What drove Paychex's fiscal 1998 revenue growth?

Growth came from continued expansion of the Payroll client base and greater use of ancillary services such as Taxpay, Direct Deposit and Check Signing. The IRS EFTPS mandate, effective July 1, 1997, accelerated Taxpay client growth, and the HRS-PEO segment grew through gains in 401(k), Section 125 and PEO worksite employee counts.

How did the EFTPS mandate affect results?

The mandate required many small businesses to remit payroll taxes electronically, so payments became good funds one day earlier. This reduced tax-exempt investment revenue in 1998 and raised the effective tax rate to 29.1% from 27.5% in 1997. Management said a modest Taxpay price increase offset the revenue loss, and that growth benefits from EFTPS would diminish in fiscal 1999.

What is the company's exposure to ENS funds and interest rates?

Electronic Network Services investments totaled $1,154,501 thousand at May 31, 1998, and were offset by ENS client deposits of $1,150,484 thousand. The company's available-for-sale portfolio of $654.5 million carries a weighted-average yield to maturity of 4.5%, and the company invests mainly in AAA/AA-rated securities, with a benchmark duration of 2.5 to 3.0 years.

What are the company's expectations for fiscal 1999?

Management expects Payroll revenue growth to approximate fiscal 1997's rate as EFTPS benefits diminish, HRS-PEO revenue to grow faster than Payroll revenue, and operating income to increase for the full year. Corporate expenses are expected to rise at a rate similar to fiscal 1998, and the effective tax rate is expected to be 29.5% to 30.0%.

Are there any material legal or year 2000 risks disclosed?

The company reported no pending legal proceedings material to its consolidated financial statements. It estimated year 2000 expenditures of approximately $5 million and planned to have internal mission-critical systems compliant by the end of calendar 1998, while noting that third-party compliance could affect results.

PAYX 10-K FY1998 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed August 27, 1998. Cited figures are marked; the original filing is the authoritative source.

Paychex, Inc. reported record results for the fiscal year ended May 31, 1998, its eighth consecutive year of record revenues and net income.

Service revenues rose to $493,704 thousand^a (up 23.5%), operating income to $134,700 thousand (up 39.4%), and net income to $102,219 thousand (up 36.0%). Basic earnings per share were $.63 and diluted earnings per share were $.62. The Payroll segment generated $455,227 thousand in service revenue and $180,265 thousand in operating income, with 293,600 payroll clients at year end.

The HRS-PEO segment's service revenue reached $38,477 thousand^b, with 6,000 401(k) clients, 16,400 Section 125 clients, and 19,200 PEO worksite employees. Management attributed part of the revenue growth to the IRS EFTPS mandate, which accelerated Taxpay client growth but reduced tax-exempt investment revenue in fiscal 1998. The balance sheet at May 31, 1998 showed total assets of $1,549,787 thousand, including $1,154,501 thousand of Electronic Network Services (ENS) investments offset by ENS client deposits.

Stockholders' equity was $329,607 thousand^c. The company had $250.5 million in available cash and investments and $262.5 million in unused lines of credit, with no amounts outstanding. Operating cash flow was $136,761 thousand.

Management expects fiscal 1999 Payroll revenue growth to approximate fiscal 1997's rate as EFTPS benefits diminish, an effective tax rate of 29.5% to 30.0%, and purchases of property and equipment of about $30 million^d. The company reported no pending material legal proceedings and estimated year 2000 compliance expenditures of approximately $5 million, with internal mission-critical systems targeted for compliance by the end of calendar 1998. Its market risk disclosure states that a hypothetical 75 basis point rise in interest rates would reduce the fair value of its $654.5 million available-for-sale portfolio by approximately $13.4 million, or about 2.0%.

02—Key points

Key Highlights

Service revenues of $493,704 thousand, up 23.5%, and net income of $102,219 thousand, up 36.0%, for fiscal 1998.
Operating income of $134,700 thousand, up 39.4%, with the Payroll segment contributing $180,265 thousand in operating income.
Basic EPS of $.63 and diluted EPS of $.62 for fiscal 1998, versus $.46 in fiscal 1997.
Client base of 293,600 payroll clients, with Taxpay clients at 220.7 thousand (up 22.0%) and Direct Deposit clients at 104.4 thousand (up 36.5%).
Strong liquidity: $250.5 million in available cash and investments and $262.5 million in unused credit lines, with no borrowings outstanding.
Interest rate sensitivity: a hypothetical 75 basis point increase would reduce the $654.5 million available-for-sale portfolio's fair value by approximately $13.4 million (about 2.0%).
Fiscal 1999 outlook: effective tax rate expected at 29.5% to 30.0%, capital expenditures of about $30 million, and a planned 401(k) sales force expansion of about 40 people toward a goal of 10,000 clients.

03—Questions

Frequently Asked Questions

What drove Paychex's fiscal 1998 revenue growth?
Growth came from continued expansion of the Payroll client base and greater use of ancillary services such as Taxpay, Direct Deposit and Check Signing. The IRS EFTPS mandate, effective July 1, 1997, accelerated Taxpay client growth, and the HRS-PEO segment grew through gains in 401(k), Section 125 and PEO worksite employee counts.
How did the EFTPS mandate affect results?
The mandate required many small businesses to remit payroll taxes electronically, so payments became good funds one day earlier. This reduced tax-exempt investment revenue in 1998 and raised the effective tax rate to 29.1% from 27.5% in 1997. Management said a modest Taxpay price increase offset the revenue loss, and that growth benefits from EFTPS would diminish in fiscal 1999.
What is the company's exposure to ENS funds and interest rates?
Electronic Network Services investments totaled $1,154,501 thousand at May 31, 1998, and were offset by ENS client deposits of $1,150,484 thousand. The company's available-for-sale portfolio of $654.5 million carries a weighted-average yield to maturity of 4.5%, and the company invests mainly in AAA/AA-rated securities, with a benchmark duration of 2.5 to 3.0 years.
What are the company's expectations for fiscal 1999?
Management expects Payroll revenue growth to approximate fiscal 1997's rate as EFTPS benefits diminish, HRS-PEO revenue to grow faster than Payroll revenue, and operating income to increase for the full year. Corporate expenses are expected to rise at a rate similar to fiscal 1998, and the effective tax rate is expected to be 29.5% to 30.0%.
Are there any material legal or year 2000 risks disclosed?
The company reported no pending legal proceedings material to its consolidated financial statements. It estimated year 2000 expenditures of approximately $5 million and planned to have internal mission-critical systems compliant by the end of calendar 1998, while noting that third-party compliance could affect results.

04—Continue

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