Q1 2021 Paychex Inc Earnings Call

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Ladies and gentlemen, thank you for standing by and welcome to the Paychex first quarter fiscal year 2021 earnings Conference call.

At this time all participants have been placed in a listen only mode. Later the floor will be opened for your questions.

To ask a question at that time simply press Star then the number one on your telephone keypad.

To withdraw your question that's the pelkey.

Lastly, if you need operator assistance, please press star zero.

Thank you I'll now hand, the call over to Mark Missy, President and Chief Executive Officer to begin. Please go ahead Sir.

Great. Thank you and thank you for joining us for our discussion over Paychex first quarter fiscal 2021 earnings release, joining me today is our firm Rivera, our Chief Financial Officer. This morning before the market opened we released our financial results for the first quarter ended August 31st 2020, you can access the earnings.

His release on our Investor Relations Web page and our form 10-Q will be filed with the FCC within the next few days.

This teleconference is being broadcast over the internet will be archived and available on our website for approximately 90 days I will start todays call with an update on the business highlights for the first quarter everything will review, our first quarter financial results and provide an update on fiscal 21, and then we'll open it up for your questions. This will 21 is off to a good.

Start well the impacts of cobot 19 continue to affect our results, causing unfavorable year over year comparisons our first quarter results finished better than originally projected because most of our key business metrics recovered at a faster rate than anticipated throughout the Golden 19 crisis, our business model has proven resilient.

We have seen good sales momentum excellent client retention and accelerated product development responsive to the needs of our clients. We also rapidly reduce discretionary cost where needed to protect margins at or ahead of schedule in a number of initiatives to reduce long term cost as well.

We are pleased with our sales performance during the first quarter, which reflected new annualized revenue significantly higher than our expectations.

The new payroll sales units with strong year over year, reflecting the highest fiscal quarter growth in over five years are in.

Our investments over the past several years and virtual sales digital marketing and lead generation and sales support technologies have positioned us well to succeed in this environment.

Well the challenge is small and midsize businesses. It faced during this environment, our HR value proposition has never been more clear we have seen a surge in demand for our various HR offering since the beginning of cobot and our Q1 sales results for HR services Division were very strong with double digit increase over last year, we are well.

Well positioned to continue to take advantage of this opportunity.

Our client retention during the first quarter has remained at record levels. We continue to see payroll clients that have been in non processing status begin to pay employees again throughout this crisis, we have been very proactive in providing information tools and guidance to our clients we are.

We are proud of our response supporting our clients. During this crisis, we work closely with regulatory agencies. The both remain informed and advocate for our clients our compliance and software development teams worked quickly to interpret and respond to the changing regulations and design products to assist our clients through one of the most challenging times for the business coming.

Unity.

We have provided real time updates and solutions complaint with new regulations, we were first to market with a P. P. P loan forgiveness estimator, which now produces a signature ready application right.

Recently, Wolters Kluwer, a leading national provider of tax and accounting expertise selected RPP loan forgiveness estimator to be utilized by their CCH answer connect research platform subscribers.

Since launching in early April we have approximately 300000 unique visitors to our cobot 19 help center Ur Cobot related training has seen strong participation with some webinars attracting over 10000 attendees along.

Along with the investments we've made in our platforms that have allowed us to adapt and maintain high levels of service delivery. Our thought leadership has helped in achieving our record client satisfaction.

Investments in technology combined with personalized client service that paychex is known for available seven by 24 by 365 has served us well in the current environment due to the adaptability and speed of delivery we.

We have seen sessions during the quarter you like utilizing our mobile platform increased double digits compared to the prior year period and the number of active employees on the platform continues to increase.

Our clients and their employees have been taking advantage of flex for self service self service utilization by client employees as a percentage of total utilization is at an all time high given the remote working environment for many of our clients and pay.

And Paychex learning enrollments are up also significantly benefiting from virtual training offerings that users can participate in from any location.

We recently introduced new employee health and safety in the workplace features and Paychex Flex. These features include cobot 19 leave of absence tracking through HR connect.

For employees, who request leave to care for a family member or child attending school virtually cobot 19 screening for when employees come back to the physical work environment and they held at the station solution that allows employers to collect employee information in a variety of wage.

These features combined with our HR connect in conversations features Iris scanned clocks. They end demand capabilities in other product functionality will continue to provide prove invaluable to our clients whether they are employees continue to work remotely or as they prepare for returning their employees to an office environment as well.

As mentioned in June we have accelerated certain long term cost saving initiatives, including reducing our physical office footprint and during the first quarter, we recognized $31 million in one time cost related to these initiatives and we are progressing better than expected. We anticipate that we will fully realize our projected savings from these.

Initiatives.

We are proud that both the strength of our technology as well as the care, we give our customers has been recognized by industry experts. Most recently the paychex Flex platform was recognized by light House Research and advisory within HR Tech Award for the best SMB focused solution in the core HR workforce.

Category the combination of a single device independent application with human resource services and benchmarking capabilities sets us apart from others in this category.

We have also been recognized with a 2020 Tech cares award presented by trust radius, which celebrates companies that have gone above and beyond to provide their communities and claims we support during the cold, but 19 pandemic I'm also.

I'm also very proud to note that for the 10th straight year, we have been recognized as the largest provider of 401 K. record keeping services by the number of plans by Plansponsor magazine.

We have a long standing commitment to leveraging innovative technology solutions like Paychex flex and best in class service to simplify the often complex task of saving for retirement and are proud to continue to help business owners and employees save for retirement during these challenging times.

Respective of the pace and speed of recovery, our resilient business model strong liquidity position and dedicated employees will allow us to come through this stronger while continuing to provide industry, leading technology solutions and outstanding service to our clients.

I will now turn the call over to Aaron to review our financial results for the first quarter Efrain. Thanks, Marty and good morning, everyone I want to start by saying I hope that everyone is so.

Oh safe and your families are doing well and.

Our best wishes go out.

Yes.

Those who have been impacted by the.

The pandemic.

Let me remind everyone that today's conference call will contain forward looking statements you know all that stuff refer to future events et cetera.

Look at the customary disclosures and then I'm going to refer to non-GAAP measures such as adjusted EBITDA same thing. Please refer to the press release for.

The reconciliation of GAAP to non-GAAP measures, let me start by providing some of the key points for the quarter and then follow up with greater detail certain areas and wrap with our fiscal 2021.

First quarter results reflect the impact of economic conditions.

19, this morning Sun mention.

First quarter total revenue declined 6% Tonight.

Hundred 32 million largely due to lower borrowing impacting revenue across our HCM solutions.

During our June earnings call I had noted the first quarter revenue was anticipated to be down Oh, hi.

High single digits to low double digits, obviously looking at this our results exceeded those expectations total sales.

Total service revenue moderated, 6% to nine or 17 million.

Within service revenue management solutions revenue declined, 5% 687 million and PEO and insurance solutions revenue decreased 7% to 230, when I say total service revenue moderating I mean decline.

Interest on funds held for clients decreased 28% for the quarter to 15 million due to lower average investment balances and lower average interest rates earned.

Average balances for interest on funds held for sales declined 6% during the quarter, primarily due to the impact of lower checks per client due to cope.

Expenses were up 1% to 650 million, but when you exclude the one time costs of 31 million in the morning mention.

We were actually down 4% driven by lower discretionary spending and cost control measures implemented in Q4, and we're very proud of.

How we managed expenses.

Through this entire period.

Operating income increased 919 decrease I'm, sorry, 90% to 284 million, reflecting an operating margin of 30.5% again that was ahead of expectations adjusted operating income excluding the impact of one time costs decreased 10% to 315 million reflected.

Operating margin of 33.8%.

Other expenses net for the first quarter that includes interest on long term borrowings, partially offset by corporate investment income, which as you know is quite low and was it.

And was impacted by the lower rates.

Our effective income tax rate was 23.4% for the first quarter compared to 23.3% for the same period last year, both periods reflect tax benefits for stock based comp payments that occur with the vesting of berries annual stock rewards.

Net income decreased 20%.

12 million, but adjusted net income decreased 11% to $228 million for the quarter. Adjusted net income includes onetime costs and the tax benefit from stock comp payments, we pull that out we discuss this all the time.

It's just no way to know in a given quarter, where the people are going to exercise or not we can give you guesstimate, but but don't know it.

Ended up providing some benefits in the quarter.

Diluted earnings per share declined 19% to 59 cents for the quarter, but adjusted diluted earnings per share decreased 11% to 63 cents reasons I cited above best in income.

As you know our primary goal is to protect principal and optimize quality would continue to invest in high credit quality Securities long term portfolio. Currently has an average yield of about 2% average duration of 3.3% or 3.3 years combined portfolios have earned an average rate of return of 1.3% for the quarter down from two.

Percent last year.

I'll now walk through highlights.

Our financial position it remains strong with cash restricted cash and total corporate investments of 952 million.

Funds held for clients as of August 31, 2020 were 3.3 billion compared to 3.4 billion funds held for clients vary widely on a day to day basis and averaged 3.5 billion for the first quarter total available for sale investments being.

Including corporate investments and funds held for clients reflected net unrealized gains of $117 billion as of August 31.

August 31 2020.

Compared with 100 million as of May 31, 2020, the increase in net gain position as you can surmise, resulting from declines in interest rates.

Total stockholders equity was 2.8 billion, reflecting $223 million in dividends paid and 29, though $29 million of shares repurchased during the quarter.

Our return on equity for the past 12 months, maybe 12 months remains robust at 39% cash flows from operations were 215 million for the first quarter a decrease of over 20% up from the same period last year. The decrease was driven by lower net income and fluctuations in working capital no.

Let me turn to fiscal guidance fiscal 2021 guidance for the current year, which as you know on May 31, 2021 the outlook.

Flex or current thinking regarding the speed and timing of any economic recovery.

First quarter results as you can see exceeded expectation there is uncertainty about the trajectory of the recovery over the next several quarters.

Our guidance assumes a steady but gradual improvement through the rest of the fiscal year.

We have provided the following updates to the guidance after seeing first quarter results management solutions revenue is now expected to decline in the range of 1% to 3%.

We previously guided to a decline in the range of 1% to 4% and we'll continue to update as each quarter passes PEO and insurance services revenue is expected to decline in the range of 2% to 5%.

Our previous guidance with the decline in the range of 2% to 7% interest on funds held for clients expected between 55 and 65 million total.

Total revenue is expected to decline in the range of 2% to 4%. We previously guided to a decline in the range of 2% to 5% adjusted operating income.

As a percent total revenue is now anticipated to be approximately 35% up from previous guidance of 34% to 35%.

Adjusted EBITDA margins for the full year fiscal 2021 is expected to be approximately 40% up from 39 to 40 other expense that anticipated 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% to 25%.

Adjusted diluted earnings per share is expected to decline in the range of 6% to 8%. We previously guided to a decline in the range of six to 10.

Turning to the second quarter.

We currently anticipate management solutions revenue will decline in the range of 2% to 3% and PEO and insurance solutions revenue declined 4% to 6% adjusted operating margins. Excluding one time costs are anticipated to be in the range of 34% to 35%.

And early view of the second half of the year and I just want to mention something you know when all of this started many people withdrew guidance and we walked in and we told you what what we thought.

We didn't get it completely right at first but we communicated an updated you in the middle of the quarter did the tell you where things were changing so we will continue we are committed to full transparency and we are committed to updating you on a regular basis. So investors know exactly what were thinking when we think this is what.

We're thinking.

Right now of course things can change as we go through the year, but at this point the early view of the second half of the year, we anticipate.

Total revenue will be in the range of flat to very low single digits operating margins, we anticipate to be approximately 37% of course as I said all of this is subject to current assumptions, which are subject to change well update you again on our second quarter call. So we are more power.

Than we were.

At the at the June call, obviously, everyone knows the uncertainty you're dealing with I'd say just a couple of more things to to conclude my comments number one is I.

I think what you saw in first quarter Marty alluded to it is the strength of digital solutions digital and virtual sales were up very very strong in the quarter. When I say very strong I don't mean 10, and I don't mean 20, I mean, it was very strong obviously any sales, but dependent on face to face.

Meetings with more challenging, but we've been gaining momentum there that's number one number two.

Each our solutions was up very strong from a sales standpoint, and revenue recovery has been strong in the quarter stronger than we anticipated. So when you look at digital based.

Digital marketing and sales we had a really good quarter. When you look at HR solutions, we had a very good quarter and that is part of what's driving or.

Be incrementally positive as we go through the year around PEO I would say this one of the things that we have learned as as the year has gone on is that while PEO had a sharp downturn. Initially we've seen a sharp recovery also and so we're incrementally again more positive.

On T. O that solution is important in the market and we think there will be.

Continue to be.

Good demand now.

Obviously, there's still a lot of uncertainty in the environment, but but as I said on the second half. We think we are in a position to manage through it and have taken all of the right steps in the short term and we took a lot of the right steps in the long term to direct investments to where we are.

Where we were had we not done that we would be in a different position. This is not your father's paychex with that I'll turn it back to Mark.

Okay. Thank you everyone and we'll now operator, we'll open it up for your questions.

Thank you as a reminder, ladies and gentlemen in order to ask a question simply press Star then the number one on your telephone keypad if any.

If at any point. Your question has been answered you wish to remove yourself from the queue press the pound key.

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

Hi, guys. Thanks for taking my question.

I wanted to ask Efron about your or Marty as well the last comments you had on digital and just get your view.

In terms of how you mentioned, it's not your father's paychex, how permanent do you think some of the shifts are in your business that comes to things like digital sources, and that's I guess, a product standpoint as well as the sales technology standpoint is this more of a blip or is this something do you think we'll we'll kind of fundamentally change the the fabric as we go forward.

Yeah, I'll start and then I'll, let effort jump in anything.

That I missed your comments so the as I look I think its permanent I also think as I think everyone has seen things have accelerated quite dramatically.

With the environment of work from home.

You know employees and so a lot of things are the mobile adoption. The use the look for paperless everything being paperless from recruiting to Onboarding training to any change that employee makes is.

Is all we could see all that coming and had invested in it as many had but it is really accelerated with the remote workforce is and I think it's definitely permanent even if any.

Employees come back to the office, many will return to the office or a similar environment and I think thats never going to change I think people are just used to it the also.

Also the way they are buying which is much more virtual as efron commented. The results have been very strong from a we're a self service basically where theyre going on line and doing the search for us, which we've invested in looking at demos, which we've invested in and then buying themselves on line three.

Through share payroll or flex have both been very strong as Efrain mentioned and I do think it's because we've invested well in a product that is simple to use easy to sign up for and and that's working very well. So I think it's I think it's very permanent all the way through from paperless to.

Remote to the mobility app and everything else in between so we feel very well positioned from a permanent going forward standpoint.

Yes, what I would add is it's one thing to say Hey, we had great.

Great digital sales progress in the quarter and by that I mean, not only none.

Not only surepayroll, where we can as Monty mentioned.

You can search.

Onboard yourself and payroll without having anyone involved process that would be something we did several years ago, but also our virtual selling efforts that are powered by our digital marketing efforts have been really really strong too, but what would that needs to be tied together with the digital service model and I think as Marty mentioning we've made.

A lot of investments on that side you heard his comments about the number of employees, who are actually utilizing our platform to do too.

To to connect and update their information and so sometimes we hear this narrative like somehow.

Well the only people in the market that can do that parser competitors and it's just.

It's just interesting let me put it that way it a true, but it's interesting and we've been making quietly many of the same.

Same changes and you can't compete now in the market 10 years ago. If you weren't Psas you work, we're going to be left behind and now if you're not pivoting to digital you're going to be left behind to yeah, I understand it im sorry, but I'd say the other the stat. That's been so interesting is we've talked about our flex assistant which is basically a chat but that answer.

His questions coming in from clients.

50% of the questions are now being answered by the chat, but and you know it's the use of that is just incredible.

Incredible and it has saved US a lot from a service perspective from a people perspective and what they can focus on so our team is always available as I said the only one that's available seven by 24 by 365 from a personal surface. If you need it and now those people are freed up more than ever for the more value value added questions. So.

We feel like the investments we made are really paying off and its accelerated and will be permanent as a result of this pandemic environment.

Great.

That's terrific one more from me I wonder.

I wanted to ask another question about how the business is sort of evolving in the context of the pandemic can you speak to kind of the relative importance of of cross selling to existing customers versus signing up new ones in terms of your kind of your growth algorithm. How does the model more reliant today on expanding the wallet share of existing clients or is it sort of business as usual how would you.

Kind of characterize that balance.

Oh, Hi, you know I'd say, it's fairly business as usual I mean, we're selling into the base well I think the clients the more satisfied the clients are with the existing services. They have obviously the more open they are talking to us we've expanded our product said quite dramatically and and we.

We have new technology advancements that are coming out all the time, we have quite a package of services that will help in the pandemic I think one of the things that during this pandemic is that co bid to help center is.

Is really driven a lot of clients into see how how valuable you know when clients need you. Most is when they see the greatest value and they've really seen great value in what weve offered in what they've been able to access from information. When you think about the payroll report that we produced the same day that it was that the loans were available we were the first to put out the.

Payroll report, that's been accessed and downloaded over a half a million times now and now the loan forgiveness estimator no. One has got a better estimate are in now signature ready application to be able to get your loan for given those kind of things that have added a lot of a lot of value to clients and therefore, our client retention.

He has never been stronger no one's leaving to go to any competitor.

That are using those kinda tools, because they found them. So valuable so I think the process of selling additional features are being helped by that and I think you know certain things.

We even saw a big drop in the fourth quarter of last year in retirement sales because people weren't focused on retirement that has come back strong in the first quarter. So people who were payroll clients are at payroll and HR are now look for for retirement and retirement actually increased year over year.

From a sales and revenue perspective so.

I think the ability to sell other services has really improved in through the pandemic because of the value we've offered.

That's true.

Sure your interest thanks, and the second question.

All right. Our next question comes from the line of David Togut.

Evercore ISI.

Thank you and good morning.

Marty and Efrain.

Appreciate you are giving guidance in an environment, where many companies are not I'm wondering if you could flesh out your thinking a little bit more effort on F. Y 21, you are pointing to the top half of your.

Previous guidance ranges, but it seems like a lot of the metrics that you've called out in terms of record five year growth and new payroll sales double digit growth in HR sales.

Hi, its client retention ever might actually point to a stronger result for our flight 21 are there.

Are you just uncertain, if we get another way the fiscal stimulus or maybe.

Maybe a little more detail around how you're how you're thinking about outcomes for F. Y 21, and then maybe why not world maybe.

Why not a little stronger given all the leading indicators are really off the charts.

Yeah.

[laughter].

[laughter] quite off the chart that would be good, but but yes. So David I think that just a few things on that one is.

We feel pretty good that first half is going to be better than than what we expected it would be so.

You don't win a game in the first half, but it certainly it certainly is good to be up several touchdowns before the before that happens so.

So we think first half is going to be strong.

Having said that a lot of.

A lot of it depends as you as you suggest on the back half the year.

And fourth quarter is going to be very important.

Through Q3, we see we see results being still muted just because it's a big quarter and we're we're.

Comparing against a quarter before all of the pandemic effects occurred so theres a note of caution and what we have if we could if we projected the lines. We see now we'd have different guidance, but we don't do that because it's.

It's not a it's not a.

A big accurate or or or.

It's not a four.

Forecast we would.

The very comfortable providing but we think a lot of the metrics are pointing in the right direction.

And certainly from where we were in.

In the June timeframe.

Things look better.

We're not anticipating another stimulus if it comes that would be great.

We think that Marty said another interviews, we think the stimulus did help.

It it provided a cushion for the blow for a lot of small and medium size businesses, but we're not assuming that it is better and we don't assume that theres going to be a dramatic improvement in unemployment over the next several quarters. So that dictates some some caution in terms of what.

But the environment is better than Ben or we started the year better than we than we anticipated recovery in a number of areas coming faster than than we thought.

Got it just as a quick follow up are there any constraints on your ability to implement these record new sales in the payroll services business I mean, what's the what's the timeline to implement the strong new book of business.

Well I think look selling season will be is coming up.

Actually starting in the in the Midmarket have this month.

I think probably the only thing that is going to be the most challenging is getting to clients.

Some clients are still delaying decisions.

Particularly in that mid market to be a little bit careful we're making sales were getting out now to meet with clients that they want to meet this has all been done really.

This has all been done really remotely for the last two quarters and so to have the sales that we have even in a remote selling environment has been pretty impressive and I think we've honed tend to new skills on being able to do that.

So I think probably the biggest challenge to hitting results would be continuing those results would just be getting access to the client and the client being comfortable to make a decision based on their business and whether they are ready, but right now we feel.

We feel good in in the small business in particular in the small business market I think thats continuing to expand so not only do I think we've taken a little share, but we've also seen the pie get larger because.

Because more businesses small businesses in particular that have not outsourced before we're seeing them outsource payroll payroll at least if not payroll and HR for the first time and so that market I think is growing as well given kind of the complexities of the environment and so forth and they're seeing the value of being with a P.

Hey roll provider for example to help them get the loans to help them get the loans forgiven to work through all of the complicated regulations that are changing and so forth.

Understood. Thank you very much.

Okay.

Our next question comes from the line of Jason Kupferberg of Bank of America.

Hey, Thanks, guys. Good morning, I, just wanted to start with a clarification effort and just on the second half outlook did you say that revenue should be flat to up total Rad.

Total reps.

Yes flat to very low single digits.

Okay. Okay, now last quarter, where we talking up low single I know, it's not much of a difference if I just wanted to see if I have that that nuance right and is this just kind of a timing thing where that recovery happened a little sooner. So that the year is a little bit more balanced than you might have thought otherwise.

When you say last quarter, Jason what what are you referring to sequentially when you the previous quarter no last.

Last quarter, when you gave us guidance and you broke down the first half in the second half.

I thought at that point in time, the second half was expected to be up low single digits.

No I Didnt say low single digits for second half that that wouldn't have been correct. So I'd have to look at what I said, but no no. We said that no no and Jason just to just to provide some clarification. We still expect we still expect at this 0.3rd quarter's going to be down versus the prior quarter with.

With growth and then growth more significant growth in fourth quarter No I don't I don't think we might have said.

I won't speculate on what we said the transcript will say what was said, but if we said something that indicated we were going to be positive in the back half or second half that wouldn't have been correct.

Okay, Okay fair enough and just a question on the margin Friday, how should we think about the long term implications of it.

For your cost structure, no real estate sales force customer support et cetera, I mean is there any way to quantify that at this point or at some point in the not too distant future perhaps.

Probably in the not too distant future not not this second but I think the question you're asking if I can ask a question or answer a question you're not asking you to.

Look there is a range of initiatives that Marty Marty was mentioning.

The speed with which we.

We did the footprint rationalization it doesn't take.

It doesn't take too much to too many assumptions to think that.

We can't confirm.

Continue to evolve that model, so that you need less space than you currently do and address costs in that way. So we'll look at that we're not ready to commit to what that number looks like at this point, but we've had good experience, thus far and I think the acceleration of our other digital efforts.

Suggests that we can we can at least control costs in that area and maybe get more efficient as we go along but we'll we'll we'll talk more about that in future calls.

Okay, and maybe just one last one on the back of the strong sales performance. You. Just saw can you just talk about the trends you're seeing in terms of new business creation and your overall win rates.

Yeah sure I mean, we're certainly seeing it does I think it just generally in the economy, new business set up to start ups or are up 20% year over year. It's it's a pretty incredible and I think what we're saying what you see and we see it on new businesses as people are shifting so people are getting out of some.

Business is shifting to others are evolving their business and others are seeing opportunities in this environment that they didnt see before so new business startups are are really growing and I think we're getting a good share of those because of the investments we've made where it's easy to sign up it's a very full featured product whether you go to sure.

Whether you need flex and so I think new business startups from that is are helping and then I think existing businesses. As I mentioned that are now outsourcing that we are doing payroll and HR themselves have found that it's it's time to outsource to someone like paychex that can deliver great value to.

Them and really protect them help protect them in an environment that is changing so rapidly with with all the regulations in the benefits and what employees are looking for from them as well.

All right well, thanks my comments guys.

Okay.

Okay. Thank you.

Our next question comes from the line of Steven Wong of Morgan Stanley.

Hey, good morning.

Thanks for providing all the continually guidance through all this we do appreciate it I was hoping to start off just by sharpening the pencils on a few items that you guys have been talking around specifically I think I don't think I missed it but.

An actual retention number for the quarter, I guess that 83% last quarter, but it included an adjustment for businesses that were suspended and then if you could maybe walk us through how youre thinking about year end fiscal year end unemployment rate assumptions and and business failure rates from here.

Yeah, I would say on the on the client retention you know, we really give it once a year, but we're still at the highest levels of retention, we had so even and I would say that of those.

Steven that that number is that we said that were suspended we're probably down three quarters of those from the peak.

So we still have some that have suspended their service, but it's getting down to a very low number now made more of those go lost after year.

After year end, we're watching that.

What we've seen a really a pretty dramatic decreased from the peak.

And it probably a quarter of what we saw so yes, it could still impact client retention, but it's a much smaller number than.

And what it was and we'll have to see as we get through calendar year end, whether they're kind of hanging on for either more stimulus or to be able to get through year end.

But at this point, we've seen a real improvement in that and I'm sorry, what was your other question the questions on unemployment Oh unemployment you know it's hard to say.

You know really that's just a prediction as to where we are we've seen what half the jobs come back that that were lost we definitely see the progress slowing as you see employees come back and being paid. So we are seeing we saw much better improvement in the first quarter than we had expected as we've talk.

What about and that is slowing its still progressing and positive but the number you know I'd it'd be hard to predict kind of where we think thats going to be I think it's going to continue to improve but at a slower rate.

Than we had and I think the artist prediction is really you know kind of you know after the elect.

After the election, what does that do to things and I think Thats why were a little more cautious in the second half of the year is just saying hey, we have a pretty good sense I have obviously of second quarter.

But when you see third and fourth it's a little bit harder to predict.

We're not pegging, our forecast to seven or six or five or four and a half.

Percent unemployment in Q4 as part of the reason for that.

This is more complex than.

Excuse me than simply what's happening with Worksite employees or.

Experts, we obviously, Marty said expect it to be to improve it and frankly, the unemployment numbers have been better than than we were anticipating originally when we put our plan together, what's that need to be in Q4 to hit the numbers I don't think thats really we're not picking our forecast in that way. So we're looking at.

A lot of other factors that really has to do with.

Not only whats happening on HCM sales for what's happening in the rest of the base, which is more than 50%.

Yeah. The other thing that's important to note is we're very diversified in our client base. So.

You know, we even as this happened we didnt, even the leisure and hospitality in particular took a huge hit as restaurants closed and then reopen partially and so forth. We certainly have plenty of clients in that leisure and hospitality kind of sector, but we're also very spread around into other sectors and you know construction.

Everything around construction has continued to perform quite well from a jobs perspective, particularly in the south and so forth. So we're quite spread out and so we don't see if theres any one industry, that's really taken a hit with that doesn't necessarily reflect in our results.

Completely understand and appreciate the color on all that maybe just one quick follow up as you were talking about sort of the diversification I believe the one area, where there was maybe like any concentration among your client base was in the PEO space, where its more concentrated to think you mentioned previously in discussions, Florida, Texas, California, just curious what you're seeing on the ground there relative to.

How you think about the national footprint, and whether that sort of just nets out in the wash on the PEO side or if there is any particular areas of strength from and obviously, there's a lot of headlines about.

Migration of investment dollars towards low tax states are any of those things just thoughts on conditions on the ground in those areas.

Yes, what weve seen if you look at it from a worksite employee standpoint in those states as we've seen a pretty sharp recovery certainly.

Yes.

Several of those states I would say, California is more volatile.

Okay.

Barger PEO space just as.

Just as a battle flare ups.

Good.

But we've seen a pretty significant rebound in a lot of those states not not to where they were before pre coated but certainly starting to get up towards those levels and I think that PEO itself.

So if you look at it from a revenue standpoint, and the amount of Worksite employees that we're processing and also on a sales standpoint, we're seeing good results.

Both ends of that equation, which suggests.

The environment is more mobilizing yeah, Florida as Efrain said, everybody is still down, but Florida is the strongest on our small business index that we track on a monthly basis, Florida has been number one south has been strong again construction both residential and commercial has continued to be strong. There. So were we certainly had more kind of.

And trained in those states.

They have been stronger state and insurance rates on top of that have been good. So the increases in insurance I have been pretty.

Pretty pretty low so I think they'll continue to have we should have continue to have good good retention as we go through open enrollment for insurance plans and everything this quarter.

Great. Thanks for taking my questions.

Okay.

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

Hi, guys. Good morning wanted to ask about the change to virtual in E. Com, how does that change the revenue per client first and then secondly, how does it change the margin structures are a higher margin inherent in that.

Interesting so so I think.

I think Brian it's a function of size of clients. So.

So the smaller the client obviously the lower the revenues so if you're driving a lot of.

Smaller clients tend to be the one.

At our.

That that use a lot of the.

Commerce solutions, So you get less revenue in that standpoint on the other hand from a margin standpoint, sometimes better because there's lower cost to serve so theres a little bit of a wash you got to overcome.

A bit of the.

The the sales.

Revenue impact, but longer term, it's still a pretty positive.

A positive development I didn't catch the second part of that question and then margin I just mentioned that margin can be as good or sometimes even better.

No. That's helpful. That's what I would have figured but but wanted to confirm that.

And then Marty on your comment.

Sales performance is accelerating with year over year growth in number of clients sold and I think you talked about a record number of units sold maybe the highest in five years I was just trying to get a sense of where that was in the trough how much was client growth down maybe in the trough and then how much.

As it is it growing now on a year over year basis, just hoping to quantify that impact.

I just wanted to one.

Want to clarify some.

Clarify something Brian when.

When we when Marty said that unit growth was the highest it's been in five years, he's not comparing it in terms of sequential improvement. If it was sequential improvement the number would be even more amazing, but but but what we're comparing it against the same quarter last year pre kogut, what we're saying is that our unit growth in the quarter.

Very high.

So with that I'll, let Marty answer that rest of it yes.

Yes, because when you talk about the trough Tonight I think Thats reference picked up are you talking about last quarter, we're comparing year over year, so year over year first quarter, it's been the best sales unit growth.

That we've seen in probably five years or maybe even a little bit more so if that's what you were asking so it's not it's not compared to how low it got in the fourth quarter its compared to last year first quarter. So we've seen a real pickup in demand as I said.

You know, Brian from those who didn't outsourced before new business starts and I think taking some share as well.

And then the client retention being so strong is overall is really helped we don't talk about net client growth, except once a year, but.

It's neat needless to say when you put that together you got nice growth.

I would say you know just.

Our our digital marketing efforts over the last couple of years of really really picked up really been terrific and I think it's really fueling a lot of those results.

Those results.

And going forward do you think a friend that it's it's still the 1% to 3% client growth or maybe does this model change a little bit but these kinds.

With these kind of new business starts in the CECL model.

Yeah. It's still early you know I want to you know while part of me wants to be draw a a a aligned with several points and then kind of extrapolate out yeah I wanted to be cautious about that there is an element here that were ended in barn.

We are.

That favors digital solutions I mean, that's not that's not a surprise and Marty answered earlier. When he was asked that question how permanent for durable is it certainly you got to think that Theres a portion of this that's durable and we'll continue in that you've got to bake that into your model and that there is demand there.

Which is what what Marty was saying I mean, one of the things that we have seen is that we have seen some indicators that some of that demand is coming from companies that didn't outsource. We also happen to be in an environment, which is.

Counterintuitive were business formation is better than than anyone expected so very different in some ways for most definitely.

So we'll have to get a couple of more quarters under our belt, but to get a sense of whether this starts to change that equation.

Great. Thanks for taking the questions.

Okay, great. Thanks.

Our next question comes from the line of engine Nicholas of William Blair.

Hi, good morning.

Just hoping you could speak to trends on the workers comp side of late have you seen any stabilization in rates, there or will that continue to be a headwind throughout the rest of the year.

I think it will be a bit of a headwind from a revenue standpoint, Andrew but.

Rates seem to be stabilizing and actually we've seen in some cases been ticking up slightly. So so we think we may have we may be getting towards the bottom of the trough. So to speak that has some impacts obviously on on PEO. In addition to our our.

Our ensure.

Insurance broker workers' comp sales it seems like we're getting closer to the bottom there.

Got it could be here good to hear and then just a follow up something you could speak a little bit to the M&A opportunity right. Now are you are you still open to doing deals I would assume so when and where do you expect to find those opportunities and then related Lee. It. If you have any commentary on kind of what pricing is looking like in those areas.

That's helpful.

Yeah, we're still very open to that and have continued to stay in contact with.

Opportunities and and with the bankers community and so forth as to what's available.

Very interested of course and all the lines of our current business in particular, so PEO businesses and.

Payroll of course and others.

I think its opening up a little bit I'd say valuations are still right up there I wouldn't say there was any any discounting going on because of cold but I.

I think its difficult its a little bit still difficult to do due diligence and things like that given limited travel and and access, but but I think we'd be able to work through those if we found the right.

Right business. So yes, we're very open to M&A, obviously, we are very liquid and I have a good solid cash position and if we find a good acquisition, we're certainly well.

Eight ready and able to execute on that.

Great. Thank you.

Okay.

Our next question comes from the line of Bryan Bergin of Cowen.

Hi, good morning, Thank you.

Wanted to ask on management solutions from what I understand the mix of your better than expected performance you're in one Q related to changes in check volume contribution versus some of the New addition momentum you're talking about versus the increased retirement and other services side can you just help us understand the mix of the factors that contributed here in one Q.

Yeah, I would say probably the largest.

Change, Brian was really a function of where we are.

Where we started at where we ended up in terms of average client base in the quarter. So if you think about businesses like ours that are more established you've got a number of different factors that are weighing on the revs.

On the revenue what's your rate of retention, we said that that was high.

Probably higher than we anticipated or plan. So that was a positive you had sales while sales revenue was better than we planned it still wasn't quite what it was overall pretty cold it so that that had some.

Some better impact, but but that wasn't a big driver the bigger drivers what was happening within the client base in terms of the number of clients that would break that down just not just number of clients, but the employees. Those clients had so the employs the declines were roughly about what we expect.

We just had more clients in the base than we had on average than we had anticipated who were processing. So remember we're putting plans back together in May June we're trying to anticipate in an environment, where states like California, and New York, which are important revenue states were.

We're largely starting to or we're in the process of the or continuing to be shut down it turns out that that those factors have moderated so what we're seeing when you look at a panorama across the country is moderate improving statistics in most geographies, where we're looking at and accrue.

Most industry as Marty mentioned earlier when you put that together we start if you will from a little bit higher.

A higher step on the wrong word the latter than than we anticipated when the plan was put together and.

Another way to think about it if you flip that analogy over.

Over or are you changing LNG it.

It was it was definitely less worse than we anticipated as we started the year, we the impact of coated which was very severe in April had a fall thinking what would have this end up looking like well.

Those those pundits who thought that the recovery would be sharp we're.

We're actually more in the right than wrong and now the recovery from here, we've we've signaled that its gradual.

We're still seeing signs of a gradual recovery nothing is changing our mind at this point to say that we don't continue to to.

To progress from where we are however at a point, where we are at the trough wasn't quite as severe as we for first quarter.

Okay. That's helpful. And then I wanted to ask a question on Salesforce. So can you just give us a sense of the mix. The sales force that has returns here too in person meetings brilliant I guess currently versus in one Q.

Mill feed on the street model versus the virtual Salesforce and how should we think about this mix longer term as things normalize.

Yeah, I think we're we've picked up more virtual this year. So it's still probably of the total.

You know it might be 25% to 30% I think that will continue to grow, particularly I think this is as I mentioned earlier on the call. Brian I think that has accelerated I think more client prospects client prospects are you know are able to do things over a zoom color over webex call.

Feel comfortable going through the demo a digitally over and online and be able to make their decision. So I think that's going to accelerate I think it also is it's more productive and efficient if they can be virtual. However, you know we're opening up kind of as we speak across the country with being able to go visit.

As well we are doing it based on kind of state by state or city by city and whether the local management feels that the rules are there that they can visit that decline has called the prospect is comfortable and the revpas comfortable but that's starting to open up a much more now.

But the I think you will see more virtual or growth in virtual sales meet.

Meaning telephonic, we've been in it for many years and you also.

And you also have more self service as well as both effort I have mentioned that on the low end of the smaller size clients much more is being done without ever talking to a rep at all because of the investments we've made at both sugar and sure payrolls products and flexes product you can go online and basically you know search.

Find it demo it and buy it.

Pretty much without without talking to anybody, but you can always reach someone if you need it. So virtual is going to be more of a way of the future, but we're still always going to have for the more complex sales.

Experienced reps that are there in person and with the sales engineering team demo ing the product and so forth and I just want to reiterate what Marty said.

Well in the past you would have thought about okay sales equates to how many sales people yet.

Were are there that is only one factor in the equation, if you have and you.

Commerce, the ability to sell without any sales people involved which was something we invested in in the last couple of years and you're not constrained by the amount of people that you have.

We've seen the benefit of that in this quarter.

Well just to follow up there what's the top end of employer size that you're seeing do it by themselves so that E Commerce model.

Oh, I think well it depends on the it's not.

Not always employer size it could be employee size. It could be complexity. If you are pretty straightforward simple it could be up you know into the 2020 employees, but typically I'd say, it's under 10.

Brian but its you know if your risk if it's a straight forward business it could be more employees than that but it's I think it's typically under 10 employees.

Okay. Thanks, guys.

Okay.

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

Hey, good morning, Marty and Efrain.

That's what I wanted to ask a little bit about.

I wanted to ask a little bit about the guidance and I'm wondering if you have factored in any price increases into it I know.

Last year last fiscal year.

Decided against that because of the situation. We're in I'm just wondering for fiscal 21, what you anticipate.

Yes so.

So the short answer is yes, there are price increases selective I would say that we are that we are implementing a one of the reasons why we feel comfortable doing that is in part customer feedback in part the fact that our operations people such as stellar job that our NPS scores.

Again, I mean, we could keep going on and on about things that are record high but.

But our NPS scores at this point through the pandemic are at record high and.

And thats the strength of our model and the strength of our model really plays well for this environment.

To get through the the environment. They were they were facing we think that many many of our clients have stabilized.

As as evidenced by the increase in.

For the decrease in non processing clients and the level of service gotten great feedback on and we think that.

That many of our clients will be okay with a modest price increase so we will do that as we go through the year.

And then just a second question on health insurance premiums or your expectations going into next year and what do you think that will how that will impact the PEO business if at all.

I think kartik I as I mentioned, I think it's going to be pretty favorable generally I think high single digit kind of increases depending on the client of course, but generally I think if you looked across and I think thats going to be very favorable for gaining new insurance clients I think we performed.

Very well our risk in underwriting team has done very well and therefore I think we are going to benefit from that.

Better rates.

Better rate changes and.

And I think also the overall environment is certainly helping us as well. So I think that you know should bode well for better sales, even better sales from an insurance perspective for both PEO and the agency the insurance agency itself.

Hey, Thank you very much I appreciate it.

Okay terrific. Thanks.

Our next question comes from the line of peak Christiansen of Citi.

Good morning, Thank you.

The question.

Nice trends.

I have two quick question so.

I was wondering if you could characterize your win rates that you're seeing lately in terms of.

Where where are you are you winning a new.

These these new accounts.

Seeing it from self processors or other competitors any discernible trends there would be would be helpful to understand and whether or not you believe you're seeing early signs of some share shift.

Yes, I think it's a little bit of both we've mentioned I think we're seeing those who have been self processing doing things themselves and the complexity of the changes and the need for help is a critical time kind of in their business survival or growth or Dave.

Dave look to outsource for the first time, so I think as I said I think the pie is gotten larger I think more outsourcing and thats been pretty steady it over the years and now that's that feels like that changed and we're very happy that we've won.

We think a large number of those because of the product set and are not not to mention is that front as mentioned many times, our lead generation and digital the offering and the demo et cetera, and the mobility App and.

And then I think also we've seen a net gain from some competitors.

This quarter based you know something we track on our largest competitor we see some gain there I wouldn't say, it's huge but I'd say, it's definitely a net positive gain from what weve gain what we've sold from a competitor or taken in from a competitor versus last.

We saw a net gain so we're definitely gaining some market share there at least as well as probably some of the smaller regional payroll providers in particular that just can't keep up with the need to support them. It from.

And from a payroll a paid a pay check protection loan program, you know be able to get them. The information they need for the loans that I said, we had available to them pre populated and on the loan estimator in.

And it's for the forgiveness I mean, we have a signature ready application. All you have to do is go in and fill in rent utilities or anything else. That's non payroll the payroll data is already pre populated.

You can either sign electronically or print and and just file that to get your loan forgiven. When you see those kind of technology advancements that we offer as opposed to particularly a regional accompany and even some of the national ones, It's a very different value proposition.

So in a time of extra need I think you're seeing a shift towards more outsourcing.

That's helpful and then I just had a quick one on.

At least there's been some data that's coming out at least at the enterprise level, suggesting that companies that have been impacted directly by by the pandemic are just now beginning to to shed some jobs and.

I was wondering if youre seeing any any trends or any particular areas within the small business community that indicates.

That that trend is possibly.

Creeping into the two small business.

I would you know I.

I think small business took the biggest hit in Q4, you know and what was our Q4 I mean that kind of March April timeframe and you know they are now I think there's still there's still hurting and they need another stimulus we're not counting on it based on what we've seen but they certainly could use it you know I think the most recent survey.

It was over 80% of small businesses in particular, who.

Who took the loans have used them up now and and they're looking for a second stimulus that kind of help them through and then we're not sure what the impact is going to be particularly in the northeast as restaurants have to bring more diners inside and then have capacity capacity constraints. So I you know theres still could be some fall out but I think.

Small to mid size businesses, probably hopefully took their biggest hit already and we're not necessarily seeing more layoffs. There. They were also much more careful about bringing them back we haven't seen a total return of the employees.

That have come back and they are probably down double digits right now from where they were pre coated small businesses, meaning I haven't I've started to bring people that I per load or laid off back, but I haven't brought everybody back yet and so I think we already saw that I don't think we're seeing necessarily another drop off and.

Yes, there is no stimulus and people just say, hey, I can't survive any more but most of our data has shown a pretty good comeback at progressively continuing to improve.

That's really helpful commentary Marty. Thank you so much gentlemen, nice trends.

All right.

Thanks.

Our next question comes from the line of Lisa Ellis of most <unk>. Thanks.

Hi, good morning, guys.

First question is related to the the PEO.

I just want to understand a bit better what's going on in the PEO I think everything you mentioned you first saw a sharp downturn and then now sharp upturn can.

Can you just elaborate we were you referring to sales or performance speaks listing business or both of those.

Yes, sorry about that Lisa actually was probably both but but one when I was.

When I was.

Making that comment really was a sharp decline in the number of Worksite employee so even before we saw.

[music].

Checks check volume and checks and employees decline in the HCM business, we were seeing that in the in the PEO business were they shed employs more quickly and then PEO had a more sharp upturn as.

As conditions started to get better now part of that could be part of that could be what that for example states like Florida felt the impact in hospitality accommodations leisure so.

So they were they were feeling it at first and then they started to come back and started.

Hiring back, but but that's what I was referring to an up and obviously it also impacted impacted sales and now we're talking back in March April timeframe.

Yes, okay. So on the sales side are you finding like how our sales doing in the CEO are you finding that that I mean, I know, that's particularly a reasonably complex sales, but I would imagine there's a lot of demand for our <unk>.

Are you finding that youre able, but the sales are rebounding and you're able to sell the CEO in even if it's it's remote from current environment.

Yes at least they have recovered even stronger our asphalt business and our reps sell both PEO and asked so meaning not the co employment and but the need for HR kind of across the board has really taken off.

So there is we are you know really strong on the south side and coming back on the PEO side as well I think what efforts are the strongest strengthen the PEO has been the recovery of the Worksite employees coming back on the payroll on the on the sales side PEO is done fine, but the DSO has been even stronger now our reps can see.

Sell both so I think whatever the need of the client has and if it's not as much of an insurance need or they're not interested in insurance right now, but the needs errors toward HR.

Which I think we've seen then that may lead to an as wholesale which sometimes is a little bit quicker because you don't have to go through the underwriting and so forth. So I think PL peos come back, but it's always been much stronger and overall it spend because it's driven by an h. ARD need a human resource administration and need to handle all of you.

Whether its furloughs layoffs.

Cobot leaves of absence per family et cetera, that's where the biggest demand has been as how do I handle all of this stuff and.

And we've really seen that and of course, you know we have that was strong HRG. The HR generalist 600 of them across the country, we've been able to sell the value of that HR person, that's helping those clients quite dramatically here in the last quarter.

Okay, and then my last one I'll ask to be inevitable election question because by the time, we talked to you guys next quarter it will be over so what.

What what policies.

Agenda items are you keeping the most close eye on as we get closer to the election.

Well.

It's interesting because I think.

You know one generally has obviously been.

Better it appears better for business. When you look at the last few years because of the growth in businesses and so forth and the other side you know could probably bring a lot more regulations and more.

More opportunities with depending on the health care and so forth that comes out in the regulation. So if its heavier regulations theres going to be a lot of opportunity there if the administration changes.

That would give us great opportunity if the administration stays in place with you know tried to be less regulations, but I would say more confusing regulation that gives us an opportunity as well. So we really see kind of I'm trying to play the middle the line here, but we do see opportunities on both sides of whatever happens with the election.

You know probably it tends to be a little bit more on the regulation side.

If a Democrat gets in there, but and it will just.

And it will just be change, which will make some businesses outsource more because they are worried about the changes, but either way I think we see opportunities coming from it we're watching the level of insurance and healthcare regulations any impacts on four one Kay.

In retirement.

And what that impact there and then you know on payroll and HR. It really is just the level of regulations and so forth either way I think there is going to be plenty for us to do and plenty of opportunity be frankly.

Terrific. Thanks, guys.

Okay. Thanks, Lisa.

Our next question comes from the line of Jeff Silber of BMO capital.

Thanks, So much I know, it's late I'll, just keep it to one.

You talked about accelerating some of the cost initiatives can you tell us up to 31 million to book, how would that separated between op expense and SGN, a and what kind of cost savings should we expect them. Both those light ends from these initiatives. Thanks.

Hey, Jeff rather than get into I, I laughing, because I talked to the controller.

And most of it's going to end up with Gionee, but we'll just footnoted in the in the slide So you can update your models.

Okay, great and in terms of the cost savings have you quantified what you'd say.

I think I provided some guidance.

Last quarter I'd have to go back and update that I think it will be comparable to the to the the cost.

The costs that we take out, but let me let me revisit that.

To get a better answer.

I appreciate it thanks, so much.

Okay.

Our next question comes from line of Samad Samana of Jefferies.

Hi, Good morning, Thanks for taking my question. Similarly, I'll keep it to one just effort did you mention this quarter, how many customers are still.

Paychex customers, but that arc processing payrolls actively I think you gave that mix last quarter, just maybe an update on that and how that changed quarter over quarter would be helpful.

Yeah, Oh, sorry go ahead.

Yes, so Matt as I mentioned earlier, you know, we didnt give the absolute number but we're down about three quarters from the peak and even that number was you know I think people misunderstood that it was very large.

You know even at its peak and but we're down to like we're down three quarters from where it peaked we.

We still could take some losses from those clients, but it's not a big number compared to our client base.

And and we're watching those clients some of those may again may be hanging on for year end or.

Or to see if they get another stimulates the kind of help them through but the number and.

And the number dropped three quarters and very few of them went loss. So we really feel very good about the ones that came that reduced the number that were non processing. Most of them are back processing now I'd they are processing.

With fewer employees than because they haven't brought them all back but they are processing and less then definitely less than 10% of the number went lost so it was really a very positive so far and Weve got kind of that last quarter that were suspended kind of hanging on either for more stimulus or year end.

We'll have a good sense of that I think at the end of the next quarter I can tell you kind of exactly my guess is that will be pretty much off the service by then or they will be very few left but it's not it's not a number now that's really impacting us that much at all.

Great I appreciate the clarity and hope you and your families are all doing well thanks again.

Thank you Sir you too.

Our next question comes from the line of Ken.

Of JP Morgan.

Thank you. So much also encouraging results I just wanted to hone in on the winning the startups piece I thought that was really interesting how much of your success. There with start ups do you think is organic versus.

Doing something different in digital marketing and driving Internet leads I know everything you and I've talked about this and.

Im curious if thats a different muscle you are using to generate that.

Well I think it is I think is that friends mentioned he's used the word digital probably I think one the price for using it you know those investments you know tension it really made a big difference is efron pointed out you know you start back a number of years ago, and whether it's your payroll or flex both we've invested a lot in.

Making that easy to to search to then demo online as well as be able to buy online and that has really paid off as efrain mentioned in this environment.

While people are remote and they're going to get there getting more used to.

Not talking to anyone I think that was the trend any way all of us would say that right that people not wanting to necessarily meet with someone just especially if they are small in fairly simple business to be able to go online and figure it out themselves and set themselves up not to mention that one of the biggest challenges of having more leads.

Was then getting a hold of the prospect. After you got the lead this ability allows people to start and then actually encourages them to start the process of self side of sign up in setting themselves up and then a sales rep can jump in at any time and realizes if that has slowed down to help them through the process, but now they have already started to set.

Before when you had a reach someone in contact them you know a lot of times, we weren't able to contact the prospect or they had already gone somewhere else. This in these investments that we've done from a digital standpoint in both the lead generation and the self setup have have helped a lot and at a time when a lot more startups.

Our looking for someone that has been kind of the perfect marriage of of timing there.

Yes.

Thank you for that money that's.

Very complete answered just a quick follow up and I'll. Let you guys go just on the.

A lot of talk about outsourcing and I were going into the selling season can you remind us because I get this question a lot just want to make sure I'm fresh on it just what percent of the SMB market is in house as you define it versus outsourcing today.

Well you know the number is always pretty consistently been a third.

30% or 30% to 35% outsource add 65 to 70 still do it themselves of the small business market and that has that changed for many years now I haven't got the most up to date data, but I would definitely feel that has adjusted given the pandemic and then I think thats a trend that is going to continue.

As people have you know once they've seen the value of it.

Thats whats changed so it's always been kind of a 30 70, meaning outsource and not outsource and I definitely think that shifted.

It probably had a pretty good shift here in the last two quarters makes sense.

Makes sense thanks Vincent.

Okay.

Our next question comes from line of Mark Makeover of Baird.

Hey, good morning, Marty announcement.

Wondering with regards to the.

The in house clients that you're picking up.

What are they using typically are they using into it and quickbooks or are they using excel spreadsheets. This what's the level of sophistication and what are you seeing in terms of the the average client that's that switching over.

You know mark is going to be more anecdotal, we don't track it really close because the client doesn't always say it but I think it's a mix of those I would say it's.

It's you know, it's probably more do it kind of.

Themselves manually than it is into it but I think into it could be that could be 25, or 30% of the mix coming in but a lot of times. They havent used anything its more just figuring it out themselves on as sales spreadsheet type of thing and you know that kind of thing and then the need for.

Payroll kind of combined with HR has pushed them kind of over the limit to say, hey, I need something else I, just don't need a calculator of payroll I need to understand the rules and regs and I've got somebody that is now taking.

Family leave because of co bid or they need to stay home with Joe.

Children or something how do I handle all this what about parental leave how do I handle all these rules and that by multi state in particular, it's.

It's really hard to keep up with it. So I think it's been that combination of matches I don't just need a calculator I need really help and how to do these things and and that my employees are asking for more from a mobile standpoint. So you know my employees are expecting to be they are now asking for pay end demand. For example, we haven't even touched on that in this.

Well you know we offer pan demand they started asking that I worked eight hours because more employees are working shifts in part time and various shifts where instead of being more normalized they're asking.

They are asking for pan demand they are asking for access to their check stubs on a mobile we're now offering you know Google search so if I say, a Google what I want to be able to ask siri or Google what I got paid and when I got paid that's now available. These are things that you don't more younger I guess I'd say employees are asking for that flexible.

Realty and those demand and they can't do that with what they've been using.

Since you brought it up on the P. on demand what percentage of the clients are now using that.

You know, it's still pretty small, but it's growing I think as more clients are seeing the ability to have it.

I don't I think the clients feels like it especially with our.

The way, we're offering it today, it's no risk to the clients themselves. It's you know being done that way I think more employees that are realizing that its available are asking for it and more clients being aware of how simple it is to do it it will pick up it's still very small from a.

From a starting standpoint, but it's starting to get attention, particularly again with this environment, where hey, I just may need somebody to work eight hours here and that employee says if I'm only working eight hours this week or because of chilled.

Or because of children at home I can only work 16 hours or 20 hours had like the money right now instead of waiting two weeks to get my check because I'm not working full time right now, it's becoming more interest. So we're trying to get the word out there that it's available and I think it's starting to catch on but it's still pretty small at this point.

I appreciate that.

The of the new clients that you're getting that Werent doing self service can you break it out just in terms of what percentage of the new clients are getting we're self service versus your largest competitor versus regionals.

I don't have that right in front of me and I don't know if front if I don't know I don't have that.

Don't have that I.

I'd have to we'd have to look and see if weve got that but I would say.

Trent.

I don't have it right in front of me no. It's a pretty good you know.

As we're saying I think the uptick from normal sales.

Value that driving a lot of growth is the more the newer outsourcing that we've talked about that are outsourcing for the first time and and new business is definitely up I would say double digits as well my first part of the reason why you're not getting them.

Sure on that is it.

We recognize we're in an unusual environment where.

New business formation is up and I think that Theres Theres a third in addition to everything else, we're benefiting from that and we seem to have the right solutions for the right time.

Third place in the market.

And new units are up what what percentage were they upturned this last quarter you.

You you were going to have so the answer is good we're not going to give you. The exact number so good being certainly more than low single digits Mark.

More than low single digits.

Okay, and how about HCV.

I'm, sorry, how about leverage line base HCV.

Average life.

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I'm not sure I know, what that acronym into or maybe I'm missing.

Annual contract value of the bookings that.

Sure our sell another row sales.

Well well update that as we go through the through the year Mark. So we're we're not going to provide that on a quarterly basis.

Okay. Okay, great. Okay. That's good all right and then just I just put that in the acronym lexicon.

Okay, and then finally.

Marty I heard your interview with regards to the discussion in terms of employment growth and the PPP.

How are you thinking about this this fall and winter with regards to you said youre not expecting the stimulus.

It comes through it sounded in your interview like you thought that was really crucial for some clients can you can you just discuss like how crucial do you think it is what percentage of the clients are really kind of.

You know kind of at the end here or.

And how we should think about that because all the comments are really positive.

And it sounds, but it also sounds like you're not expecting the stimulus to come through so I'm just trying to put those two together.

Yeah.

Hey, Mark I, just want to clarify something the comments are positive versus expectations. I mean, we are not sitting here, saying that everything's, great et cetera, we understand the environment, which we're operating our comments are positive because the results suggest that it's better than we expected and we are navigating through the environment I just want to make sure.

We're not paying a rosy macroeconomic picture that everything's, great. We're saying, we're navigating effectively through the environment. That's the that's the idea that we want to convey.

Okay, and the challenges yet it's better than it's better than we expected. We expected you know less of a recovery in that first quarter and it's been much stronger and we performed very well compared to our expectations, but but you're right. You know triangulating. All my interviews is a problem with doing too many interviews.

You're right about 80%, what we've seen in general surveys not just our clients, but in general you know about 80% are saying there at the end of the first loan about 40% to 45% are saying they need additional stimulus. We think it's important that they get additional stimulus what everyone was saying that in our forecast.

We have not built that into say that that's going to be a big impact and we have not built in that they're going to get it and that is going to have a big impact. So as we look out the hardest thing is forecasting the second half of the year because one we did much better than we thought in the first quarter, we can kind of see what that's what's happening into the second.

Quarter, that's probably fairly predictable what's really unpredictable is you know the second the third and fourth quarters fourth quarter in particular, where we estimated already that there was going to be a positive growth year over year.

Now, it's a better compare obviously to a tough fourth quarter previous year, but it's hard to predict so.

I think the stimulus stimulus another stimulus for small and mid size businesses, absolutely needed it needs to have more flexibility it needs to have an easier way to forgive the loans is that going to happen I don't know, it's just that I think everyone was saying at the beginning and we didn't build in like that was going to have a big impact in the second quarter. So.

If it does happen that should help us and give us even more tailwind, but where we weren't including it at the at the at this point.

I appreciate that.

Great job in terms of all the things that you can control.

Thank you thanks appreciated.

Our next question comes from the operator are there any other question.

Our next question comes from the line of Kevin Mcveigh of Credit Suisse.

Great. Thanks sales just Oh huh.

All right I'll keep it tight but for now I'll keep it tight take just the record sales in you talked about just couple of different ways, but is there a way to frame just what the average client size is your maybe just how much of those sales coming in or DIY is opposed to traditional method and did that.

The mix helped contribute to the margin boost in terms of the guidance here was that more just overperformance on expense.

It's better expense management.

Yeah, you know I would say because of where it was coming and because of the channels through which it came in it tended to be smaller rather than larger that's where you tend to see more more of an impact on.

On on those kinds of sales.

It doesn't contribute necessarily does that change in margin profile going forward, but obviously, if we continue to see that kind of a sustained performance.

Awesome I'll leave it there just in the interest of time. Thank you.

Okay. Thank you.

Our next question comes from the line of Matthew O'neill of Goldman Sachs.

Yeah, Hi, Tom and can can you hear me I'm sorry.

Yes.

Okay. Thanks, so much for taking my question I realize where we'd be on time here I was just curious as some so many things have been asked and answered really impressive resiliency of the business throughout obviously unprecedented time here.

Going back to the Paycheck protection is there any quantifiable dynamics that you guys have kind of internally studied with respect to that the percentage of that the current base. That's been a recipient of that or when you think about those businesses that are maybe not at this point kind of struggling.

Yes.

Quantum quantifiable metrics around that.

Yes.

You know I don't I don't have those numbers right in front of me.

You know, we do know that we when we did a number of things we partnered with three fintech companies to help including because the credit and some others to help get loans out there. We provided those reports as I said the first to provide the pair report we think our clients have about 28 billion in loans based on.

What we know are out there.

When you think about that across the whole base that's not a.

Huge number when you think about distressed businesses in the base. We felt good about the fact that we're able to help them get those loans and secure those loans and.

But I think it's not a real large percentage that took the loan or needed it but I am sorry, I don't have that I know, we were trying to track. It it was tough to to be able to track through that data to see how many of our clients actually took the loan. We do know that we worked through about 28 billion is what we expect of loans outs.

Standing so.

So.

I'm, just writing follow up I'll leave it there, but I don't think so.

Okay. Okay. Thanks, Matt that's sounds great. Thank you operator, I think we're going to operate I think will give us.

Operator, I think we'll given time, we'll close the call at this point.

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Are there is there anyone else on the call.

Have we do have a final question from the line of David Grossman of Stifel. Okay, We'll take that.

Oh, sorry, sorry, I Didnt mean to prolong this even longer than it already is go access.

Yes, sorry, [laughter] so.

Yes.

Yes.

Thank you I really just have a clarification.

And I really just wanted to follow up the question earlier about growth in the second half of the year.

Like Jason actually I had the guidance at low single digit growth.

For the previous call in the back half of the year and perhaps we all know that's understood. What you had said previously so perhaps for you.

And you can just.

Share with US what's your what's your guide was for the back half three months ago.

Yeah, I think I, just said that we expect the back half of the year to be flat to very low single digits. So to the extent you hey effort, you're not seeing anything different that you said, let's.

Let's just say I sit with a little bit more conviction that stuff if I said it.

It could.

Yes.

All right fair enough, let's leave it there thanks again.

Okay.

Okay. Thanks, a lot.

Okay. At this point, we will close the call and if youre interested in replaying. The webcast of this conference call. It will be archived for approximately 30 days. Thank you for taking the time to participate in our first quarter Press release conference call and for your interest in Paychex hope everyone stays safe.

And thank you for calling in.

Thank you ladies and gentlemen, this does conclude today's conference call you may now disconnect.

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