FOOL CONFERENCE CALL SYNOPSIS*
By Debora Tidwell (MF Debit)

Paychex, Inc.
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911 Panorama Trail South
Rochester, NY 14625-0397
(716) 385-6666
http://www.paychex.com

UNION CITY, CA (March 27, 1997)/FOOLWIRE/ --- Paychex, Inc. released results for the third quarter 1997 on March 17th. They announced record net income of $19.3 million or $0.27 per share for the quarter, a 40% increase over net income of $13.8 million or $0.19 per share for the same quarter last year. Total revenue for the quarter was $195.6 million, a 27% increase over last year's revenue of $153.5 million.

NINE MONTH RESULTS. For the nine month period ended February 28th, net income increased 36% to $54.4 million or $0.76 per share compared to net income of $40 million or $0.56 per share for the same period last year. Total revenue was $531.1 million, an increase of 31% over $406.9 million for the first nine months of the previous year.

PAYROLL SEGMENT RESULTS. For the payroll segment, operating income in the third quarter increased 50% to $25.9 million from $17.3 million for the same period a year ago. Payroll service revenue was $97.9 million, an increase of 21% over last year's revenue of $80.7 million. For the nine month period, operating income from payroll services increased 33% to $71.1 million from $53.3 million for the same period a year ago. Payroll service revenue was $270 million, an increase of 18% over last year's revenue of $228.3 million. Strong growth in their payroll client base and improved penetration of Tax Pay, direct deposit, and check signing were major contributors to continued record performance in the third quarter. Paychex currently services 256,000 payroll clients with 169,000 utilizing Tax Pay, their tax filing and payment feature. In addition, there are 70,000 taking advantage of their direct deposit product and 26,000 use their check signing option.

THE PEO HUMAN RESOURCES SEGMENT. During the third quarter, Paychex Business Solutions, their PEO, and the human resources division which is formally included in the payroll segment were combined into one business unit -- PEO/HRS. The combination will enhance opportunities to grow the PEO/HRS business as they take full advantage of their more than 100-person human resource services sales force and the division's experience in providing many clients with 401(k), record keeping, Section 125 health care plans, worker's compensation, employee handbooks, and other human resource services. For the quarter operating income from the PEO/HRS segment increased 18% to $0.9 million from $0.8 million for the same quarter last year. Third quarter operations included approximately $0.4 million of startup costs related to the March opening of 6 PEO/HRS offices in Southern California. What drove the decision to lead with California for PBS is that the PBS concept in California from a market awareness point of view is pretty well down the road. Also, they have about 1/6 of their client base in California. In Southern California particulaarly they have around 25,000-27,000 payroll clients. So they thought that from a sales opportunity that was going to be one of the best bets to heighten their odds of being successful the first time out. PEO/HRS revenue was $97.6 million, an increase of 34% over last year's revenue of $72.8 million. Operating income for the nine month period from the PEO/HRS segment increased 451% to $4.3 million from $0.8 million for the same period in 1996. Revenues rose to a record $261.2 million, an increase of 46% over last year's revenue of $178.5 million.

PEO/HRS EXPANSION. Expansion of the PEO/HRS client base continues to be strong as they now have 12,000 work-site employees representing an increase of 35% over the same time last year. The 401(k) product now services over 2500 401(k) plans, an increase of 142% over last year. In fiscal 1998 their HRS sales people are going to have much higher quotas on 401(k)s and lower quotas on handbooks. They basically have let the handbook operations dwindle down as they have taken advantage of lots of opportunities and they are now at a core level which they will also need to support the PEO because they do give handbooks out to customers. They have very little recurring revenue in handbooks where 401(k) has high recurring revenue.

CONTRIBUTORS TO GROWTH. They are pleased with their excellent financial results for the third quarter. Outstanding new payroll client growth was accompanied by increased utilization of Tax Pay, direct deposit, and other ancillary products. They also benefitted from additional efficiencies in the processing of year-end W-2s and other tax filings. They see growing acceptance of their PEO/HRS products and anticipate excellent opportunities as they combine the resources and client experience of PBS and human resource services. It is the intent of management to continue funding the PEO/HRS expansion program from its operating profits.

INCOME STATEMENT. Most of the line items on the income statement are best evaluated by reviewing the segment information. Other income was up 22% for the quarter primarily due to their increased cash position. Their third quarter and year-to-date tax provisions for fiscal 1997 are approximately 28% of income before taxes and they expect it to remain relatively close to this for the full year. Next year they would expect this rate to go up slightly.

BALANCE SHEET. Total assets have increased just over $30 million in the quarter with most of the increase reflected in cash and investments. Approximately $20 million is from earnings while the other $10 million relates primarily to payroll accruals to be paid over the next 3-5 months. Worker's compensation reserves total $2.9 million and remain consistent with their policy of accruing for the maximum potential liability.

SEGMENT INFORMATION. As mentioned, during the third quarter they combined their PEO and human resource businesses into one segment for operating and reporting purposes. As they expand their PEO operations it has become increasingly evident that they should take full advantage of their HRS sales resources and their extensive client experience in dealing with normal PEO business operations such as 401(k) record keeping, Section 125 benefits, worker's compensation, employee handbooks, and other human resource services. All of this segment information has been restated to reflect this combination and additional prior-year information by quarter is available on the Paychex web site at http://www.paychex.com.

RISK RELATIVE TO RECENT PROBLEMS AT ESOL. The PEO is in its infancy for Paychex and while they are seeing some good success they think right now it is extremely material to their P&L. As far as worker's compensation, they have basically entered into a policy where they can accrue to the financial risk or maximum that it would be on a fixed basis. If the costs actually come in lower than a certain level, they can enjoy some rebates or refunds. Right now they have not booked any of that because it takes an actu"arial, helvetica" assumption and they are still too early in the policy years. But, basically, in these financial statements they have accrued almost $3 million of worker's comp and that represents the maximum liability that their subsidiary can have under its plans and all the arrangements with its people. They do think there is some upside, but again they are not going to book that until it is much more certain than what it is right now. It's the same thing in the health care. They have given away probably some profits on health care by making sure that they have fixed cost programs that minimize risks. Looking at risk, it's not just the risk of the marketplace because you can't get away from that completely, but they feel great about the credibility they have in reporting earnings and are doing everything they can to ensure they stay in that same posture. They are going to remain very conservative in these areas to ensure the best they can that they don't have any issues.

PAYROLL SEGMENT. They experienced a very strong third quarter. Their segment income was up 50% as they had one of their best year-ends ever from both a client growth and client service point of view. Year-to-date segment income is up 33%. They continue to leverage operating costs which were 27.8% of sales in the third quarter compared to 30.8% a year ago and also SG&A expenses which were 45.8% compared with 47.8% last year. The higher than normal leveraging was due to higher sales levels for ancillary products such as Tax Pay and direct deposit as well as higher levels of other payroll revenues. They remain quite pleased with their increase in client count and utilization of Tax Pay and direct deposit products. What is interesting, if you look at the operating income in the Payroll group for the first nine months, it is pretty much equal to what it was for the quarter. It is 26.4% on the segment number into the total number. Normally they see a little bit of erosion in the third quarter due to year end, but this year they had an abnormally high level of Tax Pay and they also had some great direct deposit activity as well as some incentive programs that they put on for their payroll specialists which has them doing a better job on client service and creating some other income. They think they changed the formula slightly here. Whether that will continue exactly as is in the future is hard to determine because they think there were some one-time items included in the numbers. They are very pleased and are seeing leveraging. They think they will still see some leveraging although it might not be as strong as it was last quarter. More revenues as well as the more they get in the ancillary areas will allow them to further expand margins.

PEO SEGMENT. They also had a good quarter in the PEO segment as they added 1900 new work-site employees and over 450 401(k) plans during the quarter. At the end of the quarter they had 365 clients, up from 200 a year ago. Their client growth is fine it is just that the average number of work-site employees in a client was a little less than what they hoped for but is probably a more realistic number as far as what they can expect. The quarter's segment income was up 18% and would have been up over 60% were it not for approximately $400,000 of expansion costs to open PEO operations in 6 locations in Southern California. These operations basically opened in the last week. The significant increases in operating income on a year-to-date basis are related to both the PEO and the HRS group reaching critical mass in terms of work-site employees, 401(k) clients, and other services during the year.

HEADCOUNT INCREASES. For fourth quarter, their plans this year are the same as they've been in the past for the payroll side. Typically they grow their sales force 10-11% and expect a small productivity increase. That will be the same process that's going on now looking toward the start of the new year. The official number of salespeople in payroll right now is 536 territories. There are 100 people in the combined HRS/PEO sales force. With the California opening it went up by about 6 people and that should be fairly constant now until they make a determination about what other markets they will roll it out to.

PAYROLL DEBIT CARD. They are ready to present the product offering. They have been offering it in Florida and Chicago but effective at the end of March it is going to be a product offering in four more branches. They fully expect it to be a quota product for their sales organization beginning in the new fiscal year. There is a lot of excitement at Paychex about it. How fast they are going to be able to sell the service is anyone's guess at this point, but they feel really good about it and they think it is going to be good. It is not going to be like the 401(k) business where they will have to develop a critical mass before they start making money because the access card to them, operationally, is just like direct deposit except there is a separate set of account numbers which isn't an operational issue at all. Basically it is just direct deposit. All they are doing is adding to the aggregation of all the direct deposit computer files from the country the next day the access card employee. From an operational point of view there is hardly any economic impact at all.

* A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. Note: Statements made by a company other than historical information may constitute forward-looking statements for which the company can claim protection under the Safe Harbor Act. Please consult the company's filings with the SEC for information on risk factors which might cause actual results to differ materially from the information contained in these forward-looking statements.