior year periods.

Net realized gains on the sale of available for sale securities included in interest on funds held for clients were .9 million for the fourth quarter and 11.5 million for the 12-month period of fiscal 2004 compared with net realized gains of 1.0 million and 4.0 million for the respective fiscal 2003 periods.

Consolidated operating, selling, general and administrative expenses increased 27% for the fourth quarter and 23% for the 12-month period.

The increases are largely attributable to the expense charges to increased reserves for pending legal matters of 26.6 million and 35.8 million in the fourth quarter and 12 months respectively.

Excluding these charges consolidated expenses grew 13% and 18% year-over-year in the fourth quarter and 12-month period of fiscal 2004.

These increases are due to additional costs resulting from the acquisitions and investments in personnel, information technology, and facility costs to support the organic growth of the company.

There were approximately 9,400 employees at May 31, 2004, compared with approximately 8,850 at May 31, 2003.

As a result of the acquisitions, amortization of intangible assets increased to 4.2 million and 16.6 million in the fourth quarter and 12 months of fiscal 2004 from 3.8 million and 9.5 million in the respective prior year periods.

As a result of these factors operating income decreased 11% for the fourth quarter to 86.9 million and increased 8% for the 12 months of fiscal 2004 to 433.3 million respectively.

Investment income net decreased 38% for the fourth quarter and 46% for the 12-month period.

The decrease in the fourth quarter is primarily due to lower average interest rates earned in fiscal 2004 and lower net realized gains on the sale of available for sale securities offset somewhat by higher average portfolio balances.

The decrease for the 12-month period is due to lower average portfolio balances resulting in the sale of investments to fund the fiscal 2003 acquisitions, lower interest rates in earned in fiscal 2004, and lower net realized gains on the sale of available for sale securities.

Average daily balances invested were 521 million and 447 million in the fourth quarter and 12 months of fiscal 2004 compared with 434 million and 548 million in the respective prior year periods the corporate investment portfolio earned an average rate of return of 1.9% and 2.3% for the fourth quarter and 12 months of fiscal 2004 compared with 3.0% and 3.3% in the respective prior year periods.

There was 2.2 million and 7.4 million in net realized gains for the fourth quarter and 12-month period of fiscal 2004 compared with net realized gains of 4.1 million and 13.7 million for the respective prior year periods.

As previously disclosed the funding of the Advantage acquisition generated 7.0 million of realized gains in September of 2002 and the funding of the InterPay acquisition generated 3.5 million of gains in the fourth quarter of fiscal 2003.

The use of corporate investments to fund the two acquisitions resulted in a year-over-year reduction in investment income of approximately 7.4 million for the year to date period of fiscal 2004.

Our effective income tax rate was 32.7% and 32.6% in the fourth quarter and year to date period of fiscal 2004 compared with 32.0% in both the respective prior year periods.

The increases in the effective tax rate are the result of lower levels of tax-exempt income earned on funds held for clients in corporate investments.

The full year fiscal 2005 income tax rate is expected to approximate 33%.

As mentioned earlier net income decreased 14% in the fourth quarter and increased 3% in the 12 months of fiscal 2004 compared with the same periods last year, and again, excluding litigation expense we would have achieved our EPS guidance for the fourth quarter and the year ended May 31, 2004.

Moving on to the balance sheet.

Cash and corporate investments have grown to 524 million.

Our total available for sale investments including corporate investments and funds held for clients reflected net unrealized losses of 4.2 million at May 31, 2004, compared with net unrealized gains of 45.0 million at May 31, 2003.

During the fourth quarter of fiscal 2004 interest rates on longer term securities began to increase while short-term rates remained relatively consistent.

The three year AAA municipal securities yield increased to 2.50% at May 31, 2004, from 1.58% at February 29, 2004.

This trend in longer term rates resulted in the decrease in the fair value of the company's investment portfolios from a net unrealized gain of 25.0 million at February 29, 2004, to the 4.2 million net unrealized loss position at May 31, 2004.

A volatile interest rate market has resulted in significant changes in the market value of our available for sale portfolios.

During the 12 months of 2004 the net unrealized gain, loss position ranged from a net unrealized gain of 49.6 million early in the fiscal year to a net unrealized loss of 7.6 million near the end of the fiscal year.

The net unrealized loss position was 6.8 million at June 21, 2004.

Our net property and equipment balance activity during the 12 months of fiscal 2004 reflected capital expenditures of approximately 51 million and depreciation expense of approximately 39 million.

For fiscal 2005 capital expenditures are expected to be in the range of 65 million to 70 million.

The expected increase in fiscal 2005 capital expenditures reflect higher anticipated purchases of printing equipment, communications system upgrades and branch expansions.

One of the primary reasons here is the printing equipment which in the past has been leased but we have decided that purchasing will be much more beneficial from an investment standpoint as we tend to use printers for longer than the normal useful life.

The fiscal 2005 depreciation expense is projected to be in the range of 40 million to 45 million.

The company recorded 406 million of goodwill and 96 million of intangible assets from the acquisitions of Advantage and InterPay in 2003, and Stromberg in fiscal 2004.

Intangible assets primarily represent client lists and license agreements with associate offices which are amortized over periods ranging from 5 to 12 years using either accelerated or straight-line methods.

Intangible asset amortization is projected to be in the range of 15 million to 16 million for the full year of fiscal 2005.

Goodwill balances will not be amortized but instead be tested for impairment on an ongoing basis.

Total stockholders equity increased to 1.2 billion at May 31, 2004, with 177 million in dividends paid during the 12 months of fiscal 2004, a payout of 59% of net income.

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

Our investment portfolios and the earnings from these portfolios have been impacted by the decreasing interest rate environment.

The federal funds rate which was at 6.5% at the end of fiscal 2000 has decreased to a current level of 1%.

The decrease in interest rate environment has negatively affected net income growth.

We have mitigated some of the impact of the lower interest rates on earnings by realizing gains from the sale of investments.

When interest rates begin to rise the full benefit of higher interest rates will not immediately be reflected in net income due to the interaction of long and short-term interest rate changes accompanied by changes in the market value of the long-term investment portfolio.

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

However, we estimate that the impact of a 25-basis-point change in taxable interest rates which is 17 basis points on tax exempt, on our earnings for the next 12-month period will be in the range of 3.5 million to 4.0 million.

Please refer to our recently filed Form 8-K under the market risk factors section for additional discussions of changes in interest rates and related risks.

Legal contingencies.

Paychex is subject to various claims and legal matters that arise in the normal course of business.

During the third and fourth quarter of fiscal 2004 we recorded 9.2 million and 26.6 million in expense to increase reserves for estimated costs associated with the resolution of pending legal matters of our Rapid Payroll subsidiary.

Legal reserves totaled 35.0 million at May 31, 2004, and are included in other current liabilities on our consolidated balance sheet.

These reserves may change in the future due to new developments or changes in the company's strategies or assumptions related to any particular matter.

In light of the reserves recorded we currently believe that resolution of these matters will not have a material adverse effect on our financial position or results of operation.

However, they are subject to some inherent uncertainties and there exist the possibility that the ultimate resolution of these matters could have a material adverse impact on our financial position and results of operations in the period in which any such effect is recorded.

We refer to you our Form 8-K for a more detailed explanation of pending litigation.

Safe Harbor.

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 the light of certain risk factors which could cause actual results to differ materially from anticipated results.

Please review our Safe Harbor Statement on page 3 of the press release for our discussion of forward-looking statements and the related risk factors.

At this time I will move the meeting over to Tom Golisano who will provide his comments, then we'll open up for Q&A.

Thank you, John.

First a few general comments about the year, and then I'll maybe say a word or two about the litigation.

First of all, the economy.

The first thing I would say that new business start-ups which we've seen fairly strong for the last six to nine months has continued.

This has an impact on our ability to sell new clients because approximately 45% of new client sales are brand-new business, so that looks very good.

In the month of May we saw a significant increase in the number of new hires.

In other words, the number of new employees our clients are bringing on to their payroll which eventually should result in -- assuming it continues, eventual check growth per client.

So from all aspects of the economy so far it looks fairly well positive.

General sales activity, as John mentioned, we had a very strong year in all products.

Including the HR products and the PAS products where we had a significant increase in the size of the sales organization.

Our sales rep retention for core payroll was in the category of what we'd call very good, in the low 30s as a turnover rate, in HR it was higher, and in the category we'd probably call fair, I guess fair is the right word.

We're making some moves in the compensation to try to improve that sales rep retention in HR, human resources, but overall we were very happy with the sales activity.

We sold well over 120,000 new clients this year.

Client retention John already mentioned.

We had almost a record year.

Considering the involvement of Advantage and InterPay into our daily life, particularly the branches that were affected in the northeast, we think this was a very good accomplishment.

We feel that the process has been well managed and well executed.

Looking forward to next year, John already gave you the -- the forecast from a sales activity and a client retention activity we've set pretty aggressive targets.

We think we'll be able to get more positive results because of Advantage and InterPay referrals than we were this year, mainly because of the number of clients that have been converted, and plus the people have gotten, or the clients have gotten to know us.

The lawsuit which I, you know, it's not good taste to take time or give a lot of issues around the lawsuit, but to give you a general idea of what it's about, is we acquired Olson Computers late in 1996, and that was the software that we utilized at the time to start our major market services division, our larger company payroll processing.

Along with that acquisition came the licensee relationship with about 100 licensees utilizing basically the same software, and over the years the number of licensees diminished.

Because of the nature of the software, and I don't mean to get technical, it was a DOS 16-bit, the programming language was Pascal, and the database was a database called Beatree (ph) which has been not supported.

The company that created it is no longer in business.

We felt it would be very prudent, of course, that Paychex get off of this software, because of the high risk, which we did but our licensees, or some of them, a few of them, have decided that they wanted to stay on it, and that is what the litigation is about.

As things evolve I'm sure you'll hear more and more about it.

I guess that's about it.

I think we can open it up for questions.

Our first question will come from Cindy Shaw from Schwab SoundView.

Couple of questions for you.

One, HR and benefits revenue acceleration has been pretty impressive in the last couple of quarters but your guidance for fiscal '05, it would suggest it's slowing down.

If you can give us some color on that.

And then also margin expansion over the last -- the first three-quarters of fiscal '05 had been very impressive, and it seems that it's still 120 basis points on services operating margins in the fourth fiscal quarter, good but slowing.

If you could give us some color on what we can look for our next fiscal year?

Basically, Cindy, the first one, on the HR, it's a good question.

We did well on Workers' Comp, not only on the fiscal '03 policy, but we also did very well on the fiscal '04 policy, and a lot of that benefit was recognized in both the third and fourth quarters.

So the revenue on a division where the revenue isn't that great compared to the payroll was benefited from that.

Going forward, you'll find that you can't maintain super, super, super high growth rates, at, you know, 30% plus, for very long, on the HR side.

Now, basically what's happening, the PAS will continue to go well, the 401(k) will continue to go well, the year-over-year comparisons of the acquisitions anniversaried out on April 1,, so we feel HR is still growing just as good as it was.

There's been a few anomalies in there.

So what you might look at and say is a slowdown, we don't feel that way at all.

Margin expansion, we expect good margin expansion again next year, and that's how we're going to overcome the little bit less than normal client growth.

The fourth quarter was down a little bit but we knew we were in good shape and we invested heavily in getting some of the sales forces going and some of the other things.

We also had a great sales year, so I don't mind paying it.

I'm kind of glad to pay it.

Commission expense in the sales force is pretty high in the fourth quarter as we have an accelerated program, and they had a great year.

Any, you mentioned spending on sales to improve retention on the HR and benefits side.

Has that occurred already?

It's in the process of occurring right now.

Thank you.

Adam Frisch from UBS you may ask your question.

Thanks and good morning.

Quick point of clarification.

John, the 3.5 to 4 million in revenues you said for every 25 basis points, that includes the float on client fund and the corporate cash balance.

Is that corporate cash is not included in revenues?

Total effect.

What's that?

I think you can go back and start trying to calculate everything.

I think it's far better for you to take our guidance which was very specific in both those line items and then just decide whether you think you're going to see improvement.

The long term isn't going to see much right away.

The short term might see a little bit.

I really am not a forecaster of interest rate but I believe at the end of the year, unless something significant happens, and we'll comment on it as we go through year that you should stick close to our guidance on the number because we got you pretty close to that, and you won't be very far off.

No, I just said, I just wanted to make sure the 3.5 to 4 million, that was total, right?

So that includes clients, slows--

Yes.

In recent months if there's anyplace I've seen our models are off it's on these two areas.

Okay.

And then the second question on unrealized gains what are you expecting in '05 versus '04?

Nothing.

They're gone.

They're all gone.

Okay.

That's the problem.

We know that -- we knew this was going to happen.

And I'd rather see losses right now because that means the interest rate environment is improving, we've not factored into our plan taking any gains, and, you know, it is what it is.

Okay.

The slower client growth this year, could you explain if it was -- is it a macro issue and the organic growth -- the total growth for next year being a little bit slower than the organic growth this year, is that also secular industry related?

You guys are talking pretty positively about that.

I don't know if it's big enough to impact it that it much but are the recent acquisitions performing in line with where you felt they would?

There's no question that we've done a very good job, in my opinion of, integrating the acquisitions.

But the point we're making about the sales activity, when you measure client growth, by a percentage number every year, and all of a sudden as we -- what happened last year, you integrate 85,000 extra clients and you're used to a certain referral ratio on your clients, well, that referral ratio did not exist for Advantage and InterPay in the same method or level that it exists for our core payroll group.

So consequently we had a bigger base to measure against, and because we didn't have the referral bases for Advantage and InterPay, at least not to the level that we're used to our client growth as a percentage appears to go down.

But as John indicated, next year it should bounce back up because of the fact that the integration process is well down the road.

Did that explain it?

Yep, totally.

Just last housekeeping item.

What was the client checks the checks per client growth?

They're relatively the same.

Okay.

Thanks, guys.

Adam Waldo from Lehman Brothers you may ask your question.

Good morning Tom and John.

Starting with Tom, Tom, I wonder if you can just recap for us in the fiscal '05 plan, what assumptions you all have made around sales force headcount growth by division as compared with those that you outlined for us on a preliminary basis on the February call in March.

Sure.

In core payroll I think we're looking at approximately 7 to 8% in core payroll sales rep growth.

In HR, outside of PAS we're probably looking at about 15%.

And the PAS category it's approximately 35 to 40%, and in major markets I think it's about 25% sales person growth.

Okay, Adam, we will probably update the investor slide presentation within the next week or two.

Okay.

And all that information will be in there.

Okay.

But just taking Tom's comments, Tom and John, it sounds like you're going into FY '05 a little bit off the preliminary guidance you gave for sales force headcount back in mid-March.

Is that a fair assumption?

And if so could you give us a sense for why the slightly slower headcount growth, and particularly in the HR and benefits line, the impact of that obviously on service revenue expectations?

I don't agree with that.

If we gave you a number it was really off the cuff a little bit.

Okay.

We've gone by plan.

We, I think we both feel more optimistic today than we did in February.

It might not be reflected in one of those numbers but, you know, we go through the planning process very thoroughly and that pretty much is in the April and May time frame.

Adam, can you tell us which category you think we're light on?

Well, Tom, just going back to the comments that you made, again, you know, in the conference call transcript back in mid-March you all were rolling up expectations for PAS/PEO sales force headcount growth in the 40 to 45% range, retirement services headcount growth in the 20% range, and assuming no section 125 and Workers' Comp headcount growth--

I bet you you'll find when the numbers come out we're not too far off.

Okay.

All right.

So you're still relatively comfortable with those earlier indications?

Yeah, we're being very aggressive in all of our sales organizations except core, and we're being very consistent with core.

Okay.

So if that's a reasonable set of expectation to still have, maybe, John, could you give us a little more color around why the 12 to 14% service bureau revenue growth at HR and benefits in your FY '05 guidance given the aggressive sales force headcount growth?

Because I've probably got 6.4 million plus another 5 or 6 million in Workers' Comp that may not reoccur.

I've got about 12 or 13 million of revenue growth in this year that isn't recurring.

Okay.

But even sticking with that if you strip all that out, you know, you grew the HR and benefits headcount base by about 15% this year, and even if you strip that out you still got something in the low to mid 20s revenue growth in that division which was great productivity.

Should investors expect a similar level of productivity gains in FY '05, and/or diminished productivity gains?

Adam, I would love to tell you the number was 30%, okay?

We do a lot of detail work on this.

Yes, sir.

And you get, I'm telling you, when we give guidance, it's right on top of our plan.

I don't sandbag it.

It's just kind of how it all worked out.

There's a whole lot of factors in there.

Productivity is not diminishing.

You know, that's just the way it rolled.

Now, the other thing that could complicate this, is, about should be too much in the HR side is, we finally have these acquisitions anniversaried, so all the little things they had are kind of out of here, but it's not -- we're just as optimistic as we ever were, and this is kind of where we are.

You also have to understand we are really focused on net income growth.

And operating income without float.

I understand.

Lastly on the Rapid Payroll matter you boosted the legal reserve on the balance sheet at year end in fiscal '04 by more than four times the rate of the jury verdict in the Los Angeles finding.

A week or so ago.

Can you just give us a little more color into what drove the thought process around that big a boost in legal liability reserve?

That's another number I don't like to book, I can assure you.

I'm sure.

And talk like this, Can I work for this guy.

Anyway, no, first off the 6 million, 6.4, we do expect will be significantly reduced.

I can't tell you how much, and it's better I don't tell you how much, because, you know, litigation is always sensitive, from all sides.

The increase in the reserve isn't relating to that one.

It's relating to trying to resolve the 22 that are there.

That was just one of them.

Okay.

Each one has a little bit different thing to it, and, you know, we just -- we inherited, unfortunately, a tough contract and we are in the process of working our way through this.

One of the good things of this thing, if there's any good thing attached to it is this doesn't affect our ongoing business at all.

It isn't like this is a lawsuit where because of it, now it's going to impact future revenue growth, et cetera.

It really has no impact on our future operations.

Now, it's always important that we treat licensees with the right respect and we service them the right way, and we've done that, but it won't affect the business.

So it's just a matter that they're going to get some of our cash, and at the end of the day probably somewhat more than we'd like to, but that's the way life is sometimes.

Thanks very much.

Steven Weber from SG Cowen you may ask your question.

Yes.

First, can you give us -- you gave us this guidance on the sales force headcount.

What do you think the total headcount is likely to grow by in fiscal '05?

In total employee headcount or total sales rep?

Oh, total employees.

Oh.

My guess is probably 5 to 6%.

Maybe a little higher, but not too much higher than that.

Okay.

And, John, as you and I have talked before, as rates rise, your bond portfolio sinks underwater.

What kind of, what's your game plan here on how you're going to manage that bond portfolio?

Do you contemplate taking -- realizing some losses so you could buy higher coupons this year or could you just go through that, your thinking there?

Basically, if the whole portfolio gets underwater, there will have to be -- some losses will occur, but I don't think they will be material.

When I say that I mean, you know, at most, a couple million, okay, so it's modest.

It won't really factor into anything.

We -- our long-term objective on interest rates is to be neutral.

Where net income growth and operating income growth without float is the same.

So in a market where you're rising -- or lowering rates we took gains to do that.

Eventually we couldn't stop it, so right now we won't start taking losses and improve the quality of the portfolio until we get to a position where the rate increases have been enough that basically net income growth would be higher than operating income growth without float, so it won't happen until then.

So I don't see us taking any significant levels of losses.

Okay.

And last question.

You bought this little Stromberg operation, but it's never been sized.

Can you tell us -- can you give us some feeling for how much that will add?

Because you only had it in there for a couple of months.

Will add to HR services in F '05?

I'm not sure I can reasonably predict that.

The acquisition is rather, obviously, current, and we're in the process of training our sales organization and its application.

Our initial results were very positive, but I'll tell you it's way too early for us to give you any kind of a logical or honest prediction on what the results would be.

I will tell you we're very optimistic about it, and our sales force is excited about it, particularly our major market sales organization but it's too early to tell and I'd feel very much at risk by trying to give you an answer to that.

Steve, another impact here is the fact that we're going to try and turn this model where we can.

Might not be everywhere.

Sales model to a recurring revenue rental model.

Okay.

And what will happen is that will diminish immediate sales numbers but it will really make for a really nice and profitable product offering over time.

Okay.

That's the best explanation.

Thank you.

Bryan Keane of Prudential you may ask your question.

Yeah.

Good morning.

You guys said retention is close to an all-time high.

So is that about client retention about 80%, and can you talk about if that number can get even better?

Slightly lower than 80%, but very much slightly lower.

And we're planning on some improvement this year in 2005.

But not a lot.

And the improvement would just be, you know, just better contact with your customer base?

Is there anything in particular you can do to retain the portfolio or is it still mostly, you know, a mix of bankruptcies and things out of your control?

We're really going after the things that are within our control.

John mentioned our surveys during this presentation.

We client-survey every branch every month, and we measure two things.

What they're feeling on the quality of service that they're getting at the current time, and then for new clients we measure how the process was for them coming on as new clients, and we've seen steady progress going up and up and up, and I think it's combined with the fact that our payroll specialist turnover is probably at the lowest rate in our history.

So the combination of good client, or employee retention at the payroll specialist level we have about 2,800 of these people, and the fact that we've been working on very hard has probably had the most bearing on all of it.

Now, if we see a little better economy going forward that should help, but I'll tell you, history will tell us, it's not going to be that great a difference.

Okay.

And I wanted to break down the three components, I think, of the revenue.

It was 5% client growth, 3.5% pricing, and I think it was 3.5% ancillary services.

How does that compare historically of where you guys have been?

That's been the guideline now for about three years.

Pricing stayed pretty stable, 3.5, and then ancillary at about 3.5 is where it's been?

Yes, we, client growth has been a little less than 5 when the economy was bad but that's pretty much the model we have right now and we're sticking to it.

We feel good.

Okay.

And then just last, just I want to make sure I got it right, net income growth is expected to be in the range of 16 to 18%, but if I excluded the charges for legal matters, is it closer net income to be about a 10% growth?

Yes, that's the gap, again, still because of interest rates.

Okay.

Great.

Thanks.

Jim Kissane of Bear Stearns you may ask your question.

Tom and John can you give us a little more color on the retention on the Advantage and InterPay client base?

Yes.

The client retention level on the InterPay and Advantage client base was about 100 basis points lower than on our core payroll base.

A little bit of that I think is reflected in the fact that the average client size in InterPay was about 7 employees, 7 or 8 employees, maybe -- I'm sorry, 10 employees, compared to 14 for our core base.

Which indicates the lower average size client will have a higher turnover rate because of out of business.

So basically about 100 basis points difference.

Okay.

I'm just asking because you said they were not referring as much to you, I just wanted to make sure that they were happy with the service.

No, they're happy.

It has nothing to do with happiness, it's just they don't use our product.

Gotcha.

And just one last question.

You know, it seems like the major market segment has decelerated over the past couple of quarters.

Can you touch on some of the factors of the new client growth, ancillary services, retention, and what is the right sustainable long-term growth rate for MMS?

We talked about this last time before.

You know, I mean, 30% plus is high, okay, we can't sustain anything at 30% plus on a recurring revenue basis, so there's no issue here.

The other thing that is part of it though, is in the last 12 to 18 months we covered all the geographic areas in the U.S., for a while we got some growth because of that, so major markets are still doing fine, but you know, when a business starts hitting 150 million, 30% growth is big number.

So we feel great about it.

I hardly would characterize this as deaccelerating.

Okay.

Take a shot at long-term sustainable growth?

25% plus for a while but I really, you know, I couldn't tell you exactly because I don't know.

But along with that, as the growth rate in revenue goes down, the growth rate in profitability probably will go up.

Because you're not expanding the sales organization as fast and you're not opening new markets.

Okay.

Thanks, Tom, thanks, John.

Randy Mehl from Robert W. Baird you may ask your question.

Good morning, Tom and John.

Thanks for the detail on the 8-K as well.

I wanted to follow up on one of the cost items that's the other item.

It was up 21%.

Seems like a big jump.

And I'm wondering, number one, why that was up as much, and what we might look for in that item going forward, whether there's some costs that are going to go away.

Which other item?

I think it was called "other costs" in the expense footnote, I think it was page 8 of your document.

I don't know what that would be but I don't--.

It's actually the second biggest cost item next to compensation.

Well, that's just -- I don't know.

It could be the year-over-year with all the Advantage stuff, which is going to go away.

Okay.

So there are some costs, though, that you would expect to go away.

That's what I'm trying to get at, is how much of 2004, you know, expenses, how much benefit might we see in '05?

Randy, I think it's somewhat easy to calculate.

If you take, I mean, you know, there's a lot of numbers moving here and this thing is a lot more complex right now with the litigation and that, so I'm fully aware.

But I think if you run through the numbers with what we've given you and the guidance we've given you you're going to see the revenue are down but obviously to get to the 15% plus, and we're not right at 15 on the nose, we're a little bit better than that you'll see that the expenses do come down, and where they're coming down is when we get the InterPay conversion completed there's some cost benefits there.

As we get the InterPay conversion our payroll specialist productivity is much better than theirs.

It's a little leakage everywhere.

So that's why we weren't too alarmed by the 3% client growth because we knew we had the other opportunity related to the acquisition, related to cost.

So the acquisitions in the year out have a couple of things that they just make a little more complicated but they do provide equal opportunity to get where we need to be.

Okay.

That's good.

And then, I just want to make sure I understand the HR and benefits discussion here.

It seems like excluding the Workers' Comp items you grew about 25% or so in fiscal '04.

You're growing the sales force, you know, on average across that unit, maybe 20% on aggregate, and you're layering on a small time and attendance business and you're expecting about 12 to 14% growth.

Is that--

Yes, and one of our other reasons there's some offset in there, the PEO in Florida it does not have a lot of growth in it.

Because the PEO markets with insurance in the PEO market are very difficult.

We're not having the exact same difficulty on our PAS product.

Okay.

Are you expecting declines in the PEO in fiscal '05?

I can't remember if it was a decline but it isn't a very much of an up.

Okay.

And then just one final.

Average daily balance growth, it seems like embedded in your expectations for '05 is maybe mid single digit type of growth in the daily balance, yet that seems to have been growing much faster than unit growth.

And I'm wondering, I guess, number one, why the difference in how fast it's been growing relative to unit growth.

Number two, you know, why is that going to just grow at units next year.

One reason is we've got mid -- and that's the right, you figured out correctly.

Next year the calendar does not fall with us.

Our people look at this so exactly, they know where the Friday's fall and all that, and next year is one of those years we don't get the breaks, so the average balance won't go up as much.

In the normal year that would have been in the high single digits.

Advantage/InterPay also affected this somewhat in the past, but that's where we are.

And again, I'd like to challenge those people in the budget process, and Tom and I do, but at the end of the day what they say the average balances are going to be, unfortunately is very close to what we think they're going to be.

Okay.

Thank you very much, I appreciate it.

Pat Burton from Smith Barney you may ask your question.

Hi.

Thank you.

If we go back to the beginning of this year when you guys knew you were integrating these acquisitions 5% was I think the target for growth in net new client additions and with the coming in at 3%.

What would you attribute that 2 percentage point delta to?

We went into the year with a very, very aggressive sales plan on units.

They actually attained the plan on revenue, as they sold a little bit better and a little higher client than we expected, so at the end of the day the sales force met the objective, they just didn't meet the unit objective, and we didn't feel bad about it.

We got some of those revenue but -- that does affect us but overall we felt good.

But we set a target that was probably too high.

Unit-wise.

But as John mentioned the productivity of our sales people went up this past year, and it sounds like the old battle path that we used to have between units and revenue, and we're still partially fighting that, but revenue production was at the above level that we anticipated, unit was below.

Thank you.

On the major market side could you just give us a breakdown of where the clients are coming from?

I know historically it's been from your, primarily your competitor as opposed to from your smaller clients but just an update there.

I don't think it's changed much, about a third of them come from core clients that are moving over because they have a higher need level from a software perspective, and then the other two-thirds of the clients, probably half of them come from a combination of ADP and Ceridian and then the other third are generally converts from either in-house systems or other payroll processors.

Thank you.

Greg Cappelli of CSFB you may ask your question.

Hi, it's Greg and Josh.

Just wanted to ask thoughts on timing of when, you know, the remaining cases might get resolved or just what you're thinking there.

And were you inferring before, John, that you thought the 6.4 million judgment would not be a good number to use for sort of an average judgment for the remaining 21 cases?

No, I wouldn't use it.

Absolutely not.

To answer the first part of your question, what could very well happen in this situation is we move through one or two or three of these trials, and then there would be a global settlement because there would be sort of a floor established.

Depending on its reasonability.

If that happens, it could be finished and wrapped up within six months.

But if we have to go through and several trials, it could take up to two or three years.

Okay.

I appreciate that.

And then, Tom, just given your comments earlier about the economy, I just wanted to clarify.

Sounded like you expect that if we continue to see things go at the same pace you could see average checks per client tick up into positive territory.

Is that what you're expecting in terms of what's in your guidance for '05?

No.

No, we're assuming everything in our guidance actually pre-May.

Okay.

There's always a jump in new hires in May but everything was calculated in our guidance pre-May 1st.

So there is nothing in our guidance relative to increased check growth or even any kind of new hire growth.

Got it.

Just one final one on the HR and benefits space with the exceptional growth there.

Profitability wise, is it okay to assume that, I mean, it's higher profitability in this division than payroll at this point?

Not across the board.

For example, not in Workers' Comp.

Probably in 401(k) record keeping, but in PAS, the answer in the PAS area is no, that the profit rate isn't as high, but it's because we're making a significant investment in the sales organization and in the operations organization in PAS.

So if I were to rate them, I would say 401(k) highest level of profitability, Workers' Comp in the center, and PAS being the lowest, but it's because of the investment we're making in PAS.

Got it.

Thanks a lot.

Okay.

Brandt Sakakeeny from Deutsche Bank you may ask your question.

Yeah.

Thanks.

Hi, John and Tom.

Two quick questions.

First one is, with respect to the defections that were on the InterPay and Advantage payroll, who all left you guys, where did they go?

Was there one competitor who was being particularly aggressive or did they just go to regional players or just drop off payroll systems?

I think a combination of all three.

I don't think we can sit here, I haven't looked at any statistical information recently that would pinpoint any kind of unusual trend there, so I would probably guess all three.

A point you can argue, one thing, remember, on lost clients, defections is small because let's say you had 24%, that's not the number, but half are going to be bankruptcies, 12%, another about 6% is going to be move to too small, so the defection potential you're talking about is very small.

Okay.

Okay.

Especially with the InterPay group.

Thanks.

And I guess the next question is just an update on the international, which I know is still very early but wondering if that's getting any traction?

And just tell me what your thoughts are.

Well, we've processed our first payrolls.

That's great.

And we acquired a handful and we've sold a few and we've processed a few.

So, but like you hit the nail on the head, it's way too early.

Okay.

Great.

Thank you very much.

Greg Smith from Merrill Lynch you may ask your question.

Hey, good morning.

You mentioned where the clients are coming from on the MMS side.

I was just wondering if there's any shift in new clients just on the core side between start-up, competitive take-aways, and things like that?

There's been a slight shift towards more new start-ups and that goes in sort of correlation with what I said earlier, we're seeing a jump in new business start-ups.

And as I said earlier about 45% of our new clients are brand-new businesses.

So probably today I would say that new business start-ups are slightly higher percentage-wise than they were, say, a year ago.

Any change in the overall competitive landscape?

I would say not.

You know, obviously we're not selling against InterPay and Advantage anymore.

New payroll processors spring up every day.

We're pretty much status quo with ADP and fairly -- we don't get involved against Intuit at all, hardly.

And then lastly, just any particular areas or product lines you're looking to maybe fill through acquisition at this point?

No.

You know, we've got a very full plate when it comes to products today, particularly in the HR area.

And adding Time in a Box, time clock, we think that's going to be a great opportunity.

So right now we feel we're very product rich, we're always keeping our eye out for something that fits in the employer/employee relationship but right now we feel we're in a great position.

Then just lastly quickly if you could just talk about the growth in client usage of the Web-based system what you're seeing there.

We are continuing to see growth in that.

It's -- I think we're up to probably around 7,000 clients, which on a base of 505,000 isn't that many but there are certain clients that this appeals to.

People that want to -- or have the feeling that they must control the input, and are willing to do it and want to do it in the middle of the night, you know, those types of situations, but it's not overwhelming by any means.

Okay.

Great.

Thank you.

Greg Gould from Goldman Sachs, you may ask your questions.

Thanks.

Tom and -- just a question on the pace for control or the checks per client.

You have mentioned in the month of May they increased significantly can you quantify that?

Yeah, Greg, that's not what I said.

I said number of new hires.

Oh, sorry.

Number of new hires.

Yeah.

We monitor every month the number of new employees that are put on by our client.

Obviously common sense would say eventually that's going to turn into something, but one May doesn't -- or one month doesn't a spring make.

Right.

That's a pun on the month of May, at least in Rochester, New York, it is.

So it's too early to speculate on andy client check growth.

Okay.

And what about pricing increases on the acquired customers?

Is it going to rise faster than the core Paychex customer?

Yes.

The reality of life was, when we made these acquisitions we realized the general pricing was 25 to 35% lower than Paychex, on average.

We feel that that difference cannot be made up overnight, and it's going to take a number of years, so we're probably more aggressive on the InterPay and Advantage pricing than we are on our core payroll.

Probably and maybe at the rate 8 to 9% instead of 3.5%.

Okay.

One last question.

John, the capex increase in fiscal '05 includes branch expansion plans.

Can you elaborate on that?

What it is is we're in a period of it's not branch expansion.

New ones.

We've got to relocate more branches than we normally do.

We have bought branches and they expand, they expand, and then we squeeze them, then they've got to relocate, and we just have a few more relocations this year than normal.

But the biggest impact on this whole thing isn't that, it's Xerox printers.

Okay.

Yeah, don't forget though, we had to integrate a lot of Advantage and InterPay clients and personnel, too.

Okay.

Thank you.

David Farina from William Blair you may ask your question.

Good morning.

Tom, you are now going to be over 1,000 core sales reps.

If you kind of do the math on that it's like 6, 7,000 clients per, you know, prospects per sales rep.

I mean is there a theoretical minimum the sales force needs kind of territory-wise?

Your number is real close.

I think, right currently we measure 7.4 million businesses between one and two hundred employees in the markets we serve and if you divide that by 1,060 or 1,070 whatever it is, comes to about 7,000 per.

David, I would say half our offices operate at a much lower number prospects to rep than the average.

I mean, obviously 7.4 million divided by 1,060 gives you an average about 7,000.

So half the offices are higher, and half are lower.

And I'll give you our most weirdest example, if you want to use that word, is Rochester.

We have one sales rep for every 1,500 potential clients in this market.

Now, I know this is our home office, but the fact is that these people produce on a productivity rate equivalent to the average or higher than the average in the country.

So I wouldn't start getting nervous, from my perspective or your perspective until we start approaching the 3,000 number, then maybe I'd start thinking about this issue.

You said you're happy with the productivity number, so obviously that, you know, even though you ran at a 7% clients the dollar productivity is where you're want it to be so you're not seeing it at this point as an issue?

No.

What happened to us this year as we'd mentioned earlier we didn't make the unit number but we made the revenue number.

I think we were 101%, or something like that, 101.3, so that's very happy.

We're very happy about that.

And, you know, what's evolved over the years, David, is all the ancillary services added to that sales mix, and that's just as important as unit growth.

Thank you, Tom.

Craig Peckham from Jefferies you may ask your question.

John, I just wanted to clarify something on the litigation reserve here.

Are you accruing in that number ongoing legal expenses, you know, lawyers' fees and so forth or is this simply surrounding a potential settlement, or damages?

This basically is a summary of both.

You know, the bad requires you to determine some type of a range of exposure, which in this case is not very easy to do.

In the absence of any number being better than any you're supposed to book something that might be on the low end of that range, and I don't know even if I know I'm on the low end of the range because I really don't know the number.

But we'll continue to track it but right now, that's supposed to have money in there for a settlement as well as any legal costs and it's the best number we know.

I guess what I'm trying to get a bead on here is the current expense profile after taking out that reserve is still burdened with any unusual legal fees.

No.

Okay.

That helps.

Thanks.

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

Thanks.

You know, Tom, just getting back to your comments about higher employment levels in May, or you're seeing higher in May, if you look back over time, how long should that take, if at all, to translate into, you know, higher checks per client?

Well, I don't think I'm in a really good position to answer that question.

Again, let me go back to what I said.

One month doesn't a spring make.

And first of all we have to be pretty certain that this trend continues through the rest of the summer.

And even beyond.

If it continues, and this is totally speculative, and I wouldn't go to the bank on this, but if it continues, logic would say that eventually it's going to make a difference.

But, man, I wouldn't go to the bank on it yet.

So did you say that you were at 14 now, employees, on average?

.1 or 2.

It's still real close to 14.

David to put this in perspective over the last few years we forecast checks by branch in our plan.

We are usually within 2 million checks, 2 million checks times the revenue is still not a big number.

This can happen, but it will happen slowly that we'll see it, and we'll anticipate it.

I wish I could sit here and say I saw a potential here for a big upswing.

I don't.

By the same token, I would also say that this year probably better than any other year we feel there might be a chance that we'll beat the plan on checks.

The last few years we've just missed it because we've been a little too optimistic on what would happen but I don't think this is going to be a big item.

Okay.

And then, actually, one question for you John just on the Workers' Comp.

Did you change anything about, you know, the structure of the, you know, the plan at all that, you know, would mitigate, you know, the magnitude of a refund you saw in '03 or do we have that same variability or, you know, potential in '04 as we had in '03?

It will be less.

What we've said all along is we were going to be conservative on Workers' Comp all the way.

In '03 we were probably slightly too conservative until we saw the activity and the actual resolution with the insurance company last December.

But the policy has changed.

We used to lay all the risk on them.

Now, while they have risk, we're -- I wouldn't say we're completely self-insured, but for all practical matters we are.

We lay off the big ones, we monitor the claims very closely and we're going to continue to be somewhat conservative on this area because we do not want to be on this call talking about we really missed Workers' Comp and now we've got problems.

Great.

Thanks.

Robert Tong from Smith Barney you may ask your question.

Just wondering if you could give an update on the mid-tier market office openings.

Hi.

Just wondering if you could give an update on the mid-tier market office opening, because you're, just in terms of the expense impact ramp-up in '05 in revenue generation and plans for anything beyond those four regional sites.

On the mid-tier we don't have any on MMS.

I think that something got mistaken.

MMS is now in every single location.

I meant mid-tier market.

Oh, we might open three or four but they're not that big.

I think there's going to be four, John, and the significant impact -- there will be no significant impact, either revenue-wise or profitability-wise.

And what was the sales force turnover like in '03 again?

You mean in '04?

Sorry, yeah, '04.

Core payroll, low 30s, 31, 32, and HR, high 30s.

And MMS, it was down under 20%, I believe.

Thanks.

Michael Baker from Raymond James you may ask your question.

Yes.

You had made a comment in terms of talking about the PEO that the Florida market, at least appears to you to be a little more challenging.

In terms of that model, and at least I inferred that you might be pushing PAS a little bit more.

Maybe you could comment and give us a sense of, is that just internally generated or are you seeing some competitive factors or demand aspects to that?

In Florida we are choosing to not take increased risk and our insurance carrier on the Workers' Comp keeps restricting the codes we can write in Florida.

We are clearly the premier PEO.

PAS gets some acceptance down there but not as much as we'd like, only because they're used to the PEO model.

So if we were willing to take a lot more risk, which we're not, we could grow the PEO business more.

Our focus isn't on the PEO.

The PEO is in Florida it does okay.

And again, we think we have one of the best ones in the country.

We like PAS better, and that's what we're pushing.

And then just looking forward on Workers' Comp basically you're not looking for the same type of self-funded benefit that you had last year?

That's just how conservative we're looking at claims.

We've gotten better at looking at claims and anticipating.

So all in all, take out the 2003 factor we did better in 2004, 2005 will be the same.

It will be better, but it might not be proportionally better year-over-year, but we're getting better at this.

Okay.

I appreciate it.

Derek Queen from Ritchie Capital you may ask your question.

Hi, actually my questions have been asked.

Thank you.

Adam Waldo from Lehman Brothers you may ask your question.

Tom, just a quick follow up, on the Bank of America situation can you provide any update as to how discussions may be progressing there around converting the fleet marketing partnership over to a general Bank of America relationship?

Wow, I don't know how we got into this conversation on this call.

Sorry.

We had it last quarter, and I thought I'd follow up.

For those of you who may not know it, InterPay was owned by Fleet bank, and there was a referral relationship that was carried over from InterPay to Paychex, and fleet bank having most of it's presence in the northeast and part of the south, we enjoyed a referral relationship with them since we've made the acquisition.

When Bank of America came along and bought Fleet, there was always -- there's been a concern as to what would happen to the referral relationship.

And from everything I can see at this point, it looks very positive that the Fleet relationship with Paychex is going to be maintained and go forward.

As it has been the last year or so.

So we feel real good about that.

You know, when a bank makes an acquisition the size of Fleet, you never know what might come down the pike, but the Fleet people have made the decision, or the Bank of America people have made the decision that they're going to stay with Paychex and the Fleet world.

That's great news.

Is there any indication that it might be extended outside of the Fleet territories, or is it just--

Certainly over a period of a year or two or three we'd like to, you know, prove ourselves that maybe it should be extended, but I think Bank of America's probably looking at saying -- looking at this and saying, okay, Paychex, you proceed as you have, and if you guys prove yourselves over time, then maybe we'll readjust some of the other relationships that they have.

So we're happy that it's going to stay in place.

It appears like it's going to stay in place.

And then we can move forward from there.

Fair enough.

Thank you.

Paul Carder from Wachovia Securities, you may ask your question.

Yeah.

Hi, this is Paul Carder for Mark Marcon.

Back to your earlier comment about the 25 basis point change in rates and packing roughly 3.5 to 4 million, just as a point of clarification, I mean, if rates are across the yield curve and, you know, increase another 25 basis points given your mix of long and short-term securities, you know, how much do your effective rates on your portfolio increase, or maybe you can just kind of tell us how we should think about that.

I think you should just listen to the number we pointed you towards.

I couldn't answer that question.

I mean, the things all move, and I have people that work this all out with lots of estimates, you've got 3.5 to 4 but, you know, that's as if the thing was made at the beginning of the year, which won't happen.

You can see already we disclosed that the change in the long-term rates has moved over 100 basis points already, that's what put the portfolio gains out.

You know, you're just asking for sensitivity that, I know some of you really get into this in your models, and, you know, it's -- I think you're spending a lot of time in an area that you can't be that exact anyway.

Okay.

All right.

I appreciate it.

Thanks.

Once again to ask a question, please press star then 1.

One moment.

Steven Weber you may ask your question.

John, just quickly, presumably you have really good cash flow fiscal '05.

And I was just playing around, you're probably going to tell me I'm getting too close with my model, but I'm wondering why you see investment income down 25 to 30% with where the rates are today.

Are you imputing some substantial amount for paying out for this legal bill or something else in that?

No, it's the gains are down.

There's gains in that portfolio that were a little higher.

Right.

Okay.

It's all --.

It's all a gain.

No.

There's no change there.

Okay.

Thank you.

At this time we have no further questions.

Okay.

I would -- first I want to make a few comments.

First off, we really appreciate your interest.

I think the questions in this call were excellent.

We appreciate your efforts and the time it takes to kind of sort through a quarter where we have a few more items to discuss and a little more unusual than normal, and that's why we feel getting the 8-K out today is very important to help you, and, again, there's nothing we won't do to try to help you people, so if you need something, simply call.

But again, I really want to thank you for your interest in Paychex and understand that we really feel good about this past year and we're optimistic about the future, and it's not any more or less optimism.

We're kind of a long-range focus here and we think we're still well within the guidelines we've talked about and we have a strong management team that's committed to giving you that performance.

So take care and I hope you all have a great summer and it isn't raining too hard wherever you are.