Paychex 1st Qtr 2009 Earnings Meets The Street's Expectations

September 24, 2008
FIRST QUARTER FISCAL 2009 HIGHLIGHTS
• Diluted earnings per share increased 3% to $0.41 per share.
• Total service revenue increased 7% to $509.9 million.
• Total revenue increased 5% to $534.1 million.
• Operating income increased 5% to $221.6 million.
• Operating income, net of certain items, increased 11% to $197.4 million.

ROCHESTER, NY, September 24, 2008 -- Paychex, Inc. (“we,” “our,” or “us”) (NASDAQ:PAYX) today announced net income of $148.7 million for the three months ended August 31, 2008 (the “first quarter”), a 2% decrease from net income of $151.1 million for the same period last year. Diluted earnings per share was $0.41, an increase of 3% over $0.40 per share for the same period last year. Diluted earnings per share increased at a greater rate
than the net income change due to a lower number of weighted-average shares outstanding resulting from the stock repurchase program completed during the year ended May 31, 2008 (“fiscal 2008”). Total revenue was $534.1 million, a 5% increase over $507.1 million for the same period last year. “Despite ongoing, weak economic conditions, we were again pleased to generate record levels of revenue and earnings per share for the first quarter. We have been able to continue our practice of growing revenues at a faster rate than expenses,” commented Jonathan J. Judge, President and Chief Executive Officer of Paychex.

“Operating income, net of certain items, as a percent of service revenues improved to 39% for the first quarter from 38% for the same period last year.” Payroll service revenue increased 5% to $378.5 million for the first quarter from the same period last year due to client base growth, price increases, and growth in the utilization of ancillary services. Human Resource Services revenue increased 16% to $131.4 million for the first quarter from the same period last year. The growth was generated primarily from the following: comprehensive human resource outsourcing services client employees increased 17% to 446,000 client employees served; workers’ compensation insurance client base increased 15% to 74,000 clients; and retirement services client base increased 9% to 49,000 clients. The asset value of the retirement services client employees’ funds increased 7% to $9.4 billion. For the first quarter, our operating income was $221.6 million, an increase of 5% over the same period last year. Operating income, net of certain items (see Note 1) increased 11% to $197.4 million for the first quarter as compared to
$178.3 million for the same period last year.

We maintain a conservative investment strategy within our portfolio of available-for-sale securities to maximize liquidity and protect principal. Our exposure has been limited in the current investment environment as the result of our policies of investing in high credit quality securities with AAA and AA ratings and short-term securities with A-1/P-1 ratings and by limiting the amounts that can be invested in any single issuer. As of September 22, 2008, we have sold substantially all of our variable rate demand notes (“VRDNs”). The VRDNs are money market securities held at par. No losses have resulted from these sales. We expect to be fully
divested of VRDNs by the end of September 2008. Funds from the VRDNs are being reinvested in agency discount notes. We have no auction rate securities in our investment portfolio. We exited the auction rate market in the early fall of 2007 and have never experienced a failed auction. We have no exposure to any sub-prime mortgage securities, asset-backed securities or asset-backed commercial paper, collateralized debt obligations, enhanced cash or cash plus
mutual funds, or structured investment vehicles (SIVs). We have not and do not utilize derivative financial instruments to manage interest rate risk. As of September 22, 2008, we do not have any position in prime money market funds.

OUTLOOK
Our outlook for the fiscal year ending May 31, 2009 (“fiscal 2009”) is based upon current economic and interest rate conditions continuing with no significant changes. Consistent with our policy regarding guidance, our projections do not anticipate or speculate on future changes to interest rates. We estimate the earnings effect of a 25-basis-point increase or decrease in the Federal Funds rate at the present time would be approximately $4.5 million, after taxes, for the next twelve-month period.
Projected revenue and net income growth for fiscal 2009 are as follows:
Payroll service revenue-------------- 5% — 7%
Human Resource Services revenue-- 18% — 21%
Total service revenue---------------- 8% — 10%
Interest on funds held for clients---- (25%) — (20%)
Total revenue------------------------ 6% — 8%
Investment income, net-------------(55%) — (50%)
Net income-------------------------- 2% — 4%

Growth in operating income, net of certain items, is expected to approximate 11% to 13% for fiscal 2009. The effective income tax rate is expected to approximate 34% throughout fiscal 2009. The tax rate is higher than fiscal 2008 due to lower levels of tax-exempt income from securities held in our investment portfolios. Interest on funds held for clients and investment income are expected to be impacted by interest rate volatility. Based upon current interest rate and economic conditions, we expect interest on funds held for clients and investment income, net, to (decrease)/increase by the following amounts in the remaining respective quarters of fiscal 2009:

----------------------------------------------Interest on funds held--------Investment income
---------------------------------------------------for clients-----------------------net
Investment income, net
Second quarter.................................................... (30%) — (25%)----------- (60%) — (55%)
Third quarter....................................................... (30%) — (25%)----------- (20%) — (15%)
Fourth quarter..................................................... (20%) — (15%)------------ 0 — 5%