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Paychex, Inc. Reports Record First Quarter Results

Paychex, Inc. (we, our, or us) (NASDAQ:PAYX) today announced record net income of $151.1 million, or $0.40 diluted earnings per share, for the three months ended August 31, 2007 (the first quarter), a 12% increase over net income of $135.1 million, or $0.35 diluted earnings per share, for the same period last year. Total revenue was $507.1 million, a 10% increase over $459.4 million for the same period last year.

We continued our tradition of record financial results as demonstrated by an excellent first quarter, on track to achieve our eighteenth consecutive year of record revenues and net income, commented Jonathan J. Judge, President and Chief Executive Officer of Paychex.

Our strong balance sheet and liquidity position have allowed us to continue to support our ongoing operations while returning value to our stockholders in the form of dividends and stock repurchases. We increased our quarterly dividend by 43% and commenced a program to repurchase $1.0 billion of our common stock, reflecting our confidence in the long-term growth opportunities of our business. In the first quarter, we repurchased $396.5 million of our common stock for a total of 8.9 million shares and we expect to complete the stock repurchase program in 2007, added Mr. Judge.

Payroll service revenue increased 8% to $361.5 million for the first quarter from the same period last year. The increase was due to client base growth, higher check volume, and price increases.

Human Resource Services revenue increased 20% to $113.3 million for the first quarter from the same period last year. The growth was generated from the following: retirement services client base increased 18% to 45,000 clients; comprehensive human resource outsourcing services client employees increased 22% to 381,000 client employees served; and workers compensation insurance client base increased 19% to 65,000 clients. Additionally, the asset value of the retirement services client employees funds increased 30% to $8.5 billion.

Total expenses increased 9% to $296.5 million for the first quarter from the same period last year. Growth in total expenses was a result of increases in personnel related to selling to new clients, retaining clients, and promoting new services.

For the first quarter, our operating income was $210.6 million, an increase of 13% over the same period last year. Operating income excluding interest on funds held for clients increased 14% to $178.3 million and improved as a percent of service revenues to 38% from 36% for the same period last year.

Interest on funds held for clients increased 8% to $32.3 million and corporate investment income increased 30% to $12.2 million, attributable to higher average interest rates and higher average investment balances, as summarized below:

For the three months ended
August 31,
$ in millions20072006
Average investment balances:
Funds held for clients $ 3,094.6 $ 2,969.2
Corporate investments $ 1,227.6 $ 1,001.0
Average interest rates earned:
Funds held for clients 4.2% 4.0%
Corporate investments 4.0% 3.7%

STOCK REPURCHASE PROGRAM

In July 2007, we announced our program to repurchase up to $1.0 billion of Paychex, Inc. common stock. Through September 26, 2007, we repurchased 11.2 million shares for a total of $500.0 million. Subject to changes in market conditions, we expect to complete our repurchase program in 2007 and anticipate that our weighted average outstanding shares for the full fiscal year ending May 31, 2008 (fiscal 2008) will be approximately 370 million.

OUTLOOK

Our current outlook for fiscal 2008, has been revised from that provided in our Annual Report on Form 10-K (Form 10-K) for the year ended May 31, 2007, incorporating the anticipated impact of lower investment income as a result of funding the stock repurchase program. In addition, this revised guidance reflects the 50 basis point decrease in the Federal Funds rate announced on September 18, 2007. Our anticipated effective income tax rate increased as a result of the lower expected tax-exempt income earned on our investment portfolios as well as the adoption of new accounting guidance related to uncertain tax positions. Our projections are based on current economic and interest rate conditions continuing with no significant changes. Projected revenue and net income growth is as follows:

Payroll service revenue 9% 10%
Human Resource Services revenue 20% 23%
Total service revenue 11% 13%
Interest on funds held for clients relatively flat
Total revenue 11% 13%
Corporate investment income (40%) (35%)
Net income 12% 14%

The effective income tax rate is expected to approximate 32.5%.

CONFERENCE CALL

Interested parties may access the webcast of our Earnings Release Conference Call, scheduled for September 27, 2007 at 10:30 a.m. Eastern Time, at www.paychex.com on the Investor Relations page. The webcast will also be archived on the Investor Relations page for approximately one month. Our news releases, current financial information, SEC filings, and investor presentation are also accessible at www.paychex.com. For more information, contact:

    Investor Relations:     John Morphy, CFO, or
                            Terri Allen             585-383-3406

    Media Inquiries:        Laura Saxby Lynch       585-383-3074

ABOUT PAYCHEX

Paychex, Inc. is a leading provider of payroll, human resource, and benefits outsourcing solutions for small- to medium-sized businesses. We offer comprehensive payroll services, including payroll processing, payroll tax administration, and employee pay services, including direct deposit, check signing, and Readychex®. Human Resource Services include 401(k) plan recordkeeping, health insurance, workers compensation administration, section 125 plans, a professional employer organization, time and attendance solutions, and other administrative services for business. Paychex, Inc. was founded in 1971. With headquarters in Rochester, New York, the company has more than 100 offices and serves approximately 561,000 payroll clients nationwide. For more information about Paychex, Inc. and our products, visit www.paychex.com.

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

Certain written and oral statements made by us may constitute forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995 (the Reform Act). Forward-looking statements are identified by such words and phrases as we expect, expected to, estimates,estimated, current outlook, we look forward to, would equate to, projects,projections, projected to be, anticipates,anticipated, we believe, could be, and other similar phrases. All statements addressing operating performance, events, or developments that we expect or anticipate will occur in the future, including statements relating to revenue growth, earnings, earnings-per-share growth, or similar projections, are forward-looking statements within the meaning of the Reform Act. Because they are forward-looking, they should be evaluated in light of important risk factors. These risk factors include, but are not limited to, those that are described in our filings with the Securities and Exchange Commission (SEC), including the most recent Form 10-K filed on July 20, 2007. Any of these factors could cause our actual results to differ materially from our anticipated results. The information provided in this document is based upon the facts and circumstances known at this time. We undertake no obligation to update these forward-looking statements to reflect events or circumstances after the date of issuance of this release, or to reflect occurrence of unanticipated events.

PAYCHEX, INC.

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(In thousands, except per share amounts)

For the three months ended
August 31,
20072006% Change
Revenue:
Payroll service revenue $ 361,486 $ 335,239 8%
Human Resource Services revenue 113,329 94,304 20%
Total service revenue 474,815 429,543 11%

Interest on funds held for clients (1)

32,315 29,831 8%
Total revenue507,130459,37410%
Expenses:
Operating expenses 159,315 148,084 8%
Selling, general and administrative expenses 137,227 124,936 10%
Total expenses296,542273,0209%
Operating income210,588186,35413%

Investment income, net (1)

12,237 9,416 30%
Income before income taxes222,825195,77014%
Income taxes 71,750 60,689 18%
Net income$151,075$135,08112%
Basic earnings per share$0.40$0.3611%
Diluted earnings per share$0.40$0.3514%
Weighted-average common shares outstanding380,539380,360

Weighted-average common shares outstanding, assuming dilution

382,255381,876

Cash dividends per common share(2)

$0.30$0.1688%

(1) Further information on interest on funds held for clients and investment income, net, and the short- and long-term effects of changing interest rates can be found in our filings with the SEC, including our Form 10-K and Quarterly Reports on Form 10-Q, as applicable, under the caption Management's Discussion and Analysis of Financial Condition and Results of Operations and subheadings Results of Operations and Market Risk Factors. These filings are accessible at our website www.paychex.com.

(2) In October 2006, the Board of Directors declared a 31% increase in the quarterly dividend from $0.16 per share to $0.21 per share. In July 2007, the Board of Directors declared a 43% increase in the quarterly dividend from $0.21 per share to $0.30 per share.

PAYCHEX, INC.

CONSOLIDATED BALANCE SHEETS (Unaudited)

(In thousands, except per share amount)

August 31,
2007
May 31,
2007
ASSETS
Cash and cash equivalents $ 110,614 $ 79,353
Corporate investments (1) 338,639 511,772
Interest receivable 35,373 53,624
Accounts receivable, net of allowance for doubtful accounts 210,982 186,273
Deferred income taxes 13,085 23,840
Prepaid income taxes 8,845
Prepaid expenses and other current assets 26,098 24,515
Current assets before funds held for clients734,791888,222
Funds held for clients (1) 3,525,070 3,973,097
Total current assets4,259,8614,861,319
Long-term corporate investments (1) 510,465 633,086
Property and equipment, net of accumulated depreciation 260,943 256,087
Intangible assets, net of accumulated amortization 64,767 67,213
Goodwill 440,308 407,712
Deferred income taxes 15,068 15,209
Other long-term assets 6,525 5,893
Total assets$5,557,937$6,246,519
LIABILITIES
Accounts payable $ 91,807 $ 46,961
Accrued compensation and related items 99,643 125,268
Deferred revenue 6,705 7,758
Accrued income taxes 47,943
Litigation reserve 25,662 32,515
Other current liabilities 45,357 42,638
Current liabilities before client fund deposits317,117255,140
Client fund deposits 3,528,373 3,982,330
Total current liabilities3,845,4904,237,470
Accrued income taxes (2) 12,885
Deferred income taxes 7,318 9,567
Other long-term liabilities 48,122 47,234
Total liabilities3,913,8154,294,271
STOCKHOLDERS EQUITY

Common stock, $.01 par value; Authorized: 600,000 shares; Issued and outstanding: 374,716 shares as of August 31, 2007, and 382,151 shares as of May 31, 2007, respectively

3,747 3,822
Additional paid-in capital 408,883 362,982
Retained earnings (2) 1,235,588 1,595,105
Accumulated other comprehensive loss (4,096 ) (9,661 )
Total stockholders equity1,644,1221,952,248
Total liabilities and stockholders equity$5,557,937$6,246,519

(1) The available-for-sale securities within the funds held for clients and corporate investment portfolios reflected net unrealized losses of $6.3 million as of August 31, 2007, compared with net unrealized losses of $14.9 million as of May 31, 2007. During the first three months of fiscal 2008, the net unrealized loss position ranged from $24.3 million to $6.3 million. The net unrealized loss position of our combined investment portfolios was approximately $0.5 million as of September 21, 2007.

(2) Effective June 1, 2007, we adopted Financial Accounting Standards Board (FASB) Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109. Upon adoption, we recognized the cumulative effect of our uncertain tax positions of $8.4 million, with an offsetting decrease to opening retained earnings. Long-term liabilities on our Consolidated Balance Sheets include a reserve for uncertain tax positions as resolution of these matters is not expected within the next twelve months.

Contacts:

Paychex, Inc.
Investor Relations:
John Morphy, CFO, or Terri Allen, 585-383-3406
or
Media Inquiries:
Laura Saxby Lynch, 585-383-3074

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