Q4 2020 Paychex Inc Earnings Call

[music].

My name is Lisa and I will be your conference operator today.

At this time I would like to welcome everyone to their paychecks fourth quarter and year end results conference call.

All lines have been placed on mute to prevent any background noise.

After the speaker's remarks, there will be a question and answer session.

If you like to ask a question during this time simply press star and the number one on your telephone keypad.

If you would like to withdraw your question press the pound key.

Thank you I would now like to trying to call over to Mr., Martin Mucci, President and Chief Executive Officer. Please go ahead Sir.

Thank you it. Thank you for joining us for discussion of the Paychex fourth quarter in fiscal year 2020 earnings release, joining me today is that from Revera Chief Financial Officer. This morning before the market opened we released our financial results for the fourth quarter and fiscal year ended may 31st 2020, you can access earnings release on our Investor Relations Web page.

And our form 10-K will be filed with the FCC before the end of July. This teleconference is being broadcast over the internet and will be archived and available on our website for approximately one month.

I will start todays call with an update on some of the key metrics and our response to cope with 19, and then review business highlights for the fourth quarter effort will review our financial results for both the fourth quarter and full year and discuss our guidance for the upcoming fiscal year 2021, and then we'll open it up for your questions or comments in.

In May we provided you with an update on our business as we were responding to the impacts of cobot 19 at that time, we talked about the positive trends, we were seeing in our key metrics, but it was still early over the past month, we've continued to experience steady improvements across all of our key metrics. We are tracking on a weekly basis.

We are seeing a steady increase in paid employees and in the number of Worksite employees for HR outsourcing clients.

We have also continued to see an increase in sales leads and sales productivity.

One particular bright spot as client retention now more than ever our clients are experiencing their value proposition of paychex as we help them navigate through this very challenging time.

Hi credit the dedication of our Paychex 80 development product marketing and service teams worked tirelessly to ensure a seamless transition to remote working for us while providing the products and service to our cost to support our clients and their CPH. During a time of great concern for their businesses in fact, many times they're busy.

In the survival.

When the Paycheck protection program was introduced we were the first in our industry to release and online pay will report to help simplify the filing of the application for the loan as a client a paychex, we pre populated the payroll information that you had yes ahead of time, we have process. This report over a half a million times per claim.

It's in their CP A's to assist them.

We also partnered with refund Tech companies this to credit fund era, and lend deal to provide our clients with direct access to alternative lenders for the PPP loans, if they did not want to go through their own banking partner.

Overall hundred million dollars worth of loans have been process through these partners by our clients.

On June fit our the Paycheck protection program flexibility Act was signed into law relaxing the original requirements for the for businesses using use of the PPP loans, while continuing to qualify for loan forgiveness.

Shortly after we launch that ppb loan forgiveness estimator this tool, which I feel is the most comprehensive in our market simplifies the complicated process for our clients and again pre populate the paychex client data and provides a very simple way to add non payroll data to satisfy the new forgiveness requirement.

Yes.

Our service teams have provided excellent responsiveness to our clients seven by 24, even with much higher call volumes and call complexity, all while maintaining an even improving our client satisfaction and retention performance in fact client retention reached a new all time high.

Throughout this uncertain time, we've seen strong performance in multiple areas of the business. Surepayroll has continued to grow is more prospects are looking for intuitive do it yourself solutions. We have seen similar results in our flex virtual sales efforts. We're also experiencing increased demand for outsourced HR services, both PEO in asthma.

So due to the complex demands of the current environment.

Our leading suite of customizable solutions allows us to help any business larger small simple or complex do it yourself or fully outsourced with today's challenges.

Nicole Good 19 pandemic has been a challenge to our business. However, this challenge confirmed that the investments we've made in right and the recent past where the right investments cobot 19 accelerated many workplace trends and we have had the right solutions in place to help our clients adapt to their new unexpected environment.

Our five star rated mobile App provides clients and their employees with access to solutions from anywhere on any type of device. This along with our broad set of human capital management solutions and our comprehensive self service capabilities have allowed our clients to effectively manage our remote workforce and maintain productivity.

Maintaining employee engagement has been critical for our clients. During this time, especially as communications are rarely face to face whether it client needs to capture and track employee issues and request or simply check in with their people Paychex makes it simple to stay connected and maintain a productive and engaged workforce.

Source.

This can occur through our HR conversations tool or HR connect a tool that recently, we recently released that allows employees to submit their questions request and incidence directly to HR through an easy to use workflow. We have also seen an increase in the use of paychex learning and Adeline learning platform, which allows clients to retain employ.

We used by providing them with various training and professional development options, even while not in the office environment.

Our comprehensive suite of payroll solutions offers flexible payment options to help address employees needs or time sensitive situations.

We provide clients the ability to pay employees on demand for wages earned prior to pay day and make real time payments in minutes for time sensitive or emergency situations.

We continually enhance our data analytics and live report functionality faced with a rapidly changing business environment and market uncertainty providing clients with access to clear accurate information is critical for them to make decisions about future about the future for their businesses.

Recent updates to our analytics suite provide additional insights on labor cost and workers compensation information workplace illness, an injury trends and other HR details such as employee record updates and performance feedback.

Additional new enhancement enhancements are geared toward improved organizational collaboration in a streamlining processes through digital solutions, such as allowing for electronic work flow and E signatures on direct deposit in W. for forms simplifying the process of adding new workers, we offer many new self serve self service.

Capabilities for our clients employees that have streamline the process for both the employees and the client.

We have been a valuable business partner to our clients through this time, providing them with information to navigate legislation, helping them access federal loans and managing a remote workforce. Our extensive number of webinars have exceeded all records of participation with over 100000 clients and cpis registering for multiple.

Sessions.

While our solutions were invaluable to clients and adapting to the new environment of a remote workforce. They are also key to helping businesses as they begin to reopen and get back to business by using digital solutions. It helps clients integrate more contact list processes to reduce infection risk at their business.

In regards to our Paychex family, we have an ongoing commitment to our employees to ensure their safety at this time, we still have over 95% of our workforce continuing to work remotely and it has been going well given the success. We are accelerating some of our strategies to leverage a more distributed workforce, we are implementing plans to reduce.

Our physical location footprint among other expense savings initiatives.

These plants have recently been announced store employees and we are moving forward with these initiatives.

As we begin fiscal 2021, we see several reasons for optimism.

Our employees remain engaged and have continued to go above and beyond reacting in real time to continue to provide excellent service to our clients.

Our record retention and high quiet client satisfaction net promoter scores and client testimonials highlights the value, we provide our clients and their advisors as we help them navigate this challenging time.

We continue to return capital to our shareholders and our leading indicators continue to show signs of steady progress while much uncertainty remains as businesses are states pause or delay reopening as a result of cobot 19, we're confident that the value of our offerings is more relevant to our clients than it has ever been and we will continue to provide inning.

Next in services through online offerings were well trained and experienced service providers as we get through this together I will now turn the call over to Evren Rivera to review our financial results for the fourth quarter and the fiscal year effort. Thank you Marty and good morning, everyone I'll remind you.

Today's conference contains the customer forward looking statements that refer to future events, such as such involve risks. Please refer to the earnings release.

For more disclosure on these statements and related factors.

Additional periodically referred to some non-GAAP measures such as EBITDA adjusted net income adjusted diluted earnings per share set or please refer to the press release in investor presentation.

Discussion of these measures and a reconciliation of the fourth quarter year fiscal 2020 to their related GAAP measures.

Let me start by providing some of the key points for the quarter our fourth quarter.

Results reflected the impact of.

Conditions, resulting from Cowen 19, I'll provide a summary of our results and then discuss our full year fiscal 2020 result for the fourth quarter lift start their total revenue as you saw it decreased 7% to $915 million largely due to volume declines impacting revenue across our HCM solution.

Total service revenue decreased 7% for the fourth quarter to $890 million.

Within service revenue management solutions revenue declined 6% $662 million.

MP on insurance solutions revenue declined 11% to 228 million.

Interest on funds held for clients increased 14% for the fourth quarter to 25 million higher realized gains more than offset lower average investment balances and lower average interest rates earned in this part of the portfolio repositioning repositioning we discussed.

On an earlier call.

Average balances for interest on funds hope for clients declined 8% during the fourth quarter, primarily due to the impact of lower checks per client, resulting.

From cobot.

<unk> expenses decreased 8% to $615 million.

Decline was largely impacted by reductions in discretionary spending as result of companywide expense control.

Op income decreased 5% to 300 million and reflected an operating margin of 32.7%.

EBITDA decreased 5% to $351 million with an EBITDA margin of 38.4%.

Other expense net for the fourth quarter includes interest on our long term bar borrowings, partially offset by corporate investment income, which was impacted as you all know, but lower interest rates.

Our effective income tax rate was 24.3 for the percent for the fourth quarter compared to 25.8% for the same period last year.

Net income decreased 4% to 221 million and adjusted.

Net income decreased 3% $221 million for the fourth quarter.

Diluted earnings per share decreased 5% 661 cents for the fourth quarter and adjusted diluted earnings per share decreased 3% again at 61 cents.

Let's talk about year to date results.

Through the first nine months results were solid our full year growth those tempered as result of co bid in Q4.

But the year still reflected solid progress.

Total revenue increased 7% to $4 billion.

Service revenue increased 7%.

Again to a $4 billion with management solutions growth of 3% to 3 billion NPO and insurance solutions growth of 22% to $991 million.

Management solutions benefited from higher revenue per client.

And insurance solutions benefited from higher revenue per client.

I'm sorry from the full year of Oasis results, while insurance services remain challenged by lower workers comp premiums.

Interest on funds hub for clients increased 8% $87 million driven by higher realized gains, partially offset by lower average investment balances and lower average interest rates.

Up income increased 7% to 1.5 billion operating margin was at 36.1% comparable to the prior year.

Net income and diluted earnings per share each increased 6% to 1.1 billion and 3004 cents per share respectively. Adjusted net income increased 5% to 1.1 billion in adjusted diluted earnings per share increased 6% again.

$3 per share.

Let's talk about investments in income.

Our goal is you know us to protect principal and opt optimized liquidity, we continue to invest in high credit quality securities. Our long term portfolio has an average yield of 2.1% average duration is currently 2.9 years, but were little bit shorter.

On the curve.

Our combined portfolios have earned an average rate of return of 1.5% and 1.8% for the fourth quarter in fiscal year, respectively.

These are down from 2.1% and 1.9% for the respective periods last year as you realized.

Interest rates and number of tons this year.

Let's talk about our financial position, which were particularly proud of.

It remains strong with cash restricted cash and total corporate investments of over $1 billion as of May 31, 2020, and it really is highlights the strength of the company.

That we achieved that that results during a very challenging time.

Economic time for both us and our clients.

Funds held for clients as of May 31 were 3.4 billion compared to $3.8 billion as of May 31, 2019 funds held for clients very widely on a day to day base and averaged 3.8 billion for the fourth quarter and 3.9 billion for the fiscal year.

Our total available for sale investments, including corporate investments and funds held for clients reflected net unrealized gains of $100 million as of the end of May 31, 2020. This compares with $20 million as of May 31, 2019, the increase in net gain position, obviously resulted from declines in interest rates.

Total stockholders' equity was 2.8 billion minutes of the end of May 31, 2020, reflecting 889 million in dividends paid and 172 million of shares repurchase during fiscal 2012.

Our return on equity for the past 12 years remains strong at 41%.

Cash flows from operations were also strong we reached $1.4 billion for the fiscal year. That's an increase of 13% from the same period last year. The increase was driven by higher net income amortization of intangible assets and fluctuations in networking capital. So we ended the quarter very very strong operate.

Being position.

Cash and cash flow.

Let's talk about 2021.

Hum.

The outlook that I'm about to present reflects our current thinking regarding the speed and timing of the economic recovery I don't need to remind you of how volatile situation is.

And we'll talk about this in terms of.

Really the first half in the second half of the year.

We expect the impacts on the first half year will be significant and then there will be.

In improving sequential we will start improving sequentially and recovery is going to occur in the second half of the are primarily in the fourth quarter.

This outlook also includes various expense control measures, we have implement Len implemented, which I'll discuss shortly including a onetime charge that we're going to take in the first half of the year.

I'll come to that and discuss that more fully in the second our outlook is as follows management solutions revenue is anticipated to decline in the range of 1% to 4%.

PDL and insurance services revenue was anticipated currently to decline in a range of 2% to 7%.

Interest on funds held for clients is anticipated to be between 55 and $65 million.

Total revenue is anticipated to decline in the range of 2% to 5%.

Adjusted operating income as a percentage of total revenue is anticipated.

To be between 34, 35%, which excludes as I mentioned earlier, the impact of onetime costs, which I will discuss in a moment.

Adjusted EBITDA margin for the full year 2021 is expected to be between 39 and 40%.

Other expense net season anticipated to be in the range of 30 to 35 million.

And the effective income tax rate for fiscal 2021 is expected to be in the range of 24 and a half the 25%.

Just remind you too that we know.

Included in any of these.

Projections, what we expect benefit from stock comp expense, we adjust set out so that could change depending on what benefit we get during the year.

Adjusted diluted earnings per share is expected to decline in the range of 6% to 10%.

Now as Marty mentioned earlier.

Given what we've experienced over the last several months, we are accelerating a range of cost savings initiatives.

These include head count optimization in addition to reduce discretionary spend.

In addition, we're planning an acceleration of our long term plan to reduce our geographic footprint and this is the majority of the charge that I'm about to described.

We anticipate recognizing onetime costs in the neighborhood of $40 million.

Most of which will be incurred during the first quarter.

Our guidance for adjusted operating margin adjusted EBITDA margin and adjusted diluted EPS, which I'll remind you again or non-GAAP measures excludes this one these onetime costs again $40 million, we expected to be primarily in the first quarter and it is primarily due.

Directed at.

Geographic optimization, a plan that we've had in place than that we've decided to accelerate given current conditions.

Now.

Given you full year, let me give you some color on the gating one of the things that I would say is we will post on the website.

Our presentation you can take a look at it.

It will provide some some detail on this also so hopefully that will be clear once you regret it but now let me just describe what.

What we're anticipating.

We currently expect revenue to be the most impacted during the first quarter fiscal 21.

With each quarter improving sequentially.

We view fiscal 2021 in terms of first half in second half of the year.

So let me talk about the first half.

We anticipate that in the first half management solutions revenue will be down mid to upper single digits.

And PEO and insurance solutions revenue will be down in high single digits too low double digits.

Adjusted operating margins, excluding the onetime costs that are just mentioned are anticipated to be approximately 32%.

Now specifically Q1.

I would say this the greatest impacts going to be felt in that quarter in total revenues anticipated to be down high single to low double digits range in Q1, and operating margin is anticipated to be approximately 30%. So.

Be sure to bake that into the model.

In the back half of year, we anticipate greater improvement.

With much of the recovery occurring in the fourth quarter.

So we see it accelerating into the fourth quarter end in the fourth quarter, it'll look much more lumpy on normal quarter pre coated.

Management solutions in PEO and insurance solutions revenues are expected to grow in the low single digits and when I say low single digits I mean low.

So it is the combination of two three and Q4, because Q3 is a big revenue quarter and we still don't anticipate full recover in Q3.

With more of it occurring in Q4 combines to create low single digit revenue growth.

Adjusted operating margins are intensity anticipated to be approximately 37%.

Reflecting both higher seasonal margins in the third quarter and the improvement that we expect to see.

In revenue so im talking about the second half of the year.

Where we typically see higher higher margin.

Adjusted earnings per share again in the.

In the second half are expected to be flat to down low single digits. So let me refer you back to the Investor slides you can think through all of that.

Gating.

And with that I will turn it back over to Mark. Thank you Aaron and Lisa will now open up for questions. Please.

At this time I'd like to remind everyone. If you look Mike to ask a question. Please press star and the number one on your telephone keypad.

And just a moment to come path acuity roster.

Your first question comes from the line of Ramsey El Assal with Barclays.

Hi, Good morning, gentlemen, this is Damian operands a so.

Good to see some of the improvement in trends here, so sequentially I guess.

The Big question here for me is on 2021, just how you characterize that the conservatism in your guidance you know in other words are you.

Are you assuming it's some sort of improvement in the key metrics throughout the year or to what extent is it sort of a bottoming out of trends in that and then you growing over them just some color there I think would be helpful.

Yeah. So.

That's a fair question Q1, obviously as I just mentioned, we see the most impact, but if I think about where we have been over the last seven or eight years, we've seen sequential improvement I'm sorry, several years several weeks it felt like year sometime.

We have [laughter] showalter, we've seen sequential improvement week by week.

That rate of acceleration in what's a little bit tough to call, but certainly the bottom. It's in Q1 and then we expected.

To be better and we expect that to continue through the.

The remainder of the year I would say relative to what we.

Back to see three four weeks ago as we started the year, we're doing better. So there is lots. So there are a lot of signs.

At that point that that we're seeing the.

A recovery occurring.

Now how sustain and how quickly that will occur we'll see as we go through quarter. So that that's the commentary certainly think in the back half of the or you're going to see.

Substantial recovery.

Yeah that makes sense.

And maybe if I already just zoom out here that.

Maybe just a question for from Marty.

Can you maybe just give some updated thoughts about the long term composition of the of the company's business lines. Here you know obviously the endemic it's changed a lot for a lot of people that are you looking more seriously to move into.

Jason area is our businesses in five years, just the paychex model looks similar to it as to how it is today, where do you think that changed a little bit.

Well I think definitely we're we've continued to move more toward being an HR company and you know HR I think many times people still think of US a small business payroll, but as you could see our read the way that revenues have grown.

We have become more and more of an HR services company for small and midsized businesses and I think that will continue I think when you see.

We will evolve ads and that we have continued to evolve in the way that that is needed. So HR used to be about.

It HR administration, then it brought in to become more about you know kind of pushing to the front end of recruiting and staffing of the of your firm and now it will become I think even it may become at least in the short term for how do you bring people back to a physical location. It certainly has become more about how do you handle remote.

I think the investments we've made in online in our SaaS products and mobility.

All of our design has been very helpful. Because as I mentioned, you know you'll still see US is I think is an HR company, but I guess, what I'm, saying as it becomes much more all encompassing and that definition of HR gets broader and broader and I think we've been able to capture on that everything from staffing and recruiting too.

Paperless administration from start to finish of course retirement, and insurances health and workers comp.

And then you'll also see the analytics now playing a bigger role in HR as well in helping people make decisions businesses, who can't afford that kind of stuff can come with us to get the data analytics to help them make decisions and and so forth and and I think an awful lot of it is all in also has turned about training and development of employees and now.

With our learning management system that we offer you know that was perfect timing to be able to train new employees and develop employees from a remote location, which has been really critical need for our clients. So I think you know in five years paychex should be known very much as an HR company that delivers HR some.

Port of includes everything from staffing recruiting the payroll retirement insurances you name it but it's constantly evolving what that is defined as and I think our technology as positions us extremely well now and towards the future.

That's great.

Thanks, guys and hope you say taken healthy.

Thank you too.

Your next question comes from the line of David Togut with Evercore Evercore ISI.

Oh, Thank you good morning.

I will expand upon the performance to the key performance indicators in the fourth quarter I think.

Marty you talked on the business update call about a number of businesses being on hiatus spending their processing I think as of May 19th checks per payroll were down double digits. What are you seeing in particular on this KP I.

And then my follow up really relates to new bookings trends.

In the fourth quarter and how the Salesforce is operating still mostly remote some and person meetings so for sure.

Sure David I'll start with on the key metrics, yes, the basically what we referred to as suspended businesses. So they hadn't that going out of business, but they had suspended processing and ended that is down less than half of what we were at the peak and that continues to come down has continued to come down each really each.

Week, So we're seeing businesses come back now I will say that they're not always coming back with full employment that they had before so if they had 20 or 30 employees. They might have 15 or 20 now and you can expect obviously that would happen as businesses are at 50% capacity.

Restaurants in places like that but we are seeing we've seen more than half of the suspended businesses come back, which we think is very good actually relatively quickly.

And we're seeing the checks improve and the Worksite employees improved as well in the PEO in Esso offerings. So that change in base basically has happened quite quickly as well so they're bringing back employees a faster than than we had expected and hopefully that will continue.

The trend, it's certainly been continuous improvement on the sales side.

We are still remote for the most part we are starting to visit clients. If they want to be visited and the rep is comfortable visiting we've taken all the necessary safety protocols, but we're finding that you know some clients want to meet and person, but frankly, most clients. The majority of our sales are coming.

From a remote on online and in discussion over the phone.

And that is working very well I'm actually amazed that the number of final sales we ended up within the fourth quarter given the remote workforce that we have we also permanently shifted a number of our double digit percentage of our SMB, our small business sales reps to two inside.

Sales because it was going so well of course, we've been doing virtual telephonics sales for many years, but we're increasing that number because of the success of it and the productivity of that ended tools that we had in place already for virtual have continued to work well so sales productivity coming up checks per client coming up and suspended clients.

Who are suspended processing had been going down quite dramatically at front anything you want to add I think I think in addition to all of those metrics that David.

We track a number of other metrics, including everything from.

Hours punch took time.

Time recorded two funds flow through the systems and they're all showing a pretty significant recovery from the depth work.

Five weeks.

Understood. Thank you stay safe and healthy okay. Thanks, David.

Your next question comes from the line of Stephen Walker with Morgan Stanley.

Great. Thanks for taking my question, Marty and Efrain, you guys are staying safe and well.

Thanks, maybe just following up on David's question around the CPI is moving forward towards what you're seeing now and I believe Marty your comment about client retention being up nice it's ever been.

First we can we get that specific number I think the last we had seen a number there was 82 or just hovering above 82% and separately as we think about the revenue dynamics.

Given client retention is typically a bigger piece for sensitivity on the revenue front, but the revenue guide seems to obtain is stayed roughly the same the down to defy sounds like the low to mid single digit decline you gave in mid May would it be fair to say that the bookings activity, although holding up relatively better than what you expect it has gotten pretty well.

Yes, if the retentions gotten maybe better or were you already assuming that retention would have gone up.

No I think we assume that the retention is around 83%. So an all time high for US now we were conservative. So when you look at that and we still have the suspended clients, even though they are less than half of where they were at the peak. This is still rapidly changing so we're trying to make sure we understand how.

Many clients are suspended and how many may permanently go out of business. Our retention is the best that's been but we'd like to give it another.

Month, the kind of see if those all those clients come back or how many are lost and that kind of thing bookings no. I mean really sales have continued to be pretty steady. So we haven't seen any degradation in that in sales look they're not where they were pretty cold, but yet, but they are definitely improving and.

So I don't I think you know it's just all in those ranges I Wouldnt say anything sales has been improving and losses and retention I guess I'd say has definitely at an all time high but we're waiting to kind of make sure over the next 30 to 60 days that you know all those clients that we retained you know have really been reach.

Stained and are not just in the suspended state that then go out of business.

Our losses to competitors have been remarkably and improve so I don't think it also we found a time where people were not moving so they're not moving to competitors to maybe pick up but an extra discount or something like that at a time when you know they need our help.

Particular, with the loans and other forgiveness calculators that we've gotten a lot of client testimonials on so we've held more clients, we definitely have done better in not losing clients per price or four to competition.

And then I think the conservative nature.

Even as just kind of watching what happens here in the next 30 to 60 days.

Okay great.

A lot of commentary I appreciate the comments there but.

I could just quickly follow up on how you guys just thinking about the underlying assumptions efron really appreciate the granular look at fiscal 21, the first half even the first quarter versus the second half could you talk to how you're thinking about the underlying employment rate I mean, I don't know if you're able to put a specific number on it but maybe a range of where we'll be.

As we get to mid year, maybe the ended the fiscal year, what you're thinking of the exit rate and also how you're thinking about the disparity between employment in different regions in states driving that because clearly we're seeing very.

Very different experiences across states with either you know I don't know whether you want to call. It a second wave rising or a continuation of the first wave for some states are really moving towards reopening versus those that are now closing up just wondering how you guys are thinking about the underlying assumptions broadly.

Yes, So let me let me talk to the students so so.

When when you have a shock like this the the.

The impact is felt obviously you felt that in April may and that can we do continue into June July and August which is our our first quarter and I suspect others will report similar similar impacts.

We're.

In the same range.

Our assumption is that as we get through the first quarter, we start to see improvement, but we're not assuming that we see improvement.

To pre coded levels in Q2 as matter of fact, we don't see that occurring really until the tail end of Q3.

In the forecast by the time, we get to Q4.

I'd say that.

We're now looking in an environment, it's much closer to where we were say in Q3.

Of this year than where we will have been in the first three quarters of the year.

And I would say that the that part of the reason for that is that.

Well understand what the recovery.

Our clients is what's been happening with checks.

What where bookings growth is anticipated to be I think we've done a lot of simulation and modeling to get that reasonably correct.

And so.

I would say this forecast assumes.

Very modest gradual improvement through the first three three quarters of the year and then in the fourth quarter. Obviously, you have an easier compares so so we expect to see results oh much better than than certainly the first quarter and we're going to monitor it I think that.

To your point, we can tell by vertical whose impact that we can tell by state I would say the fact that New York in California are are struggling a bit in terms of reopening.

Doesn't doesn't help the outlook, but it's baked into our thinking.

And also we assumed some recovery.

In certain states based on verticals that are in that state for example, Florida in hospitality. We soon that that's going to take a while to recover and that will will start to see that as we head into next year because.

It makes sense to us that that's what will occur, but I would say in the first three quarters. We are we're cautious about how quickly that's going to occur.

That's a much appreciated on all the commentary stay safe guys. Thanks.

Your next question comes on line of Jason Kupferberg with Bank of America.

Hey, good morning, guys.

Maybe just to pick up on that the hi, Efron, maybe just to pick up on that discussion right a little bit I'm. Just curious maybe on some of those states that you'd mentioned that have gone through these partial re closings, if you will Florida, Texas, Arizona.

Seeing increasing clients that have had to go up go dormant for a second time.

Because of a re closings.

Additionally, take the front of that other first part of that I think you know we've seen some but not too much yet at this point, it's been relatively recent of course in this month. So we haven't seen too much of that yet and the funny thing has some of the southern states still are performing the best when you look at our small business index and when you break it down by.

Region, the south, particularly with construction now leisure and hospitality gets hurt and that will be IRT by some of these closings kind of coming back some of the bars and some of the restaurant well construction is still doing pretty well and we have a number of clients in that construction business and that support kind of around construction. So.

So you know home sales are up new home sales are up double digit still and a lot of that is the south and then some of the commercial construction is still up in the south and particularly Florida. So I think that won't hurt us quite as much obviously, the leisure and hospitality will will bounce around a bit but.

We havent seen you know like eight and we haven't seen at least at this point in our indicators. When we look weekly any major drop in those states that have no seem some higher recurrence recurrence I guess are accounted continuation of recurrence and closures.

Okay. That's helpful and I wanted to just asked for a little bit more color on the comment about the client retention hitting the all time high 83% is that for the full Q4 without a full year fiscal 20.

Oh man and maybe as part of that can you sort of break apart the moving pieces of retention I know you mentioned takeaways are down case, there's not a lot of switching going on so just wanted to understand you know in the in the churn that you are seeing what the kind of mix of out of business first you know.

This is a third party takeaways, what that's looking like right now and what you're assuming for the retention number in 21.

Yeah, I think you know the hard part right now as I mentioned was that the suspended accounts and a in so it is our best retention and it has been because there were fewer takeaways as we said and.

And less leaving for price out of business was up slightly but but overall. It you know I think that was probably a pretty consistent maybe up slightly the improvement it would come from competitive takeaways or price and and in that and that's the scheme of things.

Right now we'd expect that given the really high. We also are hitting great net promoter scores and client satisfaction. We have got great client testimonials really think clients have you know felt like between the payroll report that help them make it easy for them to file for the PBP loan and then the loan forgiveness estimator.

That is sold comprehensive we've gotten a lot of great feedback and I do think Thats helped drive the value to our clients even more you know it kind of in a crisis when they really needed as they found that we were there and very helpful to them important. So I think thats helped the only thing that I said is we played a little conservative as we'd like to see how the next month or two.

Hi, Paul out for the other suspended accounts again, they fall in more than in the half of the peak, but we just want to get a sense of you know do we hold at that level of retention or you know or were these some accounts that were suspended but there's still in business, but they might not make it longer term right now at all you know by now.

I would've thought that many of those would have declared their out of business I don't think the the there could be an impact from the re closings you know if you're a bar restaurant anywhere close then you open back up at 50%, but now you have been closed again, you know does that have an impact or not we're not sure yet, but but right now were very positive based on all.

The facts that we're seeing.

Okay.

As to clarify the 83% number was for Q4 or that was full year fiscal I'm, sorry, full year full year I'm sorry fully.

Where did you exit the year on that metric.

Well 80, 83% to.

That's the that's the year the ended the year.

Hi, good be engineer, Okay. Thank you guys okay.

Your next question comes from the line as Kevin Mcveigh with credit Suisse.

Great. Thank you Hey, I.

I guess what shows the decision.

Yeah, Hey, Marty the $40 million charge.

No you would come in the process is given that it sounds like a lot of its occupancy during the latest screens that specific geographies and you just kind of the success that you saw.

Forced to do remotely that they tend to Joe that decision I guess, just any additional thoughts are on that.

What's the margin impact can be longer term from those actions.

Sure I'll start with the we've we've been we had a plan in place that as we had a number of offices across the country that was our model and what we were finding is you know as we consolidated as office has got smaller we were consolidating to regional service centers.

We could put better technology in place and so forth and we had a number of people working from home already and in fact, when we would close a kind of a remote office and we would let the experienced people many of them work from home from a service perspective, because we had all the tools in place when we saw the.

The that 95% of our employees were working from home and that our client satisfaction. Even went up in our retention was even stronger we look take a look at is this a way to reduce costs, a little bit faster and we decided to accelerate closing a number of physical locations, allowing people to work from home even in the.

Those local areas and from a service perspective, and that we could save a tremendous amount of lease expense.

In rental expense on the physical location. So that's why we decided to accelerate it that's already been announced to our employees and and we're already moving forward and taking those those steps and that was the majority of the 40 million. There was also as.

Aaron mentioned there was also some reduction enforce but it was quite small less than 2% of our employees.

Still painful to do but as we worked through the closing of certain offices and so forth and some other reorganizations.

We also took took those.

Those actions as well.

And on your second question, Kevin If you take before you tax effect of 40, you can figure out what.

Okay.

We anticipate that.

That would be that will come out of the cost structure going forward.

That's helpful. Maybe just one quick follow up decides it assumed funded no incremental cellulose stimulus or you just you know with absolute Vince concern that you know if some of the seats don't get incremental funding there could be some layoffs things like that is embedded in the guy. This is well are lumpy who might be mother.

<unk>.

Yes.

Yes, I don't I don't think we're at that level right now Kevin I mean, literally I would say if you were in our management meetings every week, we're looking at different scenarios in terms of both.

What.

Ideas that that are coming out of Congress.

Extension of Ppt, what the impact of all of that is we're not we're not at a granular level, we're saying hey, if that happens it's going to result.

6%.

Still early.

To do that.

Thank you very much okay.

Your next question comes from the line of Andrew Nicolas with William Blair.

Hi, Good morning, I'm, just hoping you could compare the resiliency of the CEO business. The the payroll business in terms of the alper.

Around client is there any major difference in a way to client bases have reacted.

Current environment and how is that impacting your outlook for each business.

Well I think I'll start and then as government if he wants to add some of the do it I think we saw you know a drop in both a you know obviously with layout with furloughs and things like that what you saw in the small in the small business on the payroll side business is actually shut down or were closed. So you had no employees there on the piece.

Outside usually is a little bit larger client base little bit larger average client and a and they reduced their employees.

The worksite employees, but both have come back pretty well and the Worksite employees basically what we referred to as change in base. So change of existing employees being paid within the Worksite employees. You don't have as bounce back I think a little bit better than we expected on the PEO side. There was a great demand for both CEO and asked so I think this has helped.

Clients, who I would say on the PEO ASO site more people have moved toward that HR outsourcing. Because this is just too difficult for them to handle that they have you know 25 to 35 40 employees.

Which is kind of our average size on the PEO clients. You know I think more have moved that way because of the need in the complexity of the regulations and how do you bring people back how do you furlough when do you bring them back what how do you handle all of the changes that have been put in place and up for insurances, and so forth and on the small business side.

I think we've also seen that come back, but that one's been a little bit more about either being open or close kind of thing where the PEO has been kind of stayed open but reduce their employee said both are showing improvements, though in a little bit better than we expected. So we certainly hope that that continues.

Yeah, Andrew what I would add is that the nature of our PEO business is a little different than nature of our SMB business in terms of bids.

Geographic scope and so our PEO has more concentration state or discussed for and as a consequence. If you just isolate that factor we would have more exposure to hospitality in some of the industries that have been part when we looked at the data it was pretty clear that they were there was almost Uh huh.

Your trigger reaction in terms of.

Reducing employees, but to Marty's point, we're starting to see them come back I would say over index a bit in some parts of business on hospitality. So we probably have been hit a little harder than perhaps other people other companies may be but we're also now starting to see.

Pretty rapid recovery in terms of Worksite employees, I think that the state of how your p. or reacts in this environment is going to really depend on where your concentration is if you were in a concentration in the state or you have a heavy concentration of say thats been shut down youre going to end up with one result.

If you if you have one where the.

A lot of works and we're in the state that remain relatively open but different.

Point, but just to reiterate what Marty said, so we didn't see clients necessarily stopping.

They are processing saw was.

Clients, reducing significantly there crossing and now adding a voice back.

Great Great. That's that's very helpful. Thank you and then sticking with P.L. I'm just wondering if there's any update to how you're viewing the M&A opportunity set there, meaning how much are you kind of considering the volatility or the variability in in the economic backdrop in considering future deals and are you at a point each.

And now where you might be comfortable.

Moving forward with something like that thank you.

Sure, Yes, we're still very interested.

I'd say, we think the PEO business you know, it's a it's a growing part of our business and and we do think that Theres M&A opportunities out there we're staying in touch.

In the you know in this environment, it's a little bit difficult, obviously, one from a remote working just the due diligence and so forth, but we're staying in touch with certain opportunities and we're continuing to watch those it doesn't make it a little bit more difficult not only the remote piece of diligence, but to understand where they've dropped employees or or dropped clients.

You know, what's the what's the take now what's the valuation and many of the possibilities of acquisitions are also a little bit nervous about you know selling at this point unless you're unless we're willing as a buyer or any buyer is willing to kind of overvalue expecting how it's going to bounce back. So it's a little bit of a tenuous time to buy but we're staying.

Very close to that market and very interested for the right opportunity.

Great. Thank you Okay alright.

Your next question comes from the line of Bryan Keane with Deutsche Bank.

Hi, Brian.

Hey, guys.

Thanks for taking my questions.

Just following up on the discussion thinking about the suspended.

Clients, you know what percentage of those fall in that bucket still or remain dormant is it is it 10% of the base, 20%. The base I just don't have a good sense about.

All much much smaller Brian much smaller I don't think we've given out the number but one it's dropped in half even at its even at its peak.

It wasn't anywhere near 10%. So it's yeah. That's that's a good question actually so that people feel it gets too large it's not that large we haven't given the number but it's it's not that I wouldn't it's not even.

Not even 10% close it's probably frankly, when you put it all together, where we are now might be 1% to 2%. So we probably over discussed that for the number that are out there.

Wow, Okay. So, it's only 1% to 2% that look like they could close down or.

You know our fail I guess at this but are still one yeah that are still suspended a and suspended as a result of coal, but because we we don't we always have some suspended but.

That our seasonal and things like that but what we can break out the best we can what are really cobot related in that timing it's.

Definitely under 2% probably in that one to two range.

Does that include businesses that you've already kind of realize that have failed their turned off.

With that and no what meaning are there are are there. Another percentage group already that are closed that are basically turned off well you then would be in our loss numbers. So we've already taken those is lost clients and they're not in the retention numbers. The only thing that in our client base right now there is a one.

The 2% that are suspended because of co bid and we're still kind of waiting to see how those kind of end up if that helps the any any underwent lost already is out of the client base, yeah, and so that lost percentages that was that you know how does that compare to a normal recession. You know just trying to get a sense of how.

How big that percentage wise.

Yeah, you know really at this point you know the last recession. This was so much deeper, but we didnt really we at this point we haven't lost.

I would say anything like the last recession now that went longer and so you lost them over a period of time, probably 18 months.

This one was you know we went much deeper and I think we handle did very well from a payroll special has been the relationships that we had we kind of talk to them about being suspended so where they may have said, hey, I'm going to go loss than that by need. This if I'm going to start back up I'll call. You again, we kept it from going lost having to sell it again in competition.

And and it made it much easier for our clients and easier for us. So it's really been frankly, a lot better than I would say the last recession 10 years ago, which really those losses were larger and came over a longer period of time.

Got it helpful. And then just last question that friend just thinking about the Fourq guidance you said it comes back to more looking like more normal growth.

I guess, that's the jump off period as we go into fiscal year 22.

Just thinking about the puts and takes there you know with the weaker numbers versus you know the easier comp piece of that versus you know does business start to bounce back with new sales that kind of saying how do we think about that trajectory as we head into Fourq, you and then heading into fiscal year 22.

Well.

I guess it looks like a more normalized quarter, Brian is what I'd. The best I can say right now.

I would say this about.

Second half.

Obviously compared to a normal year, we have less visibility in the second half.

Compared to where where we would otherwise, but I would say I've time, we get around the Q4 Theres a number of things that.

Thank you occurring better for not create a situation where that quarter looks a lot more normalized.

And then certainly the first three quarters. So at this point I'll just hold.

More specifically about report that we've started getting or.

See legs under us this year, but I think that we've got a reasonably good.

Reasonably good basis for thinking that that's where the quarter.

No. That's helpful and then as we get into fiscal at 22. It just Theres No reason why you don't shouldn't be more normalized as well as it's not jump off point, yes. So so we've been talking about nonprofits and client.

Worksite employees being down.

Checks per payroll and that stuff going to normalize out as we go through and I think that the point I want to make.

Reiterate.

Marty has been making in this call.

We have the right kind of model.

For the situation, we are and what I mean by that is.

A tech services model in uncertain environment is the kind of environment.

Is the kind of business that you want to have now it's great that I'd say that really is irrelevant that I say it what's more important is the feedback we're getting from clients. We have not never gone as much positive reinforcement for the role we have played over the last several months.

So we think not only do we recovered, but we have in the balance of the year the ability to gain share in the market because we have the right models in an environment that very uncertain for the kind of clients.

Sure. So we are bullish as we go through the the the year that as we exit the year, we're going to be not only recovered compared to where we are now but actually going to the strength of our models born to show and we could very well end up being in a better place than we were when we entered.

The coated error.

Got it Super helpful stay so.

Yes.

Your next question comes from the line of Bryan Bergin with Cowen.

Hi, good morning, Thank you.

Wanted to ask on the outlook, how would you characterize the projected sequential improvement in management solutions as far as it being driven predominantly from the improving check volumes versus some of the increased penetration of retirement and some of the other services you referenced and then open up the high teens check volume decline that you called out on the uptick the if they call did you say you did better than that here in.

Q curious, how you see that playing out and 21.

We did I would say a little bit better Brian.

For Q.

And we're seeing improvement as we go through.

Q1, still early but that's where we.

We expect so you know to the point the question that you're asking.

Yes, we expect that we'll get through Q1 will understand what clients that make it and then the clients that remain have an opportunity to grow and to build a and build up their work.

Force and the combination of a better sales environment and better sales combined with recovery from our clients that drives better.

Better revenue as we go through the year.

Okay. That's helpful and then on pay offerings. So can you just comment on what you're seeing in the adoption of the real time pay solution versus the pay on demand offering and then just as me think about an acceleration of digital payment methods from traditional paper checks is there a margins.

Sorry to be had for you as potentially through less service or other means.

Well, yeah, I think so I mean, I think is we're seeing part of the expense reductions that you're seeing and you know is some of that is some of that margin we've become more productive as more clients have gone down in line and we provide a lot of self service.

Opportunity. So you know in the past you think about US we would take the information the employee would go to their their HR person or other owner of the business to change their direct deposit or you know a change other address and then go they would go to us and and it now that's all self service and.

And so the employee is is really able to do all that themselves that saved the client and us and so you're seeing it much more from that standpoint, not on the pay on demand yeah. We're seeing its still it's still early but.

We introduced that around December timeframe, and I think cobot kind of you know slowed it down a bit, but we're definitely seeing more and more interest of it.

The process you know we have to have the client sign up for it and that's been a little bit more challenging the last couple of months, but I think it's going to pick up the pace again and there certainly is a lot of interest and there was interest during the last few months in restaurants that would bring someone back and even now that bring someone back to do eight hours shift and not do 40 hour.

Hours, but work eight hours here or eight hours, there and instead of waiting a few weeks for their paychecks that they were able to use the the depend demand. So I think that as a lot of opportunity going forward does it have a lot of margin opportunity I think it has some there.

But because it's more of a there is some self service involved there and it's less maybe that we have to do but but fundamentally it's going to be a retention piece to its going to be something that it's a great product that we have that people want in the clients like and their employees like in it'll help them retain their employees and then us retain the client on on real time.

Payments, Yeah, I mean, we're still I think the only business in the industry, that's offering it we've seen pretty good pick up or just starting at a few months ago and clients really like it it's able to get them money and really seconds.

Minutes and a in its and its been gotten very favorable reviews from our clients, particularly if they have a last minute change or a mistake that they wanted to correct. They can do that and get it done in minutes instead of waiting for a day to happen or you know are some or an AC HR wire transaction.

Thanks, guys do well.

Okay. Thanks.

Your next question comes from the line up of Jeff Silber BMO capital markets.

Thanks, So much on your business update call you talk a little bit about what was going on on the workers comp side, I think you'd seen lower rates, but it was offset to some extent by lower healthcare expense because of fewer elective procedures can we just get an update and how that's trending.

I think comparable job not not a lot of not a lot of changes.

We've seen a continuation of those.

Those trends into the beginning in the year.

Okay and it doesn't matter in terms of geographically in certain states that are opening a fast are still pretty steady.

Not thus far so we we have a lot of health care on the PEO side healthcare exposure.

In the state of Florida, our results in the state of Florida goods. So.

Thus far this good update.

I think different.

Okay, Great and just as a follow up forgive me. If you mentioned that did you talk about the expected cost savings that you think you're going to be getting from some of the onetime costs that you talked about.

We said it was embedded in the guidance. We said it was $40 million, we said if you.

Tax effect of $40 million, you can figure out what the.

Benefit will be that that will that will continue going forward.

Yeah, I'm, sorry is talking about the annualized cost savings from these god loose.

Yes, So I think if you take the 40 and text.

You'll get the benefit that we expect going forward.

Okay, great. Thanks, so much.

Our next question comes from the line up Lisa Ellis with the Moffettnathanson.

Hi, Good morning, guys. Thanks for squeezing more.

I first one is just a cadence clarification on it if I understood. The cadence right. It looks like one Q revenues are expected to be a downtick from Fourq you. So high single to low double digits. Despite a lot of these operating metrics clicking can you just clarify why that is is that because of.

<unk> new sale dipping.

Because of the pandemic or what caused that.

Because Lisa remember Q4 has one month of pre cobot results in it.

And April and May where the cobot month, So Q2 Q1.

As you are right a little bit better results, but unfortunately, it also had one less pre covert month than Q4 did.

Yeah, Okay fair enough and then.

One is just a follow up.

Question about the competitive dynamic and I bring your comments about.

Hi Tech winning Sheryl you are coming through that.

Are you seeing I mean, I know you compete feel when a lot of like regional service bureaus, and then also some fast players that don't have that service component to their model are you seeing a notable shift in the competitive dynamic in your space, meaning our some of these competitors really struggling through the pandemic.

Are you seeing increased win rate again, some of them I'm curious just a little bit more color on that.

Yeah, I think Lisa we're seeing we're certainly seeing on the retention side fewer leaving the go to a competitor and and so that we see that is positive from a competitive environment from a win rate on sales I would say, we definitely are seeing an increase in for example, like share payroll on the low end on the Mike.

Our wind and we're still trying to work through whether that's.

Competitive wins, which we it looks like is some of that we're we're winning a little bit more there on the on the micro end and also that we're getting more clients that have been doing you know payroll themselves coming out in saying, Hey, I'm going to go to someone on online processor, because surepayroll benefited a lot on their website and.

They're offering from what we did on the federal side with the payroll report that help them get the loans that also has the loan forgiveness and a lot of the webinars. So I think they felt a lot of strength in the in the Surepayroll and flex opportunity and so I think we're also winning some there so I don't think overall.

The competitive environment I don't think we've seen any major disruption there I would say at this point, although there has been we've seen in heard some furloughs and layoffs of some of the competitors, but I do think that that we are winning because of the great tools that we've had for cobot that have supported clients and supported prosper.

Next who are looking maybe for the first time to outsource.

Okay, and then last one for me.

Just.

Non called the question.

On the election are there are there anything you can the policy agenda is that the candidates for the upcoming elections that you're watching for that might create either opportunity for challenge. It's for you.

Well I wouldn't really almost <unk>, yeah sure I well I think you know always if they if there is a change in the leadership.

That change tends to go back to more regulations now more regulations in general help us because there's more of a reason to outsource either HR.

Or or payroll for that matter. So I don't we don't know nothing I've seen yet would say exactly what that opportunity would be but I would typically based on history, there's going to be more complexity more regulations and therefore, it is going to be more difficult.

You know for businesses I also think obviously, we're watching you know corporate taxes, that's more from not so much from a product and service opportunity, but you know just from a because being a highly profitable company. We're obviously looking to see what will be that any tax impact.

That that Biden has already talked about and and so forth so but from a product standpoint, frankly typically in a.

Typically in a Democratic administration, or we would have more regulations and therefore, it would be fairly positive from a product standpoint, and I would also think that theres going to be a number of new rules coming out of recovering from cobot and in that will also make it more complicated for businesses.

To exist and to handle their employees, which will drive more demand for our services and again as we've said a number of times the way the investments we've made to be able to really respond to a remote workforce, which no matter, who gets and I think is a permanent part of our future. We've made luckily the right investments here that it really helps clients.

And we'll continue to help clients be our remote handle remote working and that I think is going to pay off for us going forward.

Terrific. Thank you thanks, guys right they are able to hearings.

Your next question comes on line of some odd Simona with Jefferies.

Hi, great. Thanks for taking my question Efron, maybe one on the on the retention side I know you guys. The 83% as a as if I remember correctly unit retention number if we thought about it on a net dollar retention basis.

And then at 4%.

Just to add more present.

Yeah.

Revenue.

Okay, great commodities point to Marty's point.

We also hit a record in terms of certainly since we.

I've been here in terms of level revenue.

Okay, and just just to put a bow and that's a month.

You that was really pretty extraordinary extraordinary.

Work by our service providers and when I say the strength of the strength of our our our model I think there is a theres a tendency sometimes to think of that as just added cost in the model you can't get to those numbers without.

Without those people on the front lines doing the work they do every single day so.

Can you get more efficient obviously, we've taken steps to be more efficient, but not in terms of people. We've decided that the infrastructure can be a lot more efficient than it is we've made that choice, we decided that the right thing to do in an environment, where we expect the business to recover in the back half the years not to.

To slash employees, that's not where we're at what we decided to do and we decided to get very efficient in terms of what what we're doing and I think that in this year. It. It really had paid off now having said all of that I will I will add a note of caution that Marty said earlier, which is we need to go through the first quarter.

Of the year to see that of of the people, who remain and let's call. It suspended status at this stage how many of them, we'll come back and continue to process. We're optimistic because if you would have pulled us when we started the process. We would have thought that number was was going to be very high and it's turning out to be.

Lower meaning there's there's fewer that piece of our clients that are are going walk so sorry for the link the response to the question, but but I do think it's important to highlight that those things work together and there is a role for tech services here done efficiently and I think that our margins and our experience.

Prove that out yeah, and I think I, just I'd like to play on that because we haven't really made it that much that effort just brought up one one thing and take a step further the interesting thing with our model as we've gone to an awful lot of automated self service and automate of responses automated responses through chat batch and we can answer over 200 questions audit and then automated fashion.

And now and it's made our service people much more productive what we saw in the last two months was like a year end for us which those in the payroll business means your volumes are up like 25% because at year end typically people have bonus as they have a lot of questions. That's what happened in the last couple of months April and May in particular, where we had very much higher.

Volumes and longer calls because people had questions. So when everything is going well we have the tools in place for you to do it quick and efficient anyway, you want it when you can't get the answer and do something no no automated fashion, because you don't understand the regulations or how to do something where how to handle a unique situation like coal, but we had seven by.

24 service experience service providers that were there to answer the questions and we got a lot of positive feedback about that a lot of competitors today have gone a lot of automated or going out of the country to provide support that is not at the levels that we've been providing the last couple of months. So it's really a shout out to our service providers, who when you need.

And B seven by 24 365, they're there and it really paid off for us.

Okay. That's very helpful. And then maybe just on 100 million of loans had been process by by the partners that you mentioned is there is paychex. How are you monetizing that is there a referral fee that paychex gets is there is it just in service you're providing for your customers. How should we think about the path to monetization for that.

Yes, it's not we get a referral fee based on alone that is established and you know it. It's small it's I'd say relatively small amount given our revenue and so far we're very small amount given our revenue and so forth, but it was more of a service to our clients because a number of small businesses don't necessarily have relationships with.

Banks and what we were hearing from our clients is that Hey, I don't really have a relationship with the bank and I can't get to the front of the line and so we partnered with.

Those three fintech companies and obviously it was a need that was out there and provided a support to them, so small monetary value, but a significant.

Client service I think.

Great. Thank you very helpful. Thanks, again for taking my questions. Okay.

Your next question comes from the line of Kartik Mehta with Northcoast research.

Hey, good good morning, Marty and Efrain.

Thanks, Good morning, if when you talked about second half, obviously being better than the first half and you look at the business an effort as you're modeling. It is that based on kind of what you're seeing in terms of bookings and kind of what you're seeing in your stats or is that more based on.

The experience that you guys have in this business and your expectations for how the business will trend.

I think it's a little bit of both kartik. So.

I think that.

Obviously, when we started this journey several months ago.

We.

Have.

A recovery looks like once you hit bottom when we've got to mid May a oh, we have hit bottom and how we're looking at how this progress is I would say behave pretty similarly to once we understood the depth of.

For off.

How we expected it to continue now what we're looking at monitoring as I said before we have eight to nine weeks.

Steadily improving.

Metrics. We now are looking for a continuation I think there have been a number of coal on our question or does the.

The spread of the infection and some closures is that having an impact on results. We don't see yet but of course, we're monitoring that very carefully but if current trends continue.

And again, they don't necessarily not necessarily get they will we think that the way we've laid out the year makes a lot of sense. So.

Continued improvement both on on bookings, which we expect.

Over the next several quarters.

Record high levels of retention or positive an environment, where.

The value of our our services provide our technology in our service provider.

Has some ability to win in the marketplace all of those things we thing.

We're going to bill.

To the outlook that we've got and and we're optimistic about the remainder.

No.

One of the more controversial numbers out there right now is the unemployment rate.

And as you look at that rate Pete do you try to compare to your business and is there a way to say what are the unemployment rate has to be to hit the numbers you thinking you can in the second half.

Well I think we certainly expect that theres going to be improvement starting.

Starting certainly in the fall. So I think we're in an environment, where we're seeing the same levels of elevated on a limit.

And in mid fall I think that we'll have another conversation about.

About what the impact of that.

It's too early to call that.

But and even economists disagree.

As to where.

As to where things really are I would say, we look at that were informed by that card, but really were informed by our own data. We can tell week by week frankly Bailey, if we want to.

How much people are paying employees, we know with a trend has been no what what the recovery from the depth of.

The.

Of the shock to where we are right now and those trends are positive now.

Again, theres no guarantee that they'll continue but but we feel that where we believe looking at the data.

It looks like we're on the solid trends yeah, I think if ever makes a good point. It's one one piece of data, but you know there's so much noise in that unemployment number, particularly because it's kind of state with the state by state.

Wait procedures in the way they pull those numbers together, it's pretty dicey, we have a great sense I think even our small business index. You know can get we as we got into it could see and I think atps as well, there's there's issues with those those kind of the data in the way you look at it as we saw last month with some of these numbers.

Just because of the way that they're done nothing was really set up for a shock like this and the way we it drops so quickly and if like if you look at our index was pretty flat month to month. The small business index and then if you looked at paid employees, though and the way they were measured they were actually up 4% and what about an improvement of 4%. So.

You try to look at a lot of data, but as Efrain said, we have a lot of very good data. These days on on what's changing and where it's changing and how quickly. So we tend to rely more on our own than something like that.

And then just one last question Marty.

As you enter this environment, how are you managing investing in the business yet maintaining margin.

Operating margins, where you're satisfied.

With the results.

Well you know Kartik, it's always a challenge, but I think you know even when you go back to tax reform and you look at what happened. There you know some companies took that right to the bottom line, we worked with the board to reinvest a substantial part of that.

It back into some into the employees, but also into the development and those IP investments as we look back now.

No really were the right things to do that position does very well for remote workers more self service online and things like our products. We've rolled out here with HR connect that allow clients to talk to their employees are virtually through the app and be able to do electronic signatures. So we're.

Looking to continue that investment we made some a small number of of reductions here enforced, but like I said, it was under 2% and and when you look at IP development that has continued to grow really overall the development side of IP and we're we've always had savings over the last frankly 10 years or less.

One years, we've been desk them he development to be a real tech generated service company and and that is that has paid off well so that will continue.

Our capitalized they know our capital our investments looked to be the same as last year, we're not looking to cut IP investments in in the products that that we're making.

Thank you very much okay. Thanks, Kurt.

Your next question comes from the line of 10 thing with JP Morgan.

Hey, Thanks, so much for taking all these questions guys I know, it's a good use of our time be the bookings question I know a lot of people have asked about it already but can we just clarify how didn't bookings or new sales come in.

Fiscal 2000 versus expectations and then as we looked at fiscal 21, how different is that going to be 'cause. It sounds like we shouldn't assume a lot of.

Your new business starts retention, we should be higher less switching so they're going to be more.

Selling into existing just trying to understand big picture, what bookings might look like and how is different from last year.

Yeah, I think I'll start on I think through nine months, we I think I front, even mentioned that you know did we looked pretty good and we were pretty solid in our in our growth across pretty much all the all business lines and and through the nine month and then you know is March middle of March in the into March and April and May a lot of.

That was just the dried up and we were down yes, yes, when we look back at the fourth quarter I was amazed that the number of units that we had continued to sell.

And the strength frankly was.

But lot of the strength was sure payroll, which can be sold pretty much all that sold online or over the telephone and they did very well and continued very well in the fourth quarter. I think that was the issue of where not only where are they getting a lot of a halo effect from the things that we were doing in the what was available online, but also more client more Rob.

Prospects moving to an outsource or on a small and on a micro basis. The midmarket through the nine months was very strong.

Midmarket the product all the product changes, we've introduced as they've done very well they certainly hurt a little in the fourth quarter because more of that his face to face, but I think they really kind of maneuvered and learned how to sell online and very quickly and then we've given them a lot of support and they've done well in the first quarter, we kind of expect the improvements that.

We're leaving fourth quarter with to kind of continue in the first so it's not going to be a banner first quarter because everyone is still remote but we have learned a lot of tricks of of selling remotely and how to do better scheduling how to do better remote how to meet with the client if they want to be met with and in that as all kind of picking up steam.

So I think first quarter will be okay. And then we think it will continue to pick up from there but through the first nine months. We had we had solid bookings and we're pretty excited about those that helps.

Does it does so as we look forward and spin around to margins just looking at the guidance I. Appreciate the first half second half dynamics, but it looks like at least initially.

Well see margins.

I might you guys suggest that pretty much all the decline in revenue is going to flow through here to EBITDA I know you have to the savings or the payback from the Geo.

Linkage here, but is there anything else that's impacting margin beyond just the decremental margins of.

Revenue.

If all of my question.

Well, yeah, yeah. Thanks engine so yes.

It's primarily it's primarily revenue driven and.

The impact on that specific quarter are very highly dependent on on the amount of revenue in that quarter in Q1.

More if you mention of a flow through of the margin impact and then.

That revenue starts to build as you go through that you see less less of it and you also see some of the other cost savings initiatives.

Take hold as we go through the year. So yeah, you're getting your that's primarily what you're getting and again I just.

Go back to one thing that I mentioned, one of the things that we were very careful about as we didn't want to come out of the.

Out of this shock.

In a weaker state because we thought we needed we were going to be in a position where there was going to be opportunity in the back half of the year and we were going to rebound so rather than cutting significant amount of.

Headcount in the in the first half the year, what we decided as Marty said is to optimize the amount of headcount that we had so you will see benefits. We go through the year from the actions that we're taking but in Q1 you have.

Significant hit to two to margins because of the flow through the revenue.

Got it.

That makes a lot of then thank you so much.

Okay.

Your next question comes on line, if Mark Mccollum with Baird.

Good morning, Marty and.

Just wanted to follow on with regards to the bookings.

Could you just obviously April and May would have been down because of because its cobot, but by the time, we got to June as things start to stabilize.

The bookings how did they compare relative to a year ago like what for where they trending at 90% of prior year.

80, how how would you characterize the level of improvement.

Well I think what we would say you know and frankly when you looked at the whole year, we were fairly flat with last year for the fiscal year. So I don't want to the I want to portray April and may as to negative. They obviously were down substantially but when you put it all together.

You know, we're probably flattish for the year and down slightly for overall par sold and if you look at June you see a sequential improvement over April and May. It's just you know it's still down of course over June of last year, when you've got all your sales folks out and you can't it's hard artists.

Thing is frankly, reaching prospects and a in people. They get there you don't get their attention and and so forth I do think that will come back as businesses stabilize and get back open.

And people kind of feel like there is more of a new normal we'll have that that will continue to pick up but we're expecting the first quarter will be certainly down from first quarter of last year. You just don't have the same environment yet.

Got it and then further for the budgeting for this year are you anticipating that the Salesforce will basically stayed flat or would it be would that be part of the optimization as well and potentially.

You know be a little a little bit more compact.

No I think it's fairly flat overall numbers, it's just we've shifted a little bit more to inside selling and telephonics selling because that's been working well and Ah, but overall I would say the head count numbers are about the same.

Across the board now.

No no flat growth, we didnt look nationally thinks that we needed to grow the salesforce, but I would say, it's roughly about the same number we didnt really go down either yet mark just a little color to the point that market, making what we found was in making that shift you actually could get better productivity and so.

It did it did not equate to the.

The fact that we couldn't drives a higher sales activity, even though head count was relatively flat year over year because of though.

Really a tremendous amount of work that we've done on the digital marketing side and also on our ability to sell.

Marty said virtually we really are just in a different ballgame now that were two three years ago and so you can operate.

Left field based salespeople and more virtual and drive higher levels of activity.

That's that's great color and then.

Marty you made a comment early in the into discussion about how you know a lot of people perceive you as a small business payroll company, but you've actually migrated clients up in terms of size in service level I'm wondering if you could dimensionalize that to a greater extent like.

If we think about where paychex was a couple of years ago, where you are today and where you think you know paychex is gonna be a few years from now just in terms of client size.

Number of services that the average client takes on how how would you dimensionalize that.

Well I think Mark you know if you if you look at the third at a high level. The company that revenues have doubled in the last 10 years now. So we hit 4 billion and you know that was our goal was to be over 4 billion, we're not going to exactly hold it. Unfortunately for a few months or beer, but but we hit 4 billion up from 2 billion 10 years ago. If you now.

Look at the distribution of that revenue you know you can see that it is move when we were back kind of payroll in HRS before we shifted to management solutions and PEO payroll you know had fallen below 50% for the first time, maybe a year or so ago and if you look at it now I think the PEO business you know is 25 P.O.

And insurance is 25% of the business its continually growing and the payroll side is is shifting payroll and other things and management solutions and I think that that just shows that historically, we've taken the company from what was predominantly small business payroll and the mid market is growing faster now and.

We had a couple of years, where that wasn't growing as well last couple of years that has really picked up speed even with more competition.

We've got more products much more of a technology company and a lot more self service and when you look at the double the size of the offerings from learning management.

To pay on demand.

Two HR connection in the mobility Epping of five Star App I think it's just you know the company is much more technology and mid market small and mid market company, we're not going to leave small, but mid market is going to become a much faster growing and the PEO and HR side has certainly been a much faster growing business.

So when I think a paychex as the original question you know out five years.

Sometimes our brand still obviously, having been in business almost 50 years you know the brand is still Oh, yeah. There are small business payroll payroll company well, that's really not true we're much more of a HR company in the PEO asked so insurances that we offer is the is a fast growing piece of the business. It's now as I said.

Just on our financials, 25% of the revenue and so I hope that helps I mean, that's kind of how I see it dimensioning in HR. The definition of HR is change quite dramatically and also will change dramatically now with Covance.

And what that means and I think we're well positioned to support that changing definition and need for clients have a larger size I don't think we're going to we're not going to leave the small business. That's still a great opportunity to continue to grow but that 20 to 100. In particular, you know has really picked up steam for what they need and the revenue per client.

Is obviously picked up as well as they bought more products for there to be competitive with each other as clients in their markets.

That's great and then can I just ask one last small detailed question just with regards to the first half guidance and particularly the first quarter guidance as it relates to the PEO side for for down high single digits low double digit.

Part of that is just a function of the the reduce salaries that the worksite employees are getting correct.

That's part of it yes, you got it Mark Yes, that's correct and so when we're thinking about it more from a unit perspective, it would be more muted than that you have much more muted than that you're right.

Okay, great. Thank you okay. Thanks, Mike.

Your final question comes from the line of Pete Christenson with Citi.

Good morning, gentlemen, thank you fitting me in.

I have to have to connecting questions.

From your from your multi site location client employers.

Are you seeing any any footprint shrinkage there and then there was no article last week in the journal stick with speaking more to the enterprise side that some furloughs are turning more into permanent.

Headcount reductions.

The basis of the two questions is is really.

To ask if youre seeing in the early signs secondary impacts from.

From the week weaker economies are you starting to see that.

Well to sell CPI.

Yeah with the first one I don't think like in multi state employers, we really have not seen that I haven't seen anything that stands out that so that they are reducing their footprint yet that is not a majority of our of our clients certainly, but we have not seen any trend yet.

I wouldn't necessarily be surprised if more our kids like we're doing.

Reducing our physical footprint and having more work from home and so forth.

But but that certainly wouldn't surprise me, but we haven't seen much of a trend there and then the second question Efron was.

Can you can you repeat that second we are sure yeah.

It was about furloughs term a more oh yeah.

Yes, sorry haven't really seen havent haven't seen that yet although the checks are down. So you know as we've talked about we're seeing an improvement in checks.

It checks that the D., we're seeing an improvement from the decrease in checks so but the checks are still down. So yes, there's fewer checks have they are they furloughed employees are permanently out I think it's a little bit too early to see that yet efron anything I don't know I will get a indicating the in the what we saw early onward.

That small businesses and.

Mid mid size.

Making taken action on employee.

Initially and then higher back as opposed to keep them furloughed I think in the enterprise space, you, probably seaborne thermal action that we see.

In our client base.

The trends as Marty was saying earlier the trends, we've been seeing or are the opposite which as we've seen people, adding back at this point as opposed to.

As opposed to Rick.

So it's buried in that number but that number is looking more positive.

Okay.

That's helpful. Thank you gentlemen.

Okay excellent.

And there are no further questions at this time, okay. Thank you at this point, we will close the call if you're interested in replaying. The webcast of this conference call. It will be archived for approximately 30 days I do thank you on behalf of effort and I. Thank you for your time to participate on our fourth quarter and year end press release conference call and for your interest in Paychex.

Have a great Dane please stay safe.

This concludes today's conference you may now disconnect.

[music].