沛齊 (PAYX) 2006 Q4 法說會逐字稿

Welcome and thank you for standing by.

At this time, all participants are in listen-only mode. (OPERATOR INSTRUCTIONS).

Today's conference is being recorded.

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

I will now turn the meeting over to Mr. John Morphy.

You may begin.

Thank you for joining us for our fiscal year-end press release.

It's hard to believe another year has gone by, but it has.

Also joining us today is Jonathan Judge, our President and CEO.

The teleconference call will be comprised of three sections; a review of the financial results for the fiscal year ended May 31, 2006, including comments and guidance for next year, an overview from Jon and a Q&A session.

Yesterday afternoon after the market closed, we released our financial results for the fiscal year ended May 31, 2006.

This press release can be obtained by accessing our website at the Investor Relations page.

We have also filed our Form 8-K with the SEC which provides additional discussion and analysis of the results for the year.

The document would be pretty similar to what would normally be a 10-Q.

This filing is also available on our website.

In addition, this teleconference is being broadcast over the Internet and will be archived and available for access on our website until July 28, 2006.

Please refer to our website for access to all recent news releases, current financial information, SEC filings, and the investor relations presentation which will be updated in the next several weeks.

Fiscal 2006, an exceptional year by all measures and was our 16th consecutive year of record revenues and earnings.

We continued our history of successfully selling, retaining, and servicing clients as a full portfolio of payroll and human resource service offerings continue to offer more opportunities and value to our clients and Paychex.

Fiscal 2006 reflected strong sales and record client retention activity.

We increased our client base by 4%, our highest growth percent since the acquisition of Advantage and InterPay in fiscal 2003, and now a service of approximately 543,000 clients.

This compared to client base growth of 3.5% in fiscal 2005.

Fiscal 2006 was a year of making significant investments to ensure continued long-term success in the future.

Investments included enhancing our 401(k) recordkeeping service to include more investment choices, improved time and attendance offerings, geographic expansion in Germany, healthcare offerings, and health savings account products.

Jon will share his comments with you on those investment opportunities in a few moments.

Our long-term growth objective remain at 12% growth in service revenues, excluding interest on funds held for clients, and 15% growth in operating income, excluding interest on funds held for clients.

Both of these goals were exceeded in fiscal 2006, as service revenues grew 14% and operating income excluding interest on funds held for clients grew 16%.

Year-end and fourth-quarter highlights.

Total revenue growth was 16% for both the fiscal year 2006 and the fourth quarter.

Total revenues for fiscal year 2006 were nearly $1.7 billion.

Payroll service revenues increased 10% for the year and 11% for the fourth quarter.

Human Resource Services revenue increased 29% for the year and 25% for the fourth quarter.

Net income increased 26% to $464.9 million for the full fiscal year.

For the fourth quarter, net income increased 21% to $122.7 million.

Diluted earnings per share were $1.22 for the fiscal year versus $0.97 a year ago, up 26%, and $0.32 for the fourth quarter versus $0.27 for the prior year fourth quarter.

We will now take a look at the income statement.

Payroll service revenue increased 10% for fiscal 2006 to $1.2 billion.

This is attributable to client base, check volume, price increases and increased utilization of payroll-related ancillary services.

As of May 31, 2006, 92% of all clients utilized our payroll tax administrative services, and 68% utilized the employee payment services.

Human Resource Services revenue increased 29% for the fiscal year ended May 31, 2006, to $324.9 million.

The increase in Human Resource Services revenue were comprised of the following four key areas.

Retirement Services revenue increased 16% during the fiscal year to $106.1 million.

As of May 31, 2006, we serviced more than 38,000 Retirement Services clients as compared with over 33,000 clients a year ago.

Again, we expect to sell more 401(k) accounts that anyone else in the U.S., as we expand our offering to services in this area.

At the same time, we believe we now have become the number one provider of Retirement Services in terms of number of clients in the U.S.

Sales of the Paychex Premier product have been strong as administrative fee revenues from this product increased 57% for the fiscal year to $52.6 million.

The increase in administrative fee revenue was driven primarily by client growth and also the implementation of initial enrollment fees, effective May 1, 2005.

As of May 31, 2006, our Paychex Premier product serviced over 236,000 client employees as compared with over 171,000 client employees at May 31, 2005.

Our PEO product provides essentially the same services as Paychex Premier except we serve as a coemployer of the clients' employees, assume the risks and rewards of workers' compensation insurance and provide more sophisticated healthcare offerings to PEO clients.

Revenues in the PEO product increased 25% for the fiscal year to $67.1 million.

As of May 31, 2006, our PEO product serviced approximately 59,000 client employees as compared with over 54,000 client employees at May 31, 2005.

Revenue from other Human Resource Services increased 36% for the fiscal year to $99 million.

Interest on funds held for clients increased 67% during the fiscal year ended May 31 to $100.8 million.

The increase in interest on funds held for clients was primarily due to higher interest rates earned and higher average portfolio balances.

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

Federal funds rate, which was 1% at June 1, 2004, and 3% at May 31, 2005 steadily increased to 5% through May 31, 2006.

The increasing interest rate environment has positively affected our net income growth.

The average interest rate earned on funds held for clients increased to 3.2% for the fiscal year, compared with 2.2% for the prior fiscal year.

The higher average portfolio balances were driven by client-based growth, wage inflation, check volume growth and increased utilization of our payroll tax administration services and employee payment services.

The average investment balance for funds held for clients for the fiscal year ended May 31, 2006 increased 12% over a year ago.

Combined operating and selling and general and administrative expenses increased 12% for the fiscal year to $1025 million.

Expenses were impacted by a number of factors as follows.

We had a strong sales year in fiscal 2006 as our salesforce exceeded their targets.

This resulted in higher than normal selling costs related to commission and bonus expenses.

We again achieved record client retention.

Our success was due in part to higher retention of our payroll specialists and reducing the number of clients for payroll specialists.

On May 31, 2006, we had approximately 10,900 employees compared with approximately 10,000 at May 31, 2005.

Investment income net increased 103% for the fiscal year to $25.2 million.

This was due to an increase in average investment rates earned and an increase in average portfolio balances, which resulted from investment of cash generated from our ongoing operations.

Our effective income tax rate was 31.1% for fiscal 2006 compared with 32.5% in fiscal 2005.

The decrease in our effective tax rate was attributable to higher levels of tax-exempt income derived from municipal debt securities held in our funds held for clients and corporate investment portfolios and a lower effective state income tax rate.

We will now take a quick look at the balance sheet.

Cash and corporate investments were $577.4 million at May 31.

We also had $384.5 million in long-term corporate investments at May 31, 2006.

Our cash flows from operations were again strong at $569.2 million for fiscal 2006, an increase of 22% or over $100 million from the same period a year ago.

Our total available for sale investments, including corporate investments and funds held for clients, reflected net unrealized losses of $22.0 million at May 31, 2006 compared with net unrealized losses of $9.9 million at May 31, 2005.

The change in the unrealized loss position was due to increasing yields that decreased the fair value of the Company's investment portfolio.

The three-year AAA municipal securities yield increased to 3.65% at May 31, 2006 from 2.85% at May 31, 2005.

Our net property and equipment balance activity during fiscal 2006 reflected capital expenditures of approximately $81.1 million and depreciation expense of approximately $51.6 million.

Client fund deposits as of May 31, 2006 increased to $3.6 billion from $3.0 billion at May 31, 2005.

Client fund deposits have increased due to growth in utilization of our payroll-related ancillary services and wage inflation.

Total stockholders' equity increased to $1.7 billion at May 31, 2006 with more than $231 million in dividends paid during fiscal 2006.

Our dividend return to shareholders is just under 2%.

Our return on equity for the past fiscal year was 30%.

Our current outlook for the full fiscal year ended May 31, 2007 is based upon current economic conditions and interest rate levels and is summarized as follows.

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

Human Resource Services revenue growth is expected to be in the range of 20% to 23%.

Total service revenue growth is projected to be in the range of 11% to 13%.

Interest on funds held for clients is expected to grow in the range of 28% to 30%.

Total revenue growth is estimated to be in the range of 12% to 14%.

Corporate investment income is anticipated to increase approximately 45% to 50%.

In the first quarter of fiscal 2007, we will adopt a revised accounting standard related to stock-based compensation.

Upon adoption, we will be required to record compensation expense in our income statement equal to the estimated fair value of any stock-based compensation awards, including stock options.

The prior standard for stock-based compensation, which we followed through fiscal 2006, allowed us to disclose the pro forma impact of the effect on net earnings and EPS as if we had applied fair value accounting to existing stock-based awards.

However, there are some differences in the calculation of fair value and expense under the revised standards.

Stock-based compensation costs will be primarily included in selling, general and administrative expenses and are expected to negatively impact pretax income and net income for fiscal 2007 by approximately 4% to 5%.

We expect the full year fiscal 2007 effective tax rate to be approximately 31.0%.

Net income growth is expected to be in the range of 12% to 14% and this range includes the impact of stock-based compensation expense in fiscal 2007.

We refer you to our Form 8-K for the fiscal year ended May 31, 2006 for further information on stock-based compensation costs.

You should be aware that certain written and oral statements made by management constitute forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995.

These statements should be evaluated in light of certain risk factors, which could cause actual results to differ materially from anticipated results.

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

I will now turn the meeting over to Jon Judge who will provide his comments on the fiscal year before we open the meeting for questions.

Thanks, John, and thanks to all that are on the phone, both for the time you're spending with us this morning and also for following our Company.

We really do appreciate it.

I will just add a couple of comments and then we will open it up to your questions and observations.

As you can tell, we're very proud of the efforts of our 11,000 employees this past year and especially proud of their results.

Fiscal 2006 was a wonderful year for our Company, both operationally and from a strategic standpoint.

On the operational front, our team executed brilliantly.

Sales had a very strong year and a particularly strong finish.

All of our sales units finished above their plan and you will remember from earlier calls, that we pushed our sales teams pretty hard this year to improve productivity and they more than delivered.

This bodes very well for our future since most of our sales teams' production shows up on the following year's P&L.

Our new client growth of 4% was the best that we have seen since 2002 and the acquisition of Advantage and InterPay.

It was also an excellent year for our operations team.

Customer sat was very strong, near record levels and tops in the industry.

We have the highest client retention year ever, beating records that were set last year.

We also made great strides on our payroll specialist attrition programs as well, improving almost five percentage points, which tells me that we can expect even better results in customer sat and client retention in the future.

Our finance and controls teams also produced great results.

We received very high marks for our Sarbanes-Oxley implementations.

We continued our string of excellent results in internal and external audits, and we continued our practice of filing our 10-Q concurrent with the earnings release, one of a handful of companies, if that many, that do so.

Our Company was honored with several awards this past year and I'll mention just a few.

John Morphy was once again selected as one of the top two CFOs in our industry by Institutional Investor.

Dan Canzano, our Vice President of IT, was selected as one of the top 25 Chief Technology Officers in the U.S. by InfoWorld.

Our HR and training group was named in the top 100 training organizations in the U.S. by Training magazine and our IT organization was named as one of the top 100 best places to work by Computerworld.

Paychex was named as one of America's most friendly shareholder companies by Institutional Investor in the first year that they ran that survey.

So you can see why we are proud of our teams' execution and why we're able to post the terrific financial results that John just covered.

It was a good year for us from a strategic standpoint as well.

Tucked into those financial results that John just went through were some very important investments that we made for the future.

We continued to invest in our international expansion, taking Germany to four cities by year-end.

We continued to invest in our time and labor management initiative and saw great results this past year.

Strong growth, for example, finished the year at $15 million in revenue, up from $6 million in the prior year and $1 million the year before that.

We continue to expect great things from this marketplace.

We invested in a health benefits initiative where the results were so positive that we've moved this area to the top of our investment list.

We continued to invest in product and service line development, especially in the Retirement Services area and we will continue to do so.

And we've continued to invest in broader sales coverage in MMS, [core], and HRS, including advanced hires in the fourth quarter to ensure that we were ready for a fast start this current fiscal year.

Looking forward, I am very optimistic about our Company.

We are in a terrific market that is still at the early stages of penetration and is growing.

We have an advantaged business model and enjoy natural barriers to entry.

We have a terrific and motivated team that has tasted success and likes what it tastes like.

We have a terrific business plan and 11,000 people that know how to execute.

In short, we're very proud of the results of this past year and can't wait to see what our team is going to produce this current fiscal year.

With that, John and I would be happy to take any of your questions or comments.

(OPERATOR INSTRUCTIONS) Adam Frisch.

Hi, guys.

It's Steve Stout for Adam.

Can you talk a little bit about the strong sales, which resulted in the higher commission costs?

Have these been fully realized in fiscal 4Q numbers or are we going to see these sales impact numbers later on in the calendar year?

Basically, the commission expense related to all sales that take place in the year are expensed in the year we get them.

So we basically had a good third quarter on selling.

It continued in the fourth.

So we are paying at a little accelerated level as people hit their multipliers.

That phenomenon will stop at the end of this year.

The only thing I would say about selling costs going next year is be pretty aggressive on the salesforce growth at 13%, primarily in the non-payroll areas.

That will throw some expense into the first quarter, but I don't think it will be significant.

So I think the ramp up on the selling part is behind us.

Unless again, of course, Walter and his team just does another great bang-up year, which we would be thrilled to have.

I think to your question, we take the expense in the year that the sales activity happens; actually get the benefit in the following year. [All of that] we're in.

In general, 15% of the revenue that we sell in a year shows up on that year's P&L.

The remainder of it shows up in the following year's P&L.

Okay, and do you have plans to accelerate hiring?

I know that you had started that earlier for '07?

We did accelerate hiring.

When we came into the fourth quarter, we hired ahead to make sure that we were at full strength as we started the year.

The same types of things that we talked about last year we did this year.

We got our planning done early.

We got our quotas set early.

Our sales teams have already conducted all of their year-end closedowns and their kickoff meetings for the current year.

And we've got our sales teams deployed.

The only other thing I would tell you is we don't have the final members, obviously, on June, which is our first month.

But where we are so far in June, we are pretty happy with where we are relative to the plans we've set for the month.

So same thing as last year.

We're looking for a very fast start in the first quarter.

And if we get that, then obviously we will have terrific confidence for the year.

Are there any price increases that are going in in Q1 '07?

We put the price increase in on May 1 of this year, just last month.

That is our normal trend and we put the normal size price increase in and normal results, very little resistance, if any.

How much was that price increase?

Approximately 4%, our norm.

Okay.

Thanks a lot, guys.

Bryan Keane.

Hey, John.

Just wanted to know on that price increase of 4%, have you guys ever toyed with -- since there really is no -- like as you said, nobody even cares.

Do you think -- or at least no reaction.

Can you move that up to 5% or 6%?

We've talked quite a bit about that on both sides.

And the current philosophy that we have is to continue to do our price increases in a way that reflects the value that we add into our productline and the service that we deliver, but also keep it at a level where it stays off the radar.

So we're not interested in pushing that so aggressively that it becomes an issue with our clients.

Okay, the Human Resource Services revenue grew very strong, 29%.

I guess I was a little surprised to see the guidance to come down a little bit to 20% to 23% considering all the things you have going on.

Is there any color in there that some things might be growing slower than others?

The color is actually pretty simple, Bryan.

First thing is to try and better balance which customers chose Paychex Premier versus some other things that were more a la carte, we put in a signup fee on Paychex Premier May a year ago.

In the first year, you get a very positive comparison on revenue related to that.

So the Premier growth is a little bit higher than what would be expected in the first year.

We're still going to do the signup fees, but the year-over-year comparison gets a little harder.

The second thing is, as Premier gets bigger and bigger, it is normal for these growth rates to slow down some.

When we look at revenue growth in service revenues next year and hitting our goal of 12%, we feel very good about it, and we feel great about the fact that HR and all those services are still in the plus 20% range on growth.

So it's a rate in line with what we would have looked at strategically.

Okay, so that is the key.

Nothing different really in retirement or HR Services or anything else?

No, we're hoping retirement is going to get a little bit of a rejuvenation off this multi-fund aspect.

So we will see what happens there.

Okay, and then last question, you talked about wage inflation, just curious what are you guys seeing in the payroll these days for that and how has that trended over the last 12 months?

We have seen continual wage inflation for the last many, many, many years.

The productivity increases that have come in America, I believe, have not -- might have come at the expense of what a worker does.

I don't believe they have come at what the worker's paid.

So we didn't see anything new there; it is just something that always happens.

The one thing on that point, though, that I will throw out to you, we, because (technical difficulty) business clients and we do the payroll for them and we do the new hire reporting, have a pretty good window on what is happening in the new hire world relative to small business.

This past year was a pretty terrific year, finished at -- within our clients, new hires were up almost 2%, 1.9%.

That is versus up 0.1% last year and as you remember, negative the prior three years.

So it was -- from a new hire standpoint, those numbers look pretty good to us as well.

Okay, and is wage inflation north of 5%, 6%?

Where does it fall out?

No, I put it between 3% and 4%.

Okay, great.

Thanks, guys.

Cindy Shaw.

Thank you.

A couple questions.

One, going back to the acquired clients from a few years ago, I know for them you were raising prices at a faster clip than your regular Paychex clients just to try and get pricing in line.

If you could, tell us if there is any runway left ahead of you on that or if they are pretty much in line now.

Also, what is going on with your referral rate from acquired clients and then I have some more questions?

I'll let the second one on referral rate Jon answer.

The first one on pricing.

Right now, all of the InterPay clients are on Paychex's structure and systems.

The InterPay name does not exist any longer.

So they have had some price increases that are a little higher than what our normal is and they will be in the regular process now where you try to return then over time to what I would say are normal prices.

But we're not putting any accelerated effort on that because these are good clients, as are the Advantage clients, which are still on their own platform.

We have higher retention on these two sets of clients because you're not selling new clients into them.

We aggressively raise the prices, but similar to the other question on price increases, we try to keep it in line so we increase retention, keep the clients happy and we're not trying to stretch these price increases to the point where it causes other difficulties.

And then, BofA just recently announced it's got a payroll processing that it’s offering to small businesses for no charge.

And I know you had gotten some clients with sweet deals.

If you could comment on that as well.

It falls more in the category that we are aware of the BofA offering.

We of done quite a bit of analysis on it and it would fall into the category of something that we are aware of, but it's not something that we see as a problem for us.

The market itself, if you step back, tends to segment itself into two large buckets; those who want help and those who want to do it themselves.

And for those who want to do it themselves, they will do their own payrolls, they might buy a software product and put on their own PC or their own computer system and do it themselves.

They might get help from somebody like an Intuit.

We're not interested in that market.

The market that we are interested in is the market that wants help and our value proposition is very much about that.

The Bank of America announcement is really more towards the flavor of do-it-yourself then want help and it's something that time will tell whether it will be successful or not.

But it's not something that we see as a problem for our efforts.

Great, thank you.

And then one final question.

If you could tell us what your assumptions are for the coming fiscal year in terms of client growth and in terms of average portfolio balance growth in the client funds?

We don't always answer all those questions.

But anyway, our client growth -- our longer-term target is to get back to 5.

Whether we can get all that back in one year, I don't know.

We were very pleased with the progress we made this year.

On fund -- client fund balances, I think it is going to be pretty similar to what this past year was and the variable will be what the economy does, which none of us can predict that.

Great, thanks very much.

One color I would add, Cindy, is when you look at the client growth number, you ought to look at that as an indicator, but not as one of your hard measurements and the reason I say that is because the sales teams, depending on where they are in the year, they may end up spending a great deal of their time in the existing client base pushing ancillaries and we saw some of that at the close of this year.

So it is not necessarily the best indicator of what is going to happen to us from a revenue line.

It is clearly an indicator, but this year if you look at the numbers on our ancillaries, what you'll see is that our ancillary growth was pretty terrific, including the high-end ancillary -- high-end penetrated ancillaries like Taxpay, which continues to defy gravity.

We took that thing up to 92% this year with something like 98% of our clients taking it.

So it is a good indicator, but it is not an absolute indicator.

Would you say that your cross-selling success has been increasing?

It sounds like it has from what you just said.

It has, this year.

I would say that, particularly in the fourth quarter, there was a great emphasis in the field to push revenue and it came almost exclusively out of ancillaries in the install base and over time, obviously, we will continue to push that.

I wouldn't say that it is going to become the program du jour, but it is clearly something that our teams keep pushing hard.

Good, thank you.

Rod Bourgeois.

Yes, guys.

Rod Bourgeois here.

I wanted to talk to you guys about margin leverage.

I think the way the street is looking at the latest results in guidance is that the revenues are coming in above expectations and your guidance is above your 12% long-term target.

But the street is viewing the margin number for the quarter as lighter than they expected.

So the question, I think, that would be helpful to get your perspective on is margin leverage in the business slowing or are you just taking an opportunity to invest since your revenue growth is above the long-term target or is this just completely a function of the selling expenses and commissions related to the good booking?

We are above the stated goal of 12 and 15 and Jon will add a few comments in a minute to this too.

We think we're going to be above 15.

We're going to start investing.

We are really committed to doing this for the long term.

And to do that means we got to continue to add to our product portfolio.

We feel real good about what we've got and we're going to continue to do that.

It also means that when you look at the margin leverage, as we invest more, it might not be as consistent across the year as it used to be.

We got off to a great start here at the beginning.

The first-quarter leverage was there.

And in the third and fourth quarter, maybe not quite as much.

You also have to realize the difference between 15% and the number in the fourth quarter was only $5 million.

So when you start talking about investing in a company that's got $1.9 billion of revenues, we chose to invest in the salesforce, accelerate the investing on the healthcare a little bit and we did those things and trying to build a better future.

So we still see the same margin opportunities.

They might bounce around by quarter, but when you go look at the year and you look at next year, we're still right back in there looking for 12% and 15% and I can assure you our people, when they did the budgets recently, they know that is a very real requirement.

Okay, great.

And John, as you look at the -- everyone is worried about the economy potentially slowly.

To what extent has that factored into the way you have set up your guidance for fiscal '07?

How have you thought about the economy assumptions in your fiscal '07 outlook?

We don't factor much of that in.

We have got a revenue plan that we think is very realistic, not a huge stretch, but not easy as normal.

The reason we don't do that is we just don't have any way of knowing.

It's the same way as interest rates.

So I start building that in, then you start interpreting what did I build in and we had this situation a few years ago where we took an awful lot of heat for not raising interest rates because everybody expected them to go up in our guidance.

As it turned out, they never went up.

Right now, so far in the economy, we haven't seen anything that says anything is changing.

Now that could change, but at this point, it hasn't and we also know that if we start getting our people thinking about a slowdown, that sets up excuses.

We have got them right now saying hey look, we've got things going good here.

We're going to keep you running real hard, and if things change, we will react to them.

All right.

I'll stick one more real quick one in here.

Are you continuing to decrease your clients for payroll specialists as you work on improving client retention?

Right now, we are at about at the level we want to be and we will keep looking at that.

Right now, we feel the service is about the best it has ever been.

The surveys come back very good.

We have made some unbelievable strides in the major market service and we're going to continue to try to offer -- we do believe we offer the best service in the business and we're going to keep looking at the economics because that is a tricky balance between how many specialists, how many clients and where retention is.

And we have got to make sure we maximize the profitability and the service at the same time.

All right.

Good work on that.

Thanks, guys.

Kartik Mehta.

Good morning, John and Jon.

Question on salesforce attrition, Jon.

How much progress have you made there?

Are you happy with where it is or does it still need to improve for you to feel fairly comfortable?

We have improved salesforce attrition by about two points in this past fiscal year.

We improved payroll specialist attrition by about five points in this past fiscal year.

I'm happy with the movement in both, and neither one of them are at the level that I want it to be at.

Then on the healthcare side, how many salespeople will you hire for that part of the business?

If you can, can you talk a little bit about the economics of that business, how it impacts Paychex?

I am not sure that I want to go into the specific numbers with you, but I will say this because we're doing a pretty good job of broadcasting our intentions as it stands.

I am not sure we want to give the whole business plan out.

What I will tell you on the healthcare piece, we were so excited about the results that we got from the pilot initiative that we ran that was roughly 20 salespeople, 12 at headquarters calling out, and receiving calls in and then 8 in the field that, as I mentioned earlier, we moved that initiative to the top of our investment initiatives.

And the deployment schedule that we are on for rolling that business out is -- quite frankly, we're going to roll that business out as fast as we believe we can while doing a good job with the implementation.

So we are not going to throw 200 salesmen in in the first year if we can't integrate 200 salesmen and get reasonable production out of the 200 salesmen.

So it is not going to be that big of an increase, but it will go as fast as we feel that we can and implement the business well.

John, one last question.

You talked about not having any kind of economic upswing or downturn in the forecast.

Would that also assume that you have not factored in any interest rate increases?

So if we have an interest rate increase today going forward, that's not also in the --?

Right, and we continue it.

If they put it in yesterday or before this call, I probably would have tried to factor it in.

But we have not heard yet, so we don't put it in.

What we did, if you remember, was we went last year and we said instead of injecting our crystal ball into the numbers and then potentially you injecting your crystal ball on top of our crystal ball, we just said that we would run our numbers or our models for you on existing, and then you would put in your assumptions.

Perfect.

Same as last year, that we did last year, that is the same thing we're going to do this year.

Perfect.

Thank you very much.

Tien-Tsin Huang.

Thanks, a follow-up question on the health side.

In the 8-K, it looks like you're budgeting a pretty big increase in the sales reps for workers' comp and health and benefits.

I am curious, are the salaries for these sales reps above the firm average, and is there a difference in the productivity that we should assume relative to the other sales?

Salary levels aren't noticeably different and productivity -- that is not a fair, good question, because you've got a new product and new salespeople; the productivity would not be the same as an experienced one.

Yet at the same time, it gets a little bit better because the pickings are little bit easier in the beginning.

So we have a productivity number we're looking at.

We don't really compare productivity across these salesforces who are selling different product.

Some are the hunters, they've got to find the clients, and some are the ones that hunt the client base.

So those are all different ways of looking at it, but we do track productivities, goals, by each salesforce.

We're happy with where they are, and I'm sure over time the one in health and safety, though, will improve.

Is the reason that you asked that question is you're trying to figure out over time whether this initiative is accretive or dilutive?

Yes, and also trying to get a better understanding of some of what John Morphy just said, is this the last big investment here and then we will see a normalization from here, or is this really a multiyear sales investment given the opportunity?

If you're talking about health benefits, itself, we will build that business up steadily.

But in terms of what our management philosophy is and what you should think about from us, it starts out with a theory that says that we will dedicate the majority of our resources to current period, but we will always carve out a piece of our resources to get focus on initiatives that will help us two years from now, three years from now, five years from now.

But with that said, when we go into our planning process, we start with an assumption that we have to hit the 12% and 15% and that the way that we subsidize these investments that we want to make for the future is we have to do it through our performance.

So you should expect from this time going forward, for as far as certainly I can see, that we will always be investing some portion of our resources in things that will help our business two, three, four years out.

Right, so I guess at what point could we assume, then, that these investments become accretive?

Some will be accretive and if is not accretive this year, (technical difficulty) could be close, but it might be the year after that.

But these investments still when you look at the size of the business, it isn't like they change the thing dramatically.

But they are investments that require it and that is why -- as I said, you talk about the difference between the 15% and according to what we did was only $5 million.

You can assume we've got an investment here that is reasonable, but yet not excessive.

It definitely sounds like a worthwhile investment.

I guess just moving to 401(k), can you give us just a little more detail on what you're hearing from your prospective clients or from the salesforce with respect to the multi-fund product?

Let me do to things.

First, to close off your last comment, we believe the insurance investment, which is why it would jump to the top of the list, will be more than a worthwhile investment and this one, if it pans out to where we think it could pan out, this could be a stellar event for our Company.

But again, as Jon said, that will be three or four years out.

But because of the nature of the investment, the size of the revenue that comes from it, the recurring nature of the revenue that comes from it and the recurring nature -- the recurring revenue comes without cost to us, it could be a very terrific investment.

The 401(k) environment is also a terrific environment and one that we have spent a lot of time and effort and money investing in.

This multi-fund product is a product that will essentially open up our ability to do record-keeping to all of our clients because prior to this, the only way that we were going to get record-keeping, 401(k) record-keeping on our clients was if they would come with the five companies that we were doing business with and the funds per company or so that were offered.

This multi-fund allows us essentially to have access to record-keeping on all of the 401(k) funds that are out there.

So again we think it is going to be a terrific play for us.

It is in its infancy right now, but all of the indications are that this one should dramatically improve our 401(k) record-keeping performance.

Terrific, well done.

Thank you.

David Grossman.

Thank you.

Actually, John, could you just remind us of the sales cycle for payroll, and at what point during the year do you start getting visibility on new client adds retention?

Starts from the first day.

Well, I guess my question is is it pretty heavily skewed to the February quarter or --?

Somewhat skewed except for the fact that we know from the salespeople a lot of work starts two three months ahead because some clients -- it isn't like they all magically convert on that date.

A lot of that conversion activity starts ahead of time.

Some people choose to change immediately.

Some people choose to go later.

But I think I know what your question is, David.

Yes, the January quarter is a big quarter for us.

It is especially important on the sales side, which is less important actually in the current year than it is in the following year.

The average, the January quarter, the average I think for a sales team would be something in the neighborhood of 22% to 24% of the year will be done in that quarter.

But we also skew our plans that way.

So when we talk to you about how we did in any given quarter, we've got a good history track on our business.

We skew our plans to the history track.

So we have already built those things in when we talk to you about how we are doing quarter-by-quarter.

Right, so I assume that -- you talked about great sales results in the February quarter this year and retention and among other things and I assume that we are seeing that in the numbers.

Payroll growth looks like it was up around 11% in the May quarter.

So is it -- do we see those benefits pretty much through the third quarter next year and then to gauge what payroll growth may be in the out years?

Is it really the visibility comes in the second half of next year?

I guess I would say two things.

One, if you go back to the point I made earlier, when you think about our sales teams and their results in the current fiscal year, about 15% of what they sell will show up on the P&L of the year that we are in.

The rest of it will come the following year and that is because of the fact that we capture some of them in June and some in July, and August and September and so on.

The second thing I would tell you is that in the guidance that we give you, we take all of those assumptions into our model.

So it is already planned.

When we put our guidance forward to you, we have already done all of what I think you're trying to do.

Yes, I guess I was thinking more about a year beyond fiscal '07, just when do we get a sense for how the payroll growth is tracking?

Is it usually -- does that visibility usually come based on the sales numbers in the February quarter?

Visibility, it's a little bit clearer than that because when you get down to the end of August or September or October, you can almost say what percentage of the year should I have in at that time.

It just all stays preseasonal.

So while there is a big lump in that one period, if that lump is not going to show up -- it usually shows up sooner because the others are weaker already.

I got it.

It's seasonality, but the seasonality is very consistent.

And just on the rates, could you just remind us again what -- if rates start to flatten out what the duration would be before it would flow through the portfolio and you would start anniversarying those comparisons based on the current contracts?

With no rate increases, you have gotten our guidance on what next year is.

I think I went out to fiscal '07.

I'm sorry, fiscal '08.

I would have some improvement baked in right now, but probably not a lot unless long-term rates move.

Okay.

And then just one last question on the comments about the healthcare business.

Could you give us a sense of how the sales model may differ if at all from the payroll model in terms of geographic dispersion versus centralized sales and how you are approaching that market?

It is going to differ in some respects and it's going to be the same in some respects.

The way that it's going to be the same in some respects is it's going to end up being a referral model.

The only difference is that the referrals are going to come from our payroll salespeople as opposed to, in the early days, as opposed to -- in our existing model, the referral rates comes mostly from existing clients and from accountants.

Basically, the way the model works is as follows.

We bring in about 120,000 new clients every year and we have got a little over 540,000 existing clients.

Those clients are always touched either by our payroll specialists in the case of our existing and in some cases by our sales teams and all of the new clients are touched by our sales teams.

The average closing rate for us is something like 50%.

We talk pretty closely with about 240,000 clients a year.

We can talk to every one of them about healthcare benefits and for those that are interested in healthcare benefits, we will refer them to our healthcare salesforce, which is a licensed salesforce.

It will be both deployed from a headquarter standpoint and also geographically.

So it would be in both ways.

But again, it's going to be a referral network.

The referral network will come from our existing sales teams.

In each of the cities that we operate, we will have coverage.

Right now, we're dealing with about 100 carriers from a health insurance standpoint and that number will continue to increase depending on which carriers are predominate in the markets that we choose to go into.

Okay, thank you.

Tim Willi.

Thank you, good morning.

Two questions.

The first one, regarding the ramp up in sales, particularly in your various HR Services businesses, just curious if you could characterize that initiative as one that is a reaction to very sizable demand and just seeing that demand and the inquiries are far greater than your existing sales staff could support at the levels you want or is it the converse where you are just seeing a great opportunity to actually push this out to clients and make them more aware of these services and the value proposition that you are bringing?

Is that question specific to any line or all of our sales or all of our HRS sales?

I would just say all of your non-payroll sales and if there are a couple particular areas within that, such as HR or Premier or something that you would like to highlight.

I would just be curious.

It actually happens the way it happens I think in most companies.

The way the process starts is through our planning process, we look at the market, we look at where we are in the market, we look at what our penetration rates are.

And we make an assessment each year as to whether or not a market is growing or a market is flat or declining and where we should place our investments.

Like most companies, we tend to have an appetite for investment that exceeds our ability to invest.

So we always have a great list of things to look at and through the planning process, it's essentially a business model.

If you can put a case forward that would allow us to get a significant return from the investment, then we will normally agree to that investment case.

So when we look at any of the businesses in HRS, it is all about what is going on in the market and our existing businesses.

Do we think that there is still lots of opportunity there, and if so, we will invest?

If we think that the opportunity is not as great there, then we will put our investment dollars other places.

In some of these markets, like the insurance market that we just talked about, that is an example of a market that we believe is completely underserved.

All of the research that we of done on the market says that the combination of the fact that the market is underserved and the opinion of the providers and the fact that we have an advantaged distribution model to the existing industry distribution model, it tells us that it's a spectacular opportunity for us and therefore, it is why we are so interested in investing in it.

We get great leverage off of our existing infrastructure, and it has had a financial -- the financial model on the health benefits industry and all of the performance that we of done on it is extraordinarily attractive.

So it is really a combination of new markets that we choose to enter, existing markets that we are in that we think we can do better with better coverage or existing markets that we are in that we put more coverage on because we've developed new products for the same marketplace.

Okay, and then my follow-up was, I'm curious just whether it would be the healthcare or 401(k), if there is a way to characterize the attitude of current and potential customers that -- they are looking at these products as a way to reduce their -- solely as a way to reduce costs and administrative burdens or is there a mindset that they really need to be much more comprehensive in the benefits that they offer that they currently may not be in an effort to attract and retain people to grow their businesses.

You said 401(k) -- did you say 401(k) and insurance or just 401(k)?

Those two specific, but just to get in general those HR Services.

I can see where in payroll it's about reducing administration, cutting costs, but it seemed to me in some of these other businesses that may be the small-business market just hasn't been able to offer enough benefits to attract the right people than they wanted to.

Maybe now you are bringing them those kinds of products with the ability on cost and administration that they can offer 401(k), health insurance in an effort to recruit people, staff themselves and continue to grow.

That is a broad question.

I will try to do the best I can with it.

The first premise on payroll, by the way, our experience would not be the same as the way you described it.

In fact, the majority of the clients that come to us don't come to us because they are trying to save money.

They come to us because they are looking for the piece of mind of somebody who is an expert in a fairly complex area, yet provides it at a very good price to them.

They come to us for that reason so that they can focus on growing revenue in their businesses and keeping their businesses vibrant and alive.

On the HR Services, the 401(k) would be a good example.

In the 401(k), particular with this multi-fund product that we have developed, we believe and it comes from a substantial amount of contracts with existing clients, we believe that the average client would prefer to have the same person that does their payroll do their 401(k) administration for the obvious reasons of the linkage between the two.

So we think that the reason that we're going to get great take-up in the 401(k) world comes from the fact that when clients switch payroll and come to us to take their payroll, if they have an existing 401(k) relationship, now with our new product, we can do the recordkeeping on that regardless of who the 401(k) provider is.

That is what we think is going to drive that.

On the health insurance, the reason that we think or the drivers that we think that will cause us to be successful in health insurance has to do with the fact that we believe that this market is underserved, that the existing infrastructure or the existing distribution model that handles health benefits for providers is the independent agent network and the independent agents, just like in payroll 30 years ago when Tom started this Company, the independent agents, given a choice of calling on a small client or a large client, will call on a large client 100% of the time.

We've had, and this is anecdotal evidence, obviously, but we have had multiple people talk to us about the fact that small businesses -- that when they wanted to institute health coverage, they had to go find the agent, track the agent down and try to get the agent's attention to write the policy for them.

Likewise, the insurance providers have not been as interested in the small business environment as the large because they worry about the possibility for adverse selection on claims.

With Paychex, because we do the payroll for these clients and are able to screen out people being placed on payrolls after the fact because they have already discovered that they have got a health problem, it gives great confidence to the providers that they can enjoy a healthy relationship in the small business environment.

And finally, what I would say is the overall driver for both of these initiatives is the economy.

I would say the government has a lot to do with that.

If you listen to any election, you will here two of the issues that you will constantly hear being beat into the ground is improved health coverage for the American worker, and that responsibility being borne both by the employer and being pushed on the individual to take an active role in that, as well as retirement savings.

So as long as that continues to be the thrust, we think there is going to be more interest in Retirement Services.

There's going to be more interest in health benefits, and we think we are uniquely situated to take advantage of both of those occurrences.

Great, thank you very much.

T.C. Robillard.

Thank you.

Just a couple quick questions on PEO and Paychex Premier businesses.

PEO business had contraction in the fourth quarter looking at it on a year-on-year basis and obviously there was a tough comp from fiscal fourth quarter '05.

Can you give us an idea of how we should expect the growth rates going through fiscal '07 and then if you looked at those two businesses combined, is a 15% to 20% growth rate, which was the combined level for the fourth quarter more normalized going forward or should it be more along the lines of the 20% to 23% that you're looking for for overall HR Services growth?

First off, the PEO -- first off -- we don't look -- the PEO will continue to grow.

To me, the PEO is more an indication of what would be fantastic market penetration.

Our PEO really is only located in the state of Florida, a little bit in Georgia.

So it's one state.

We're obviously in all 50 and we have much higher client counts in other states than we do in Florida.

Florida is a good state, but California and a few others are massive.

So basically when I look at the growth, I'm looking at Paychex Premier and the PEO growth slowdown in some of the workers' comp comparisons, which right now are pretty much filtered out so you don't need to go into a lot of detail on those.

So I really look at the business together and the growth in those two businesses together has got to be in the 25% plus range for awhile.

So, we're very happy with where they are going, and I would not focus too much on the PEO.

I would really look at Paychex Premier.

Now, to throw a little more color at this, I was on a panel a few weeks ago at Goldman with the four leaders in this, which is ADP, us, Gevity and Administaff.

We are actually almost bigger than the combined of the other three.

It's pretty obvious that Gevity is going to go away from the PEO model.

Administaff is probably going to stay in it, and ADP is now offering something outside the PEO model.

So really you've got to look at these things together and when you look at the PEO, you just are looking at a Florida market where penetration is relatively high in the state of Florida.

The rest of the country is minuscule compared to Florida.

So I think you're looking at some comparisons that don't mean that much.

So I really look at them in total and the Premier is the big one to watch.

Okay, great.

Helpful.

Thank you.

Pat Burton.

Hi.

Congratulations on the quarter and the year.

My question, I guess, I will ask John Morphy is within the portfolio, what percentage of the assets repriced are let's say within a six-month time frame?

Thanks.

You mean the funds held?

Yes, the funds held.

The duration right now is about 2.5.

So it rolls over based on that duration.

And it is not disproportionately weighted in that number to any longer-term investments?

It's even across the duration?

No, it is pretty even.

One reason that has happened is once we buy an instrument now and we're trying to maximize when we buy, there is not much trading in the portfolio because the new rules on losses.

We used to be able to move the duration and do it to where you were investing on the period and trade them around, we don't do that anymore.

Last question.

Is a higher percentage now municipal bonds and does that impact your effective tax rate?

Thanks.

It is all municipals.

The only exception we will have coming for a little bit that will affect the rate slightly but not much is we have got some tax opportunities where we have got to create taxable income and in that case, we will use taxables in some instruments.

Okay.

Thank you very much and congratulations again.

Jeremy Davis.

Good morning, John and Jon.

Wondering if -- as we think about the growth in the Paychex Premier product over the past year, and then going forward, if you can help us maybe quantify the magnitude of those implementation fees relative to the administrative service fee for a typical client?

We gave you the guidance, so the factor is in there.

We gave you what the growth is this year and we gave you the growth next year, and we are thrilled with it.

So I think it is right there.

For a typical client though is it a small portion of or a certain portion of the administrative service fee?

No, the signup fee could be $1000 to $2000 at the front end.

Okay, that is actually helpful.

And then if you could maybe provide us with an update on Germany in terms of where you are in terms of size there?

The report continues to be along the lines of what we have talked about in the past.

We are pretty happy with where we are in Germany.

As I mentioned, we are now in four cities in Germany.

The German initiative is about two years old right now.

So we went to the first City, had good results, moved to the second city, had good results and opened up the third and the fourth city.

As we have talked in the past, this is an initiative that we see from a time frame horizon as the seven to ten-year time zone -- horizon -- time frame horizon.

Everything is going at plan or better.

I don't expect that it's going to be too much longer before we will be able to start talking about Paychex being the leading provider of payroll services in Germany.

From a modeling standpoint, we've tried to be pretty careful with you to say that you ought to not consider the international world in your models until we start to tell you that it would make sense to do so because right now, as fast as Germany is growing, we are a pretty large company, so it's results are very immaterial.

Very good.

Okay, thanks, guys.

Mark Marcon.

Good morning John and Jon and congratulations on the great year.

With regards to the SG&A during the quarter, obviously, it's just a variance of $5 million, which in the grand scheme of things isn't a big deal.

But I was just wondering did we include in the fiscal fourth quarter the hiring expense for the ramp up in the salesforce that is going to be in place at the very beginning of this year, and the sales numbers that are provided in the 8-K, are you already at those levels?

We are at some of them.

We have good share of a lot of them and we did hire the people ahead of time.

That cost is in there.

The SG&A costs, the easiest way that I think about the fourth quarter is really two buckets you ought to be thinking about.

One is the pre-hires that we did to make sure that we got off to a fast start, and the second is the extra commission that was associated with the sales team exceeding plan.

So, in my view, both of those are good expenses; one, to ensure that we have a good next year, and the other, the part where the commission that is paid for exceeding our sales targets, to me that is great expense because that is expense you only get if you're going to get the revenue.

Yes, and then did your facilities expenses jump in the quarter?

We had to put a building online.

So that is what it was?

Yes.

Facilities expense is one of our few that comes very lumpy.

I think the one year was down almost year-over-year, or flat, and then we put a new building in, in Rochester.

And so that is just basically -- that will stay flat.

There might be some increases, but I don't think it is disproportionate.

Okay, yes, because that was like a 4 million jump in the quarter.

Great.

As we think about, the guidance implies basically 15 to 16% fee income growth, ex float, ex options expense.

Should that be fairly consistent as the year goes along, or should we expect more lumpiness?

I think it's going to be pretty consistent except there will be some slightly more difficult comparisons in Q1.

Q1 is when the real jump in checks took place last year.

So when I look at calendarization, I see it pretty even throughout the year with the first quarter having a little bit of wind, not a lot.

And earnings, I think it's going to be pretty consistent again, where most of the earnings jump happens in the first quarter and you wind up with the quarter-to-quarter deviation being very small.

So, I mean, we could still see 14% net income growth in the first quarter.

I said -- we don't give guidance right down to the quarter.

I've given you how the breakout would be, and to go any further than that would be going further than we normally go.

Okay, and then what are you assuming -- you said you were assuming a consistent economy.

What does that imply in terms of what you are assuming with regards to the increase in the number of employees per client?

We basically assume check volumes are consistent from clients; that is where the economy comes in.

You start talking about the number of payroll specialists per client, we've got estimated growth in clients.

Now, it could get impacted by the economy.

If it does, you slow down the hiring of the payroll specialists.

Right, but I guess what I am trying to ask is if we were thinking about the number of employees per client or in general, the labor force is increasing by about 1.4% year-over-year.

That is what it has been doing.

Are you kind of building that in, in terms of thinking about number of employees per client, or are you just assuming constant number of employees per client in terms of the ones that you currently have?

Mark, it is actually more complicated than that because what happens is while we did some growth in the existing clients, we typically sell to smaller clients than the one we have.

So our checks per client actually stays about the same.

If it goes up or down, that is the economy moving it.

The economy will tend to move checks per client much faster than it moves client growth in the beginning, because at the bottom end you talk about bankruptcies, but people have to work.

And when people come down off the large companies, they wind up creating opportunities in the low end.

The low end, while it has a lot of the so-called, I call it chaos in it, it is also kind of consistent chaos.

But I think you are getting to a zone where we will watch and see what happens, but it would be impossible for me to predict what would happen there.

Yes, but in terms of what is baked in, you're basically not assuming --.

I am not assuming anything changes there.

Okay, great.

And lastly, munis, what percentage of the portfolio is in munis?

In the long-term, it's almost 100%.

How about in the short-term?

Short-term, it's probably 80%, and that only varies based on -- we always go in the short-term what the best net is.

If the best net is a muni, we are in a muni.

If the best net is a taxable, we are in a taxable.

Most of the time it's the munis.

Okay, great.

Thank you.

Brandt Sakakeeny.

Hi, good morning.

It's Rick Gray calling for Brandt.

You mentioned in the past that you're working on transitioning many of the core payroll clients to the major markets platform, and I guess 30% or so of new major market clients were from that core payroll this quarter.

Can we just get an update on how the transition is going?

First off, we are not transitioning them there; that is just where they come from.

The real difference between core and MMS, while we talk about it in terms of size of clients, it really is in technical needs of clients.

We have a lot of under 50s in MMS and we've got a lot of over 50s in core.

And what we have gotten to with our geographic expansion being even across the country, about a third of the MMS clients come from core as their needs get more technically complicated and they require that software.

So it is not an effort to transition away from the core payroll platforms to the MMS platform as a standalone or as an only offering?

No, we want them where they get the best service they need.

We like it when (indiscernible) that is all they need, but if they've got more customer, more complicated items -- not really custom, more complicated items -- then you put them in MMS.

So then the main impact is for customer satisfaction issues rather than a Paychex or (indiscernible) benefit?

The difference is the physical platform that is MMS, think of that as the software and all of the features of the software, is different in the MMS world than it is in core world.

The MMS world tends to have more complicated features associated with it.

So typically what happens is as a client has greater needs for the things they want out of their payroll platform, that may cause them to move to MMS.

You were right in everything you said except that we were trying to drive them.

Like I said, we're not trying to drive them from one platform to the next.

We want them to be on the platform that makes the most sense for them, and we have the best chance of customer sat from them.

Okay, thanks a lot.

[Sinel Daptari].

Just a housekeeping question.

Is it possible to break your payroll service revenues between core and MMS, please, for the fourth quarter?

It really isn't a meaningful stat any more, because you'll want to measure what core is versus MMS, and it is really is taking just two platforms to our client base.

Okay, thanks.

Charlie Murphy.

Thanks.

I wanted to ask about penetration levels for Retirement Services and workers' comp.

In retirement you're at 7% of your client base now.

You disclosed that 22% of your clients have 401(k) plans.

How much of that 22% do you think you can get onto Paychex over the next two to three years?

And then in workers' comp, you're at 10% of your client base.

How much do you think of your total client base is addressable for workers' comp and how much do you think you can get on the Paychex over the next two to three years?

I will answer the second one first.

I think in workers' comp, it's a typical example of a product that takes three to five years get going.

It's now got some good acceleration to it.

We are at 10%.

It's hard for me to tell you exactly what it could be, but I think eventually it could get to be as high as a third, but I can't say how long that will take because I just don't know.

One thing we do know with workers' comp, it's one of the product that really helps us on retention.

Because our clients know if they get off the payroll system, they are going to lose their workers' comp at the end of the policy year and they might not be able to get another one, which puts them in a lot of difficulty.

But I would say 10, hopefully going to 30.

On the other one, the Retirement Services, we are in the early days of this expanded investment offering, and we would like to believe we're going to get a good shot at that 22%, but we still just don't know how much.

And I think you will just see as the year goes on what momentum we pick up and we will learn more.

Okay, thanks.

Craig Peckham.

Good morning.

Can you give us a sense for what the current reinvestment rate is on the clients' funds portfolio?

No, the duration stays about the same.

It is not erratic and it's not lumpy.

Okay.

You want the reinvestment rate?

Correct.

I think we disclosed that in the 8-K.

I noticed in the 8-K that there is no current plans on the acquisition side.

Could you give us a sense for how you guys are thinking about next year, acquisition possibilities?

And I guess more to the point, what are the current platform -- the holes that Paychex would fill perhaps through an acquisition?

Let me take a whack at that.

On the acquisition piece, right now, our current plans are right in line with where you have seen us.

And that is that as we see smaller payroll companies that would make sense to acquire them, we do so.

We probably do a couple of dozen acquisitions a year of small payroll companies.

There are very few, if any, large payroll companies out there left to be acquired that we would be interested in.

So we certainly have nothing on the horizon relevant to any large acquisitions.

From the standpoint of buying companies that have solutions that we think our clients would need -- and Stromberg would be an example of one that we did a few years ago -- we have a unit in our business that is constantly looking at that.

We get contacted probably 15 or 20 times a week from different companies that have offerings that they would like to partner with us on to go to market, or they would like to see if we are interested in looking at them.

So from the standpoint of deal flow, we have a pretty phenomenal deal flow.

But again, we are pretty picky about which companies or which offerings we want to bring into the marketplace, and there is really nothing that we can predict for you.

If we see something that makes sense for our business and for our clients, you know our financial strength, you know how much cash we have on our balance sheet and you know the power of the currency that we have called Paychex Stock.

So our ability to acquire is quite high.

But our appetite is one that is -- the best way to say it is we would only acquire something if it absolutely made sense for us and it fit within our strategy and currently, we don't do very much of that.

Looking a little bit further out on possibly extending Germany, are there acquisitions in Europe that would deliver any value-add in terms of capabilities?

Right now, are focus is on Germany for a variety of reasons.

We are going to continue the thrust that we have in Germany and then once we have captured the market in Germany, then we will look to other countries.

From a philosophy standpoint, if there are countries that have the right profiles and attributes for us and the right profitability and ability to enter the market and be successful and so on, and they happen to have existing companies in the payroll business against small and medium-size businesses, it is a logical conclusion that we would look at potentially acquiring them versus build from scratch.

But right now, our international focus is exclusively Germany and it will probably be that way for the next year or two.

Okay, thanks and congrats on getting those four offices open before the World Cup.

[Gary Dixie].

Yes, hi.

Thanks.

I guess a high-level question.

As you continue to broaden the product portfolio instead of offering, have you changed at all the way you incent your people or maybe compensate them to think more and more about cross-selling and can you give us a sense as to your strategy and thoughts around that and if over the next year or two, it would make sense to start focusing a lot more on driving the cross-sell?

We have a great cross-selling system and basically it works.

There is a certain amount of commission that is paid for anything you sell.

And you're going to get help from your partner.

You're going to need his help because you won't know the product enough.

So if you get help, you're going to pay for it because if you don't share some of that commission based on the rules, the guy isn't going to continue to help it.

So we have very aggressive salesforces with challenging goals.

They have got to cross-sell some of them.

So it isn't really something you got to encourage.

It's right there and I have never seen a salesforce that had the cooperation across the various salesforces as I do at Paychex and I will let Jon add a few comments on this because he's got a lot of experience in this area.

First, we have a very disciplined approach to the way that we decide when to use specialized salesforces and when to use general salesforces.

As John said, we do do a very good job of cross-selling today and incenting the cross-sale, different than most companies.

The majority of the time we actually split commissions, so we are not paying additional commissions for the cross-reference.

If you look at our business as a whole, our business as a whole is a reference to sell type of business.

So we are used to doing that and if you look at the penetration of our ancillary businesses, I think you would have to conclude that the way that this network has been set up and the way that we are executing is actually pretty good.

Okay, you have driven a huge amount of success historically through the CPA channel.

In some of these emerging businesses, are there other types of alliances or nondirect salesforce alliances you are working on or thinking about, or is it much more the upsell of these products in your existing base?

In all of these businesses, we have a very disciplined approach about how we look at the markets that we think about entering, how we analyze the markets for current participants, barriers to entry, existing distribution channels.

Our history as a business, obviously, is to take advantage of other -- or to work with other potential partners and channels.

We know that the CPAs have been important to us as you mentioned.

Client referrals have been extremely important to us.

The bank partnerships that we have have been important to us and you know that we have also formulated a relationship with the AICPA.

They are exclusive to us in terms of referring us both for payroll and for 401(k).

As we look to these new businesses, it is natural for us to look at the existing infrastructure of the industry and where it makes sense to partner and where it makes sense to go it alone.

I guess maybe to add a little more detail to the question.

Historically, you have had such a big benefit from the nondirect salesforce.

Do you think, as you continue to see growth from beyond payroll areas, that you are going to become somewhat more dependent on your internal salesforce and does that have any longer-term or medium-term margin implications for the Company?

I think I would slightly disagree with your original premise.

It sounded to me like your original premise was that some large percentage of our clients that we get every year come to us without the aid of our salesforce.

That would not be the right premise.

The piece that happens is we get people referred to us and it would be absolutely right to assume that some large number of the clients that come to us are already prequalified, but they aren't necessarily predisposed.

So the salesforces that we have are very busy salesforces and I would absolutely not agree with the thought that said the reason that clients come to us is not because of our salesforces; it's because of the references.

They both work in conjunction with one another.

So it's maybe a bit of a nuance.

But I would tell you that I think I would disagree with you.

If the premise was that our salesforces today are not that productive, I would not agree with that.

So we have a pretty extensive salesforce today.

We are at about 2000, I guess 1800 when we finished the year.

We will go to about 2000 coming into this current year.

We're quite comfortable with the way that our coverage model is working and the plans that we have for the future.

Okay, great.

Then just two clean-up ones if I could.

Do you expect at this point any seasonality in terms of how the option expense will hit the P&L throughout the course of this coming year?

Not appreciably.

We typically give options in July, so we could have a little bit there, and that is the only piece, but we give options generally just in July.

Okay, and then just --?

Broadbased ones at other times, but they are not significant.

Okay.

Then just lastly, after what you just said a few minutes ago about acquisitions, I guess the big question is what to do with the cash.

Your dividend payout ratio is 50% right now.

You have never historically bought back stock.

Is there any thought that that second one might change or that you would consider a special dividend or taking that payout ratio higher?

You're sitting on an awful lot of cash right now.0

The three you talked about -- the dividend payout ratio is higher is probably the more likely one.

I don't see onetime dividends.

I think that is just a Christmas present to the people that happen to be in the spot on the right day.

And the formula to buy the stock back being significant enough to do has not been indicated yet.

So we're comfortable with a dividend payout anywhere between 50% and 60%.

Right now, we're at 50%.

I can't say what the Board is going to do because in the end, it is their decision.

But payroll companies also run with a lot of cash.

But I also agree; our cash balance is getting up there.

Okay, thanks a lot.

Elizabeth Grausam.

Hi.

Just a quick question.

As you're accelerating your hiring trends and your salesforce, how confident are you that you have the right systems in place and training in place to keep that new hire productivity level at the same rate in '07 or could you even improve it more even given the accelerated hiring?

At the risk of sounding to bold, we are extremely confident.

We have a long history of adding new salespeople into our fold.

We have had the benefit, if that is the way to say it, of getting too aggressive in the past and bumping into the point of diminished returns.

So we learned the hard way about what is the right number that we can integrate.

Our training, I would say, is probably second to none.

We have been recognized consistently in the work that we do in terms of training our people.

Our discipline, and this comes from 30 plus years of experience around sales and marketing, the discipline that is involved in the way that our sales teams are hired, are trained and then are deployed are as good as I have seen anywhere, including the 25 years I spent at IBM.

Great, and then another retention metric on your client retention.

Despite being at a very high rate given the market you're in, do you think there is still room for tightening that further or are you reaching a maximum point in your retention?

No.

As I said earlier, I am very happy with the progress that we have made to date.

And I think that we have still got plenty of room to go in terms of improving on that.

I have talked about this in the past.

The driver for me, the driver -- there tends to be several, is when you have retention -- when you have attrition rates in the 30s in some cases and in the 20s in other cases, that puts a big burden on our Company in terms of expenses associated with hiring new people, training them, deploying them, waiting for them to get productive, open territories for the time period that we have between when somebody leaves and we bring a new person on board and so on.

And while we are doing quite well, I think we can do better if we have lower attrition rates.

So we have spent a fair amount of time trying to look at what the problems are, whether it is the profiles that we are using in terms of the people that we are hiring, how we nurture those people once they are in our business, how we challenge them.

We've looked at a whole series of different things and we have made adjustments where appropriate.

I am convinced where attrition rates are in the neighborhood of 1% or 2% or 3%, I think most managers would tell you is unhealthy, that nobody can hire perfect people at that rate.

I think attrition rates that are in the midteens are perfectly attainable and it's something that I think we're going to try to get ourselves to over time.

Great.

Thank you very much.

Thank you.

At this time, I'm seeing no further questions.

Okay.

Again, I would like to thank you for your participation and interest in Paychex.

We closed out another good year.

We're looking forward to another one.

And I hope you and your families all have a safe and enjoyable summer.

So thank you very much.