Q2 2021 Paychex Inc Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to the Paychex Q2, EPS why 21 earnings conference call.

At this time all lines have been placed any listen only mode.

After the speakers remarks, there will be a question and answer session.

You ask the question during this time simply press Star then the number one on your telephone keypad.

The withdraw your question press the pound key.

Thank you I will now turn the call over to Martin Misty. Please go ahead Sir.

Thank you and thank you for joining us for our discussion of the Paychex second quarter of fiscal 2021 earnings release. Joining me today is that the were below our chief Financial Officer. This morning before the market opened we released our financial results for the second quarter ended November 30 of the 2020, you can access on earnings release on our Investor Relations website and on.

Form 10-Q will be filed with the FCC within the next few days. This teleconference is being broadcast over the internet and will be archived and available on our website for approximately 90 days.

I will start today's call with the update on our business highlights for the second quarter up from will review, our second quarter financial results and provide an update on our outlook for fiscal 2021, and then we'll open it up for your questions.

Well the first half of fiscal 2021 was affected by the economic impacts of cold with 19, we have been pleased with the results of our business and the sequential improvement over the first quarter in both revenues and earnings improvements in revenue occurred across the board all lines of business most of our key business metrics of continued to show steady improvement.

The way the more moderate pace as we ended the quarter, we have not yet experienced any deterioration related to recent surge isn't COVID-19 cases across the country, but we continue to monitor trends closely, especially as no restrictions are being implemented in many states.

Throughout the call. The 19 crisis, our business model has proven resilient or client base has grown despite economic headwinds and we continue to see good sales momentum with growth year over year in new units. So our digital sales remain an area of strength and we continue to invest in digital marketing lead generation and sales technologies the dry.

The growth, we also see strong demand for HR solutions, and HR outsourcing, which we delivered through both our assets so M.P.E. on models.

Since the onset of the pandemic, we have seen a greater interest the NAV sold in the US all model as businesses are looking for more immediate HR support.

We are on track for another year of record retention is losses have declined significantly compared to the prior year client satisfaction scores continue to improve as we focus on providing excellent service to our customers supporting them in this most challenging time in helping them simplify complex regulations.

We have not let up on our efforts to help our clients navigate this environment and we continue to educate clients and prospects on the state and local specific regulations, which are frequently changing including the new stimulus initiatives passed by Congress.

Our retention team is proactive in reaching out to client who may be showing signs of difficulty could to consult with them regarding available options and our clients are facing the most complex calendar year in many of ever seen and we are here to help them through it.

We have expanded our thought leadership not only in the area of cobot related regulations, but more recently operating information on the 2020 election results and the potential impacts to our clients' businesses.

We continue to see demand for virtual events and webinars to help educate clients and prospects in this changing environment.

Our financial strength the allows us to continue to make investments in technology are for product for a launch builds on our track record of innovation and delivers and our promise to make complex business issues simple, we introduced several new offerings and enhancements that help businesses increased productivity reduce risk maintain compliance.

And the DAP to mobile and AI driven trends.

More business leaders are turning the tech solutions to increase productivity in this environment and respond to the interest of their employees, our Apple watch and Google Assistant device integration now allows employees the axis, the HR and payroll information easily without even logging on to their phone or P.C.. We also added new features in our performance management.

System to allow for greater feedback and engagement with the remote employees critical to employee retention in development in this work from home environment.

We continue to enhance our analytics suite and dashboards, we deliver a user experience that enables clients to define the data that is most relevant and actionable to them, which saves time improves productivity and supports better business decisions.

We also see positive trends with double digit increases in mobile and self service usage as our strategy of the voice independence continues to gain traction with customers.

We recently announced the integration of Paychex flex with the market, leading Clover point of sale platform from Pfizer of.

Well the on the Clover at market. This gives businesses on business owners, the ability to streamline payroll and time and attendance management. This is another example of our commitment to connect paychex flex users with some of the world's leading business tools.

We're proud of these innovations in more and more were recognized by industry experts. This quarter. Most recently the paychex flex platform was recognized by human resource Executive magazine with an HR Tech award for the top HR product of the year.

The combination of the single device independent application with the HR services and benchmarking capabilities sets us apart from others in this category.

We continue to design solutions that add value to our clients, our new P.O. protection plus package helps business owners reduce risk by coverage by offering coverage related the cyber attacks and employee lawsuits except.

The exposure to these risks has been rapidly increasing in the COVID-19 environment and we are the only provider offering both cyber liability and L.Y. coverage as part of our PEO solution and by leveraging the group plan model of our PEO. The coverage is significantly more affordable to businesses.

The COVID-19 environment has also impacted the financial security of millions of Americans further exacerbating the issue of the lack of retirement savings in the U.S.

This month, we announced that we are among the first in the retirement industry the sponsor and maintain a pooled employer plan to help businesses nationwide provide a cost effective retirement plan option for their eligible employees the.

The saw brings an outcome of the secure act and along with the reduced cost compared to a single employer plan. It will reduce fiduciary responsibility for employers and simplified plan management.

As we move through this period of uncertainty we are confident that our resilient business model strong liquidity position and dedicated employees were focused on the service and innovation for our clients in the employees will have paychex emerged from this pandemic in an even stronger position in the market with our clients having experienced so for that.

And support that we deliver.

I will now turn the call over to have from Rivera to review our to review our financial results for the second quarter effort.

Thank you Marty before I begin let me just wish everyone on the.

On call was safe and enjoy this holiday season, the hope you get some time Mark.

Book to enjoy the.

Covidien season.

We're making of it what the all of us and can make of it.

To make it a good time so.

So let's start I want to remind you that today's conference call will contain forward looking statements.

Referred to the customary disclosures in addition on periodically refer to some non-GAAP measures.

Please refer to the press release in the Investor presentation for more information on these measures let me start by providing some of the key points for the quarter for Wilkinson.

[noise] sees a greater detail in certain areas and then wrap with the review of the fiscal 2021 outlook.

As Marty mentioned, while second quarter results continue to reflect the impact of economic conditions, resulting from the code of 19 crisis.

The improved sequentially from first quarter for.

For the second quarter.

Total service revenue of $969 million was even with the prior year.

And this was moderated by a larger for lower volume of client employees pay the cross for HCM solutions.

Results improved from a decline of 6% in the first quarter as you recall.

Within service revenue management solutions revenue started to increase it was up 1% of $733 million on PEO in insurance solutions revenue.

Decreased 3% towards the 36 million during our total earnings call of noted the second quarter revenue was interest.

Dissipated to be down mid to high single digits.

For management solutions in high single digits to low double digits for PEO in insurance solutions, our results exceeded those expectations obviously.

Total revenue declined 1% of 984 million. The basically is the impact of further declines in interest on funds held for clients.

Interest on funds held for clients were down 25% for the quarter to $15 million due to lower average interest rates.

Average investment balances and realized gains.

The average balances for interest on funds held for clients declined 4% during the quarter, primarily due to lower client fund collections and changes in the client base mix.

That was offset by timing of collections were a bit says and some wage inflation.

Expenses decreased 3% the 629 million of the decline of expenses was driven by lower headcount discretionary spending in some of these costs.

The results of our cost savings initiatives operating income of.

4% of 354 million of reflected an operating margin of 36 points, 36% from sorry, the 150 basis point improvement from the prior year quarter.

As a reminder, other expense net for the second quarter includes interest on our long term borrowings, partially offset by corporate investment income, which was impacted by lower interest rates.

Our effective income tax was 22.1% for the second quarter compared to 23.2% for the same period last year, both periods reflect net discrete tax benefits related to stock based comp payments that occur with the exercise of stock option Awards as you know we call those out simply because it's difficult to print.

When the will occur.

Net income increased 5%, the 272 million and adjusted net income increased 4% the towards the $65 million for the quarter.

Adjusted net income, excluding the onetime costs and the tax benefit from stock based comp payments.

Diluted earnings per share and adjusted diluted earnings per share of both increased 4% during the quarter of 75 cents from 73 cents per share respectively.

Year to date of touch on these very quickly there in the press release service revenue declined 3% the $1.9 billion with management solutions revenue declining, 2% PEO and insurance solutions declining mid single digits interest on funds of for.

Clients declined 27% as we.

Bore the brunt of lower interest rates total revenue was down 3%. The 1.9 million of 1.9 billion operating income decreased 8% of $638 million adjusted operating income decreased 3% of 670 million, reflecting the margin of 35%.

Adjusted operating margin as you know excludes one time costs of $32 million related to acceleration of cost savings initiatives the initiatives, including the long term strategy of reduce or to your geographic footprint.

And headcount optimization, the majority of which was recognized in the first quarter. The amount recognized in the second quarter with minimal about a million dollars for so from the amount that we had talked about.

When we initially released guidance.

Diluted earnings per share increased decreased 8% to 1.3 for one.

The window of 34 cents I should say and adjusted diluted earnings per share decreased 4% $1.36.

The investments in income as.

As you know our primary goal is to protect principal and optimize liquidity continue to invest in high credit quality Securities long term portfolio has an average of one you of the 1.9% average duration of 3.4 years.

The combined portfolios earned an average rate of return of 1.3% for the quarter down from 2% last year.

Let's talk about financial position.

Remained strong with cash restricted cash and total corporate investments of $963 million in total borrowings of 804 million as of November Thirtyth 2020 funds.

Funds held for clients for $3.4 billion in line with the balance as of May 30, 123.

On the 20.

Funds held for clients vary widely the day to day basis, and average 3.6 billion for the second quarter.

Our total available for sale investments, including corporate investments and funds held for clients reflected net unrealized gains of 109 billion.

Compared with the 100 million as of May 31, 2020.

The increase in net gain position resulted from the declines in interest rates.

Total stockholders equity was $2.9 billion absent of rubber Thirtyth 2020, reflecting 447 million the dividends paid.

And $29 million of shares repurchase during the for six months for return on equity for the past 12 months remained very strong at 30%.

Cash flows from operations were $431 million for the for six months a decrease from the same period last year. The decrease was driven by lower net income and fluctuations of working capital, including an increase in accounts receivable, which dropped from most of that.

On and that is a parallel.

Parallel to our recovery in our revenue.

Now I'll turn to our guidance for the current fiscal year ending May 31 2021.

It reflects our current thinking regarding the speed and timing of the economic recovery.

While results for the first half of the fiscal year exceeded expectations.

Uncertainty about the trajectory of the recovery over the remainder of the year remains.

Your remains particularly with the recent surge in COVID-19 cases.

Improvements in key indicators have moderate and our guidance reflects the steady but gradual improvement through the rest of the fiscal year.

Although not at the pace of the for six months.

We have provided the following updates to our guidance after seeing the second quarter results management solutions revenue year over year is expected to be in the range of the decline of 1% to growth of 1%. We previously guided to a decline in the range of 1% to 3% with the bias toward the high end of that range PEO and insurance solutions.

As expected the decline.

In the range of 2% to 5% that is unchanged from prior guidance.

Interest on funds held for clients, but is expected to be between 55 and $65 million. That's also unchanged from prior guidance total.

Total revenue expected to be in the range of a decline of 3% to flat for even with last year.

We previously guided to a decline in the range of 2% to 4%.

Adjusted operating income as a percentage of total revenue is now anticipated to be approximately 36%.

Of from previous guidance of approximately 35% in adjusted EBITDA margin for the full year fiscal 2021 is expected to be approximately 41% of.

From approximately 40%.

Other expense net.

The anticipated to be of the range of $25 million to $30 million previously was the range of 30 to 35 million.

Our effective income tax rate is expected to be approximately 24%, while we previously guided to a range of between 2000 for 25%.

And the adjusted diluted earnings per share is expected to decline in the range of 1% to 4% we previously guided to.

The decline in the range of 6% to 8%.

Turning to the second half of the fiscal year, we currently anticipated total.

Anticipate total revenue will be in the range of flat to up low single digits.

Adjusted operating margin is expected to be in the range of 37 the 38%.

Now, let me talk about the third quarter management solutions revenue is expected to decline in the low single digits.

On PEO in insurance solution revenue would decline in the mid to high single digits impacted by lower rates for workers compensation and state unemployment insurance.

Adjusted operating margins, excluding one onetime costs are anticipated to be approximately 41% in the third quarter.

Of course, all of this is subject to our current assumptions, which are subject to change well update you again on the third quarter call.

We refer you back to our Investor shares on our website for more information and now with all of that I'll turn it back to Mark great. Thanks, Efron, Operator, we'll now open the call to questions.

Certainly and as a reminder, if you would like to ask a question Press Star then the number one on your telephone keypad.

And your first question is from Ramsey El Assal of Barclays.

The.

Hi, guys. Thanks for taking my question on this morning.

Hi, good morning.

I was wondering if you could let us know what are your guidance assumptions include stimulus and I guess also as a follow on question to that now that you've lived through at once what's the second round of stimulus do.

You of any kind of the better understanding of how that would impact the piano.

Yeah. So let me handle the first half and then the second half so the short answer Ramsey of that no. It doesn't inc.

The impact of any stimulus a little bit tough the gauge, but it would be a net positive of what Marty talked of kind of what we think the benefit might be I think a number of beds obviously.

A lot of clients have been kind of holding his from some clients have been holding on waiting for a second stimulus well. We have found is that those who when we sort of radar clients those who took a PPP loan. The first time, a virtually 100% of them were still in business, so 99.8% or something so obviously the stimulus.

The first one made a big difference for holding clients over and the until things pick back up and I think the second one will do the same thing and it's very targeted to small and kind of on the smaller end of mid size businesses, which is even better in the has better parameters from what we can see at least that was signed.

Or approved by Congress.

For forgiveness for loans as well.

We also have done some things like made sure that we're totally connected now and with Fintech providers and lenders like because the credit. So we can pass our information from payroll and they can clients can the approved the fact that they can move information directly to a fintech provider like because the credit to get alone.

So I think everything is going to speed up faster from a CMS perspective, if you need a loan you're going to get it easier faster the for.

Forgiveness is going to be even better than before particularly for your on the low end and.

Not to mention that I think payroll and HR solutions services software.

Is covered by the expenses of the are part of the expenses that can be covered so I think it's kind of be positive certainly it's going to be positive to the degree how much you know it's hard to tell at this point.

Great.

And then I was wondering if you could also comment on or give us a little more color on the underlying drivers.

Management solutions for the rest of the year, it's great to see the outperformance this quarter. It looks like there is some moderation expected maybe a little more color on what you're seeing in your portfolio of that's causing you to be a little bit conservative going forward here.

Yeah. So let me let me talk about first kind of with the would have been the drivers.

In the first six months and then why the third quarter looks a little bit different perhaps than sequentially than other quarters and by the way.

I would just ask for other people in the two thirds of question, that's really kind of related to what we're discussing a few.

If you could just sort of keep your questions.

On a brief because we want to try to get to everyone. So the short answer to your question on management solutions is that.

Management solutions has.

HR outsourcing in the air So model in net revenue stream, that's kind of retirement services in the stream other modules of flex, including and very importantly of time and attendance in that revenue stream and then.

And then some other other items all of those all of those products are doing very well and I would highlight the fact that if you look at the at the year. This has been the year of demand for HR services. So if you look at our Worksite employees across all of our platforms that provide.

Right.

That provide HR support for were.

Worksite employees for.

So weve seen very strong demand driving the of the revenue growth.

For the revenue recovery now we're battling as I mentioned in my my comments, we're battling the fact that of the number of employees paid is down obviously because of the.

Current on unemployment, but but the underlying trends.

For a very very positive so why why as we get into Q3 does that change in Q3. There are a number of revenue streams that are billed annually and depend on the number of employees on the payroll at that point in time, because they are lower we anticipate.

But they will be lowered simply because of the number of of Worksite employees that are being paid it has a moderating impact on the.

On the revenue in the third quarter, that's what's driving that that result, obviously, then as we come out of Q3 those.

Those revenue streams are no longer.

The factor in Q4, and we expect a rebound in Q4, so thats really whats driving.

Driving the the.

What would appear to be conservatism into three we'd like where the the underlying trends are the at all of the revenue streams on management solutions and we see those continuing through the year into Q4.

The Super helpful Happy holidays to the thanks.

Thanks, you too.

Your next question is from Kevin Mcveigh of Credit Suisse.

Great. Thanks, so much.

You all.

Hey, Marty day.

Congratulations on the rich interest.

Really really fantastic outcome, I wonder Marnier efrain.

It is part of it just it feels like based on the transition to the cloud the part of that is clearly structural.

Is there a way to think about where they are.

How much you can narrow range from a retention perspective, and then ultimately.

On the translate that into revenue relative to the cloud based providers because it seems like as you transition the business model to the cloud of clearly call for even higher levels of retention.

Maybe help us understand that a little bit.

[music].

Well I think ultimately the retention is about as you know about the about the level of service and the in value that you are bringing these clients on I think the work that we've done on innovation and technology investment to the cloud you know has made a lot of benefits and I think they really shown up in this pandemic environment.

One of the one of the positives there can be a positive in this environment for businesses was that they could see the full value of paychex and the service that we bring so being on the cloud and the fact that many of them have.

The people working from home they can see the technology and what being in the cloud meant to them. So they could handle they could improve productivity. They could have better retention of the employees. They could still develop them train them on board them.

They can do or they can handle all kinds of time and attendance measures. They can do anything that I don't think day, even really thought a lot about before hand, and I don't think its ever going to go back.

For them the way it was prior to that so there they understood. The investments that we had made in the technology and innovations that we have they found the much more of of value from that and the cloud is certainly a big part of that that they don't have to rely on there's a lot more self service, but they took advantage of in their employees took advantage of the save them.

The time and money and save US time, and money is well and focus on high value parts of the products.

Moving on to add to that Kevin. So your question is okay can we expect.

25% of 50 basis points 75 basis points better.

Better retention I don't have a direct answer for that right now, but I will say this.

It's very easy to envision the that we have one service model that applies across the breadth of our 700000 plus client.

The reality is that that's not correct.

We have a variety of different service models that respond to the needs of the client as we understand and I think that we have.

Very high degree of.

Customer intimacy with our clients and understand.

What kind of service model they need.

So we have a variety of different models that are designed to ensure that.

The client has the highest possible on net promoter score we can have on our net promoter scores in.

In this year are at all time record highs and it's in part because we understood and have the capability, which others do not.

Of being able to provide hybrid flexible service models based on what the the customer desires and so I think as we continue to refine that as we continue to get better and better is understanding what each customer in each segment needs, whether it's no service too.

Full service I think you're going to see for retention of continue to improve.

Super helpful I want to be respectful the time, but so I'll go back in the queue I have another question, but I don't want to get it so.

Sure.

Okay. Thank you thanks.

Thank you. Your next question is from Jason Kupferberg of Bank of America.

Hey, Thanks, Good morning, guys happy holidays.

Hi.

Hey, Thanks, I wanted to just get your view as you head into the key selling season. Here you think coded is going to have an impact on competitive dynamics in the sense that perhaps.

Perhaps fewer SMB look to switch providers because of their consume with just trying to keep their businesses the float or is it actually possible that we see the opposite scenario with an above average amount of competitive switching as small businesses look to watch every dollar even more closely during the pandemic or perhaps their needs of become even more complex as the result of.

Of course of it.

Yes, Jason what we've seen and I would assume it's going to carry through into January in the this quarter selling season is there the much more of a hesitancy to switch. So our retention is certainly benefiting from that it does make sales away from competitors a little more challenging.

To the degree because the I think your first assumption is what we've seen as more correct, which is just that people are not focused on switching they don't want to go through the switch right now and they've also at least on our person from our perspective, they have really as I mentioned earlier seeing the value of what we.

Can bring at an all time high.

So they're going to be reluctant the switch because they are not focused on that and also I think theyve also seen we've gotten this feedback directly from clients with.

For the way, we help them with the PPP loans. The first group the way, we help them with the forgiveness. The feedback they got from their accounts on how easy it was the file and forgive debt forgiveness on apply for the forgiveness of loans was really a step ahead of other competitors for US we were able the.

The populate all the reports the for for given this application was pre populated in signature ready.

Of adding just a few of bits and now thats, even easier that we're going to tie them into the fin tech lenders as well. So I think it's one of the reluctance to move but I also think there were seeing a lot more value and that's made a big difference on our retention and the for sales I also think thats going to help us.

Okay. The.

The revenue upside this quarter was more pronounced in each of our management and wanted to get a better understanding of which specific products were especially outperformers in.

In the second quarter.

Yes, I think we made mentioned that the DSO product.

It really was strong any HR product the the the need for HR, particularly when you think of so many employees working from home some being for load.

Weather day, how do you handle the credits the tax credits and so forth about employee retention all of those things helped.

Really push HR support and more on the day, it's always side than the PEO side, I think insurance was not as important.

You know to them right now from a benefits perspective as the HR support Wasnt. So more tended to say look I'm not ready to to switch or or begin insurance, but I need the HR support the pretty dramatically.

Okay, well thanks for the answers have a great holiday from hard.

Thank you for it.

Thank you. Your next question is from David Togut of Evercore ISI.

Hi, Good morning, everyone. This is John due to the on behalf of David Togut. Just one line Thats. My first question on business formation. So you mentioned last quarter that new business the start up.

Business accounts were up 20% year over year, how did you see those trends continue into the three feeling from you given your projection for what you're expecting for that for the year.

Well I think the nationally we've seen it continue it's even higher than that I think it's approaching.

Hi, Thirtys or 40% increase in new business startups, I think what you're finding is both people shifting in.

In the pandemic to new business opportunities and those starting new businesses. Some of been laid off from other businesses and the decided this of the time also money is fairly easy to get the whole little bit low cost they have home equity where they can take loans as well at low cost the start their businesses. So that has continued we have seen the.

Household sales that I mentioned in the first quarter lot of nannies tutors things like that where people were had their kids at home and we're.

Buying for that we've seen a lot of other new upstart businesses, you know get started or.

Get started or change what they were doing and create a new business. So it has continued its continued to accelerate higher than in the first quarter and.

I would assume that may moderate to some degree because but the but.

We'll have to see.

Great. Thank you for the color on that.

Next on capital allocation you provide the update your priorities and kind of what you're thinking in terms of capital allocation as we move beyond the code the 19 environment.

Yes, I think we haven't really changed significantly I mean, obviously.

None of the dividend is an important part of the equation.

We buy back shares too.

To maintain share count level, but we are interested in looking at M&A and and remain.

In in the.

In the discussion for opportunities that we think could be interesting.

Obviously prices are high but.

But but we think theres selected pockets of opportunity, where we're it may make sense.

That's that's for sure.

Great. Thank you all very much on the happy on thanks Suji.

Thank you. Your next question is from Stephen Walt of Morgan Stanley.

Hey, good morning, and happy holidays. Thanks.

Thanks.

Maybe just starting off on what you guys are talking about was sort of the incremental penetration. The bundles you called out the assets strength. It just seems like you're getting the.

Better economics relative to each client.

And maybe that's part of additional market penetration on all the things you on other platforms of talked about in terms of incremental HCM demand just curious how big of a runway you see for that scene is seeing as it's already starting to show up as.

As well as how you think of that in terms of lowering your macro sensitivity going forward.

Well I think there is a lot of opportunities still there.

When you think about time and just take products like time and attendance on time.

Time, and attendance has really been growing very strong double digits for some time.

We're seeing that with the innovation that we've put out there from the Iris.

Scan time clocks to the kiosks to punch in and punching out on on your watch all the things have driven even more demand for things like time and attendance HR certainly has been driven a lot by the cobot environment, how different the I mean, you can understand that the clients are facing for the first time challenges they've never seen before.

For and they are going to continue I think as the next big question would be do you do you require vaccinations for example, the bring people back the work how do you how do you verify that one of the rules around that what do you do with absences due to co bid or family or things like that so these are all so complicated.

Adjusted for small to mid sized businesses, who typically don't have an HR person I think theres a great opportunity for continued demand for the services from light HR right to fully ASO and PEO as well and that includes insurance, which we think will pick up will pickup in the back half of the year the Steve into the second.

Most of your question, it's a good one and I think frankly, a few really disaggregate our results and.

We look at the kind of the second level of why the performance has been what it's been I think it's two things the first thing is.

Our sales unit or volumes.

And on HCM had been up the is the first six months, we hope it continues into the back half of the year, but frankly, it's been higher than than we expected that strength of digital strength of digital sales and marketing.

And a lot of the efforts that that we put into the platform over the last several years, that's part one but I think you highlight the second part which is important.

She is when you look at that.

At the next level of what you realized for what you see is that we really had strength in terms of selling other products to the base and I would say you're seeing the an important respects the the the criticality of having in HR solutions in the bundle.

Of the of offerings that you give declines of by by the way I don't mean, an HR solution in the sense of the.

The chart administration module, almost everyone has that but the real ability to be able to provide.

Counseling and.

In consulting to clients in a very complex.

Environment and so we have benefited from the fact that we not only have been able to increase unit sales, but also increased penetration of services within the base. So part of that to your point has the lessen the impact of what is obviously not a great macro environment still.

I hope that in the back half of the year it starts to get a bit better.

And it has moderated but I think our ability to sell within the base the importance of HR services across the continuum of what we we so.

Has proven out thus far this year and one other thing I think it bodes well for retention you know sometimes when they took the HR product they needed to set up their hand booked for the first time. They needed you know a couple of things that they never had employee rules and in kind of benefits and so forth, but now when you think about it theres such a can.

Attenuation of this need its kind of go on for some time, but I think that that does bode well for for retention of the HR products as well.

Okay, Great I appreciate the the robust commentary from both of you there just maybe one follow up.

Two I think something that Ramsey had asked about the the sort of baking in the stimulus and other factors.

The wind the tape six or nine months I think the way you described how you think of the the upswing the sort of the gradual recovery I know you'd characterized it as the next six months of not going to be quite as robust as the last six months, but if I think about the sensitivity of the upside and downside if stimulus added in as you see it is a slight net benefit is the also fair to think about the potential for a step.

Back in employment or other macro factors has also not baked into the could be possible drag to offset that how should we think about the the push and pull there.

Yes. So that's interesting complex question, but I'll try to try to give the simple answer.

I mean, it could end up having that effect. My my my sense is that you did in fact and factor in completely what the impact of of vaccine hands and all of that and that's really kind of the Joker in the deck to the extent of income for why.

Spread and now you see an uplift.

In in employment the.

Thats going to be of positive.

David If we continue in the same it with the same environment I think what we're assuming is gradual improvement unless things get much worse I think we're in in in reasonable shape.

If it goes backwards, we'll have to see what what happens as I as I mentioned earlier and Marty mentioned too we have seen some moderation over the last month or so in the improvement in.

Forward looking trends will it go the other way I don't know too early to call on them.

Okay I just wanted to see how you were thinking about of so I appreciate the thoughts there happy holidays. Thanks, Thank you too.

Thank you. Your next question is from Andrew Nicholas of William Blair.

Hi, good morning.

First I was hoping you could provide maybe a bit more detail on the health of the the PEO business specifically, Inc.

You can say about kind of the growth rate in that business over the past couple of quarters and then also just how conducive is the market right now for starting or a brand new PEO relationship.

Just just wondering if if people are kind of stuck in their ways, given the current environment or or if there is still opportunities to to initiate the new relationship there. Thanks.

Mark Barnett, who will take the second I'll come back to trends in the PEO.

So I think the second one is it.

I think as I mentioned, there is theres been some theres been a much more of a demand for the HR support and sometimes that's with the PL, but it's been a little bit more heavy on the age of so side for us on of course, we offer full I think people have been a little more reluctant to change.

Insurance providers and so forth. However, I do think thats going to the tough start the change big.

Because I think thats been a real benefit.

In the end, we also as I mentioned that provided the new bundle, that's providing l. ISO employment practices.

The liability protection that is going to be very important right now theres a lot of questions that are out there about how might treating employees that are working from home who have co bid work connected the someone who has it may take time off I think there is going to be theres a lot of as you know of course in the congressional discussion about liability protection for business.

Yes. This is because I'm going to become a bigger issue as the overall health concern start to moderate I think with the vaccine getting out there more widespread so.

So I think there is going to be an increased demand for the PEO I don't know if it's going to be in the next quarter of theirs.

Theres steady demand and I think people are more open to it every day people understand the PEO business, a little bit better and they're looking for.

The they are looking for the same concept that the Pep has for retirement assets a shared plan, where we can share some of the liability protection the fiduciary responsibility the.

Also get better rates and kind of better benefit packages by going with the PEO. So I think it may be quiet for another quieter for another quarter, but then start the pickup a little bit more as things calm down.

Yes, the with.

Respect for your first question, Andrew I think there's three factors driving the the PEO results for the first is.

In the first six months, if you look at our client base, we over index a bit in terms of our exposure to hospitality in accommodations on so that as we entered this year we were more exposed.

Then we might of been in previous years, we had a pretty sharp rebound in first quarter. The continued into the second quarter, but.

We were coming off the lower base. So that's one of the second thing is I called out in my comments, what we're seeing now is much lower workers' comp and so we rates those have an impact on revenue true.

That that's a trend that we're seeing certainly through the the back half of the year, that's that's having an impact on revenues.

And then I would say the the final point is we've seen lower at risk insurance attachment in the PEO part of that has been on our decision on the underwriting standards in this environment. So we have been.

We have been a bit tighter than than we have I think in part that's helped a bit of the a soap business, but its hurt the PEO business, a little bit and also we prefer to be.

A little bit more conservative on underwriting as we get into the the back half of the year and we see what the environment looks looks like.

If you look of where the guidance was basically maintain there is a lot of positives on the underlying performance, but there are some headwinds that we're battling.

On the in other parts of the on the revenue streams in PEO.

Great. Thank you that's really helpful. And then Marty you mentioned the Pat.

On the.

The pet plan that you introduced a few weeks back on it seems to me like Paychex is obviously really well positioned.

Total to offer a plan of that type of I'm, just wondering bigger picture.

To what extent newer like new regulations on on perhaps will impact paychex as it does the increased the target market for.

The retirement administration business does that open you up to the additional competition.

Just any additional color on that offering and what it means for paychex would be great. Thank you, yes for sure I think the fact that we've been in his personal long well over 20 years in the retirement business and that we provide more new retirement plans than anybody else in the business for at least the last eight years of I think we're well positioned.

Cash and I think Thats also proves the point that we were the first out.

I think pretty much the one of the first out with the Pep plan. We think it can be very competitive the opening up new market opportunities those small or midsized businesses that didn't want to get into a plan because they were worried about kind of administering the whole thing we could be the record keeper, but they stopped the take care of investments and and would also have some other.

Cost this is going to lower their cost allow it to be much more accessible to those who didn't quite step up to it and I do think as you said I think Congress is going to push more and more of this the new Congress on the New President Administration, I think we will push for for one case and probably give even more credits and benefits. If you start one.

So I do think it opens up a market that we're already strong in the has great potential for us.

Great. Thank you and happy holidays.

Thank you same to you.

Your next question is from Bryan Keane of Deutsche Bank.

Good morning, everyone I just wanted to clarify something you said on the hitting on three key revenues due to the number of employees on the payroll being lower.

I guess why doesn't that have that same impact in for Q 21 is it it sounds like it's more of a just a one time impact then in Threeq.

Yes, because there are certain revenue stream for Brian that are all the build in the third quarter and so and they have.

The obey for day, they follow the amount of employees who have on.

On the on your books at that point that the recur until the following third quarter.

Got it like annual it's just an annual of Bill it is somewhat unusual but the happens every year.

Got it that makes sense and then when I think about how we modeled it out at least we have a little bit lower now third quarter, but a stronger fourth quarter right.

And just thinking about that fourth quarter now sounds to be a little bit stronger than what what you kind of talked about last quarter, just thinking about any pent up demand in sales as we get to that easier comp in fourth quarter on how you're thinking about it.

Well, we hope it's going to be a good quarter because of the compare certainly sets up to be a good quarter I think of comprehended on.

Guidance the.

Obviously, Brian a lot of as you know.

A lot of it depends on the momentum we come out of the third quarter with so if.

If we come out of the the quarter with good momentum and the macro environment arrows are pointing upwards I think fourth quarter will will because the.

Others.

Don't Pan out and it will be slightly different and we'll update on when we.

We get through through the third quarter.

Okay, Great happy holidays, guys enjoy it thank you for future Brian.

Your next question is from Kartik Mehta of Northcoast research.

Hey, good morning, Marty and Efrain.

Okay, Yeah, Marty I wanted to ask I know you've talked about the selling season and some hesitancy of people wanting the switch is that what the pricing environment. Like are you seeing more competition because people are trying to get market share or has the pricing environment not been that aggressive this year compared to maybe.

The seasons pass for even the last few months.

Kartik I think it's been very consistent which means it does get quite aggressive, particularly right now at this point and on November December.

So I think you're seeing we're seeing the typical same number of months free upfront or over the first year kind of thing I wouldn't say anything more aggressive than we've typically seen.

And I'm not sure the thats, making as much of a difference.

As I said I think there is still a hesitancy to switch we're definitely seeing that I think it's helping certainly our retention and it's putting a little more pressure on sales, but right now we're feeling pretty good going into selling season, we definitely have seen again, a quarter of more unit growth than second quarter of last year and that's pretty amazing.

To me when you think everyone is still home and they're selling from home and you know were strongly eight we certainly have been selling inside for many years, but we also have a majority outside and for their ability to adapt and be able to get to clients and then use the technology that we have that allows clients the search.

The demo anyway.

And even sign up to some degree for the services is really been good so to see Europe were up units over last year into.

In total units sold as is.

Pretty positive for us as we head into selling season this quarter.

And then for and just maybe this is too early but any thoughts on changing how you're managing the loan portfolio and of the yield curve is getting a little bit steeper, but.

Have you made any changes or any thoughts on maybe the next few months.

It's funny, it's like you were looking over my shoulder and on Scribbling notes. This morning for the call.

Other third some things we can do in terms of both from duration.

I would say Kartik I want to see where we were we.

The.

Or how things look in the spring my sense is that interest rates start to flow up a bit.

Not significantly, but the none of that debt level of yield.

Yield curve steep the yet the level of yield curves. The this is.

Again, the probably give us some additional opportunities to think about.

Managing the portfolio of slightly differently than the first half of the year, we tended to be pretty conservative in terms of the approach. We took the we wanted to see what macro environment. We're in.

In.

It looks like maybe next year might be incrementally a little bit better.

Perfect Hope you guys have a great holiday. Thank you. Thank you Mike same view occurred.

Thank you. Your next question is from Jeff Silber of BMO capital markets.

Thanks, so much and happy holidays the T cells.

Well thank you thanks.

I think one of the surprises in the pandemic has been the growth in new business applications and new start ups I know, it's not necessarily an area that you focused on but I think you just on clients. There are you seeing any impact of that on your business well.

Well definitely were I mean part of the unit sales on the on the cash on the small end in particular have been a lot of new business starts now we typically have been very successful at selling brand new businesses on our paychex and share payroll platforms, what assets continued to to assist us and give us some positive.

Benefit so yeah, we're seeing it it has been amazing I do think as I said earlier that you know cash is available that is out there. The home equity you know these are held new businesses start and people also have decided believe it or not but this is sometimes the environment, where they want to go ahead and get started because of some big change either laid off for the.

The a new opportunity or their existing business does not fit in the under the pandemic in people of made switches to get into new things and capitalize on him I mean, new business starts being up I think high 30% is the last number I've seen over last year is pretty amazing.

Yes, that's true and if I could just ask a quick the outlook question asked for and.

Im looking at I guess, the PEO and insurance services are you expecting growth this year and the Worksite employees or is that something we won't see till next year. Thanks, No. We expect growth this year and Worksite employees for sure I would say, Jeff the other thing that I called out from.

In response to some loans.

Sure.

We are unique in that we have both the day ASO and PEO and we look at the Worksite employees together and if you look at the growth of Worksite employees across both platforms were up year over year, So we're going to be of.

Year over year on the PEO.

Yes.

And certainly in terms of where we ended the year.

So we'll have the.

Nice rebound there and then when you put in so we think it should be of a pretty good year in terms of works.

Worksite employees served by our HR solutions to the point the market was making earlier that's been a big source of demand this year.

Okay, great and stay healthy on say thanks again, thank you for Simview.

Your next question is from some on Simona of Jefferies.

Hi, good morning, Thanks for taking my questions.

Likewise happy holidays thing and then for me.

He asked the question.

Maybe the first line I think the the announcement with that with Pfizer of Clover was that was interesting to just maybe help us understand how the relationship might that is that more of a technology partnership or does that is there an economic relationship there as well.

Well, it's the it's got a couple of different parts to it first it's a referral relationships. So they come over what we have always found his many new businesses and we've talked a lot about the growth of new business startups start with obviously with credit card or merchant processing service.

Services, and so and then go to payroll and HR et cetera. Later, we established with the leader like Pfizer, we have a referral arrangement, where they can re for payroll or HR needs that their clients as they sell on merchant services over to us and we have a process a pretty streamlined process to get those referrals.

For our sales team to be able to sell and then there's the technology.

Piece as well we have the connection into the Clover system, which I think is an industry leading system certainly were.

The between our flex platform and the coal versus from the demographic information that the employee information for example, you add a new employee on the Clover system, and you're using flex payroll or HR that will automatically sync with the flex system and in addition, we saw an opportunity with clover with time and attendance.

Clover users for Pfizer use a lot of time and attendance.

We have a industry, leading time and attendance solutions. The number of them you can clock in and clock out on the Clover system, but you can then it look in flex and see who is on the whose punched in who is there who was out you can ship swap you can also look and see if they are approaching overtime requirements you can do a number.

The things and we're going to continue to advance the as to the point where.

If you're a clover client and have signed up with Clover and you start you can actually you will be able to in the future near future be able to sign up with paychex and the.

Self service mode.

Mode, I'd, just be able to sign right up for payroll yourself right over the Clover system. So it's a referral arrangement now a technical arrangement.

With connection it has great opportunity for us the on the payroll side and time and attendance and other products as well.

Hey, Thank you very much for that guidance and maybe just a follow up efrain, if I think about that.

The strong bookings commentary it for for the last several quarters.

You've mentioned that digital sales that had been the big contributor how should we think about and are there any interest David dynamics that you've seen on.

On the cohorts.

Cohort set of income coming through digital versus direct sales and any interesting retention trends or the size of the average customer just as we think about this being something that maybe structurally stick going forward as well.

Yes early on the retention side. So you need you need the years' worth of experience to really kind of get a sense of that so we don't anticipate that it will be different I do think that and I've said this to a number of you it does skew smaller.

That's that's part of it but that May also be a function of the environment for it. So the may be that with this amount of.

New startups that Marty mentioned Youre getting a lot of the mix has shifted a little bit smaller than the.

Than we would otherwise see but it does tend to be smaller we're hopeful obviously over time that the in the relationship with Paychex, we can nurture the Marty Marty mentioned I think in his comments, we really take a lot of care with customers and and our analytics are such that we can help of a small for.

The navigate some of the storm obviously a lot of them go out of business. So you can't do that but I would say in terms of the ability to interact with a provider of solutions provider that can maximize your chances of doing your best Theres really kind of a no finer so the.

On on the market.

Great very helpful on it.

The close for calendar 2000 and debt.

The 2021 of the.

Moving on it.

Thank you.

Thank you. Your next question is from Mark Marcon of Baird.

Hey, good morning, and happy holidays, Marty and Efrain.

It's mark.

Hey.

So just following up on on the bookings question. When we think about more units in terms of the smaller units that are coming to us through combined with some of the pressures on.

Some of the bigger units and and less switching activity. How do you think that balances out when we think about I fully appreciate in fiscal Q3, we're going to have some of the dynamics that you mentioned in terms of the employees within the existing accounts, but when we just think about new employees coming on from new units on the whole.

How do you think that compares in fiscal Q1 relative to a year ago, I mean fiscal Q3 relative to kind of your goal as we get through the selling season.

Well, it's a very interesting question Mark I think you know definitely as we've said and I think of Frans mentioned, it and I of both.

The sales have skewed smaller because of one because there is a lot of brand new businesses as we've talked about a couple of times on the call and ended the mid market is a little more hesitant so the but the good news that as the as you look at selling season right. Now is I would say is the pipeline looks very healthy so while we've had.

Presentations and Theres been some hesitancy to kind of.

Close the deal from the client perspective, I think there were a little concerned probably waiting to see what Congress does what kind of stimulus. There is what's happening with demand I think between the news of the stimulus the vaccine and where that standing multiple vaccines I do think some of these decisions will start to get closed.

In this quarter and it will still produce a pretty good selling season, we definitely saw improvement in the Midmarket from Q1 the Q2.

On our sales and so while there has been smaller you know the up the small end has been strong I do think that the midmarket is picking up speed. It certainly did in the second quarter and we expect that will given the pipeline in the third quarter.

Excellent and then can you just talk a little bit about we're still early days in terms of the reduction.

Reduction in terms of the the geographic footprint on the office space and working from home and it sounds like the net promoter scores continue to go up can you just talk about the.

Efficiency gains that you've seen on the productivity gains that you've seen from that and then.

Assets, but just.

Any sort of commentary with regards to solar winds and.

You know what your checks of shown thus far yes.

Yes, no problem at all on that Theres no. We have none of that is in our in our systems at all we've done a thorough check of that and we feel very good that.

That is not impact of us whatsoever.

Right on the yeah that is great.

So and then on.

I think the first part of the question sorry, I jumped into the yes. The the first part of Martin was just about the.

Efficiency that yes, I'm, sorry, so yes, we've been very impressed and very impressed with the employee team.

On the service side in particular, we have found that.

We have had less experience working from home, we certainly had over a thousand service on the service team working from home pre pandemic, but they have done the just on outstanding job and the Efron said the net promoter scores.

Continued to increase.

Well year to date over last year and in the productivity has been very good. So those offices that we closed you know will remain closed those that were permanently closed obviously and we'll continue to have those service people work from home it seems to be going extremely well, we've gotten positive feedback from the.

Employees on the support and I think there will be continued productivity gains to get there. So we've increased the number of clients that they've been able to handle improve the the net promoter score and to have the record breaking retention. This part so far this year. So I'd say, it's working really well and we'll continue to.

Capitalize on it.

Sounds like a win win win happy holiday. Thank.

Thank you for the same deal.

Thank you. Your next question is from Tim Willi of Wells Fargo.

Thank you.

The impact.

Thank you good to be back happy holidays to about the.

Just a question just a question sort of the tied into the corporate partners I guess, we think about on the discussion around business formations.

Looking with the platform like Clover small business startups and again, if you talked about this on prior calls I apologize, but just sort of thinking about the platform.

Concept and the ease of which people can start of business and two day sort of go to from maybe some of those initial critical function should we think about more coal.

Over like the partnerships and just any sort of thoughts about how a sales or service organization has to adapt that kind of distribution channel I guess, if you if you see that as an opportunity to acquire and build out the sales channels.

I think look I think there will still be a number of direct sales opportunities for us obviously, whether that's by the way feet on the street or telephonic or digital sales digital as Efrain mentioned the question a little bit earlier digital has worked very well from US words, it's kind of get you know completely to the point of self setup is available.

Well you can search demo the product and sign yourself up.

It's already available with our share payroll platform and and flex is moving that way as well. So finding new sales channels is always important to us and also making sure that we're responding and even looking ahead to the way the market wants to do it the market has changed pretty dramatically and that they want to they are used to doing things on their own both the client and the.

Employees of the client and we were glad to have the innovation that we've already done the investments to the allow a lot of self service and that includes right from starting up make connecting with Clover moved us back in the decision, making a little bit earlier, which we've always been looking at which says that hey, I might not be ready for payroll yet when one.

Of our sales reps directly goes to someone but what it does is say that.

Hey, I Didnt get made merchant processing and while now I see paychex show up on the Clover platform that I'm used to I can transfer my information right now back and forth and very shortly I'll be able to set up my payroll right from that so I do think it's always about finding new sales channels of the way clients want to buy and.

It is becoming much more of a client directed probably always was but it definitely much more now on client direct the decision self service do it myself when I want to do it and we're set up very well with that either directly with paychex or through partnerships like that and I think you will see more as as we find one.

Ways to do that another example on the back into that is just thinking about the new stimulus loans and the connection I mentioned earlier to bid on the credit.

We're allowing a client to go in and when they are in their flex platform doing their payroll. Okay. Do you want to another PPP loans do you want to apply for one yes, you want to just move your payroll data and everything right. The because the credit so that they can approve your loans probably the same day, yes, okay done never talk to anybody everything was was all done digitally.

And that's the way of the future.

Thank you very much for the for.

On the insights appreciate the happy holiday season. Thank you for the same to you Jim.

Thank you. Your next question is from Lisa Ellis of Moffettnathanson.

Hi, good morning, guys on and happy holidays.

The question.

On this shift you're seeing.

All the new business formation, and then the men the roll off of the employees for doing larger businesses. Just a broader question as this bold through your business, assuming it's kind of persist for a period of time.

Our the unit economics of the smaller businesses typically more attractive similar to the base is there sort of.

Broader.

Business structural dynamics that we should be keeping in line.

Well I think there's there's two ways of looked at at one we certainly having been in the business a long time and serving small clients for the longest period of time, we know how to obviously make a great profit from that as you know from our margins and so the small businesses. We can do very profitably and in fact, probably even more so today.

On the digital stop the that we have been the digital investments we've talked about right through the self service.

Were dropped we're making it's so much more productive the sign up a new small client then when you think of the Midmarket. The opportunity. There is obviously for much more revenue penetration of of the additional services that we offer these days so while the cost to set up in service may be slightly what will be maybe more the revenue operator.

He is more so thats very profitable. So we don't see any major changing of the dynamics. There in fact, it's probably given us the investments we've made of given us an opportunity to continue to earn well even if price has come down a little bit on the small end due to competition, we've taken more cost the out of the set up and the ongoing service.

That have still that have really appeal to those clients because that's the way they want to be served and then on the mid market. The ex the enhancement of the products that we offer gives us a much bigger share of revenue per client in the mid market.

Okay and then my follow up is the is another another question on the the Clover partnership just thinking about there the size of that installed customer base is probably similar on scale to your installed base is.

Is there an initial part of that partnership the aim debt kind of cross selling.

You know identifying.

Corporate client that aren't paychex client and vice versa to the might create like an initial pretty heavy lift from that relationship or is it more focused on sort of should we think about it is more like incremental over time, new sales of oriented well.

Well at least the we're hoping we're hoping so were the obviously there is the cross selling right off the bat so yes.

Over is reaching out to their client base.

Immediately and.

And letting them know one of already started issuing E mails to their client base. The say hey were connected the paychex. This is an easy set up the go to Paychex, we will transfer data back and forth you have flex and clover in the sink.

So I, we're hoping that there will be some initial.

The jump and success right off the bat with that and then we're certainly excited about on an ongoing basis being on that Clover platform. As they are I think theyve been very successful at adding new clients to it.

Terrific. Thank you Brenda happy holidays, guys. Thanks for taking the same to you.

Thank you next question is from Peter Christiansen of Citi.

Hi, Good morning, Thanks for taking my question of happy holidays.

Okay.

Two quick ones here so mark.

How are you thinking about the absolute level of go to market spending.

Relative to other periods how aggressive.

His paychex seeing right now and what are you seeing on the ROI from.

And then my follow up question is on.

On the PDP.

Is there a difference in the economics the unit economics sense.

How should we think about that thank you gentleman sure.

On the first one I think the go to market spend you know, we've we've increased our marketing spend pretty consistently.

You may have seen we've also gotten into the TV advertising, even for the brand and getting the brand out there. It was helpful to us during the.

The beginning of the pandemic.

And it has continued to be so and I think we'll continue that it's not a massive amount of TV advertising I'm not sure. It always is worth at the bit at some ROI. There is some you know a breakeven there that's that's hard to predict but we are getting more leads that seem to be following the advertising that we're doing and I think theres theres.

Opportunity there.

The investments that we've already made in go to market from a from a GAAP.

The from the Webinars from the information we of Igs really enhance that this year under Cove. It and I think it has brought a lot of clients to us. If you think about a webinars on the original stimulus package or I'm sure of when coming up that will have on this stimulus package.

You know those webinars used the bring different information webinars to bring a couple of hundred.

It client prospects and CPH, maybe 400 500, now, they're bringing 6000 7000 10000, which gives you a lot of leads.

Certainly get your brand out there and your product set but also a lot more leads because you have that information once they signed up for the Webinars. So they've been extremely successful at a pretty low cost frankly, so I think a good ROI return on our investment there on.

On the Pat just quickly I think the the economics are very good there.

No its a.

It's a little bit lower cost here, a little bit more others of probably a little bit more retention for that plan. Because you are more involved you're not just a record keeper, but your of the fiduciary and and I think it's going to be a lot stickier from a sale of that we have on for one k. and were very successful at selling for on K plans in this income.

Net of telling the client hey, we're going to be your record keeper, but here is you're going to go to the financial adviser to do this for that we can now say look we will set up basically the whole thing for you with some partnerships and we can take care of all of it at a lower cost. So the economics, we feel are still going to be very good there's always the risk of some cannibalization of singer of single and.

For your plans, but I think there is going to be a world for both of them that are out there and we may capture a lot more customers.

The prospects that have not had a for one k., but now will jump in.

Thank you very much that's great okay.

Your next question.

Question is from Bryan Bergin of Cowen.

Hi, good morning, Thank you.

First I wanted to clarify on client retention are you assuming that it's going to remain at record levels. The in your second half outlook and Marty to your comments on being pleased with the sequential improvement, but at a more moderate pace near the end of the quarter can you dig into that a little bit more of what kept the ice specifically are you seeing moderate.

Yes, so I think on the client retention right now we expect that that it will that we will stay at record breaking the issue really is the non processing clients. You know we talked about them in the first quarter. They have come down dramatically from the first quarter, meaning that there was client that didnt leave us, but they suspended.

The payroll processing, but stayed with us as the client and we worked very hard to keep them as the client even if they were suspended they are now paying they are now paying for that service. The beat the kind of hanging in there. It's dropped dramatically in fact, it's continued to drop but we're trying to see if this last number of non processing clients and that's a pretty small number of.

Compared to our base.

What will happen at year end, our they hanging in for year end or not that's the only thing.

Brian that we're kind of watching is the whether the if they all left then we probably wouldn't hit retention, we'd still have a very strong retention number but it wouldn't be record breaking I think they are the fact that they are still on the service there.

They are just kind of holding in there you've heard of restaurants that are saying, hey, I'm going to just close till spring price.

Particularly in the northeast and kind of hang in there. So so that's I think it's kind of be record breaking through the year, but I could be close depending on what happens with.

For the stimulus that at the end of what I was saying with the moderation is that.

Like there was a lot of new business formation in when you think about the quarter September October November September saw a lot of influx of new sales, particularly on the small end because of households. So you had the start of the school year and most for years. We started in September you had nanny payroll you had nannies, yet tutors, yet a lot of.

Things. So we saw a big explosion of small sales like that are small household sales in September. It's just starting to moderate as people are kind of fitting into a new reality of the pandemic. So it moderated some still growth still seeing growth. It just wasn't quite as explosive I guess I'd say as the first month or two of.

Of the quarter.

Okay. That's helpful. And then can you comment on your sales head count just how the has progressed here in 2020.

Yes, pretty flat, we went up a little bit in headcount of low single digits for overall sales and and we've continued to mix well prepaying debt equity continued to mix and planned for in house sales telephonics sales and online sales versus feet on the street.

The slate for pretty much all telephonic on.

Or digital now, but but the head counts up a few percentage points and you know and doing very well, particularly.

When you think about we've sold more units on the second quarter last year, as we've mentioned and everybody's home.

It's been pretty amazing.

Thanks, guys, having relative alright, thanks, Brian of two.

Thank you. Your next question is from Tim Jen Wong of Jpmorgan.

Thanks, So much just wanted to clarify on the change in the outlook. Obviously, the second quarter was better than and then expected did the composition of your debt.

Second half outlook change at all just curious if I Miss anything there.

No I think it just it.

I would say to engine the juice Scott.

A little bit better than where we were.

For the last call and I suspect.

We'll have more to say when we get to third quarter GAAP.

So I would say incremental the change.

Got it and then just with the EPS. So the strength you noted and to the year of demand for HR services I think you had mentioned.

When do you expect the sort of maybe for the little bit more energy into the selling that versus 90 days ago.

I think theres, just a lot of demand Marty has.

The some ways.

We have we've placed a lot of emphasis on sales in that area and the mark It is.

Generating demand in that area. So you've got the confluence of both factors, Yes, I think one thing I'd add to mention is that.

You know really starting last year, some time, Mark bottini and the sales team they really put an effort out the say it's the power of 3000, So all sales were leading with that HR.

That HR value that we could bring so instead of you know we've really moved from the traditional model of selling payroll, but then coming back with everything else and I think you know that has that helped us a lot pre pandemic and really helped us with the momentum of the demand going up for HR, because anybody if I am in there talking to you about retirement I'm also telling you.

About ASO and PEO thats available to you on the value. It brings if I'm selling you payroll I'm also talking about an ASO and PEO.

So it really has helped and so there has been a very high energy and the sales force.

An opportunity for them all to sell HR and it was perfect timing.

Yes, okay glad to see the hardware coming through and the less holiday guys. Thank you. Thanks, you too.

Thank you. Our next question is from Matthew O'neill of Goldman Sachs.

Yes, Hi, gentlemen, thanks for squeezing me in I know the call is getting long and happy holidays as well.

I don't mean to belabor the questions on the Fi serving Clover, but was curious on two fronts. Similar Lisa's question. One when you guys were working on initiating this relationship was there in the immediate identification of the good overlap of existing paychex, and clover client and providing the technological connectivity on.

Something being asked for or was it was it really more of sort of offer.

Offensive as far as this could be a great referral channel.

Going forward and then just to round out is there any sort of two way street element here I understand that people are making probably a credit card processing decision potentially before.

On a payroll decision, but are you guys able to to help sell the clover products on the other side here existing clients. Thanks, Yes, yes in fact.

We've been selling merchant processing.

With the number of partners in Pfizer of being a major one for some time its state of small part of our business because of what you just said typically they have merchant processing all already but we've been able to sometimes offer them better rates you know those rates can be very confusing and.

We have payroll client we talk to them, we have been for a number of years talking them about merchant processing and we resell basically their product. So yes, there will be back and forth referral.

Going both ways between us and it was I think it was mostly all fence of you know we've always known the was this connection because we sold merchant as well as payroll and so we look for a partner, we thought that Pfizer, particularly lately the clover system very strong and is very well penetrated and I also mentioned earlier.

For that we found that probably over 30% of their clients have time and attendance solutions that are tied in with their point of sale covert equipment and that we have very strong time and attendance solutions that can tie directly to the clover equipment, along with the payroll flex platform. So.

We felt that from an offensive perspective, the pickup referrals for payroll. It was positive for the connection that we could make we can also enhance what clover offers by giving them not only of payroll platform that is tied in with the system, but time and attendance on a number of other products as well and the demand for HR, obviously is typically there.

For for those who are using those point of sale of systems. So a lot of wins all the way around we feel it will bring us.

Makes sense. Thanks, so much okay.

Thank you for today's final question is coming from Scott, what some of the Wolfe research.

Hi, Good morning, guys. This is Scott on for Darrin Peller.

Just had one question on sort of the structural positioning for the long term.

You mentioned that expenses were down this quarter related to lower discretionary spending and reduce facility cost of kind of a mix of short and longer term cost savings and we were just wondering if you're still in the are planning on doing on.

More of kind of cost savings on the longer term side.

Well I think and Efrain can comment on this too I. Obviously, you know we're always looking at that's kind of we're always looking at you.

You know, we've got a history of having the best margins in the business.

We're really pleased that during this kind of pandemic environment that we could maintain and improve our margins.

And I think that we have been successful it making changes that respond to the market, but also make us more efficient. So yes. We are we will continue.

To look for ways to reduce cost and make us more productive and make the service and products.

Even better I think there is a lot of opportunity for self service. The clients are looking for and the employees, we're well invested in that already with the five star mobile App and all of our plan all of our products being mobile first design and and I think we're going to see continued savings there as well.

Got it and then on on the revenue side are you seeing more sustainable opportunities maybe for more sticky revenue the lift the based on the other side of the pandemic.

Well I think the HR I, yes, I think you know I mentioned at the beginning of the call I think one of the things that the pandemic has has done for us and our clients as they have been able to see the full value of being with paychex theyve been able to use products and services and count on us for eight more HR support then they wouldn't normally need in a non.

You know kind of pandemic situation and so I think it's going to provide us better retention of all of the products because we've had an opportunity for them to see that we can be there in a tough.

In a tough situation and really support them and frankly get a lot of feedback from clients that we help them through the.

The pandemic into service and help their business survives. So we do feel that the products will have even better retention coming out of this because we've been able to demonstrate the full value.

Great. Thanks for taking my question guys and happy holidays. Thank you too.

Thank you I will now turn the call back over to Mr. from you see for any additional for closing remarks alright. Thank you on at this point, we will close of the call. If you're interested in really playing the webcast of this conference call will be archived for approximately 90 days. Thank you for taking the time to participate in the second quarter Press release conference call on for your interest in Paychex, we do.

I wish you, a very safe and happy holiday. Thank you.

Thank you. This does conclude today's conference call you may now disconnect.