Q3 2021 Paychex Inc Earnings Call

Good day, and thank you for standing by and welcome to the Paychex third quarter fiscal year 2021 conference call.

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I would now like to hand, the conference over to your Speaker today Martin D. C. Please go ahead.

Thank you and thank you for joining us for our discussion of the Paychex third quarter fiscal 'twenty. One earnings release, joining me today is Efrain Rivera, our chief Financial Officer and this.

Morning, before the market opened we released our financial results for the third quarter ended February 28, 2021, you can access our earnings release on our Investor Relations website, and our form 10-Q will be filed with the SEC within the next few days. This teleconference is being broadcast over the internet will be archived and available on our website for about 90 day.

Days.

And we'll start today's call with an update on the business highlights for the third quarter and then Efrain will review, our third quarter financial results and provide an update on our outlook for fiscal 'twenty. One we will then open it up for your questions. It is hard to believe that it's been over a year since the beginning of the mass shutdowns and response to COVID-19. This past year has been different from.

Any other than we've experienced before.

New challenges and forced us to find innovative ways to connect with our clients prospects and our own employees I'm very proud of how the paychex team embraced these challenges and took a leadership role throughout this pandemic as evidenced by the newly released Sapient insights group annual HR survey just coming out this week that ranked paychex flex.

Our SaaS based cloud application number one among all solution providers as rated by their voice on the customer report and both user experience and client satisfaction scores are.

Our results for the third quarter reflects strong retention and client base growth across all of our lines of business, most notably in our ASO HR outsourcing business.

We completed the selling season with strength and our virtual digital and HR outsourcing sales driven by new business starts and the increasing need for HR support.

Our traditional sales channels have been impacted by headwinds arising from restrictions on face to face meetings and delayed decision, making by the prospects. However, we've seen growth and key sales metrics, including sales presentations and close rates, which have continued in march as well as increases and win rates versus our competitors we are well.

Positioned to take advantage of the opportunities as we transition back to a normal market condition.

And as Efrain will discuss in more detail with less than a quarter remaining and our fiscal year. We are proud of the fact that our total service revenue for the year will be roughly flat to last fiscal year. After the major impact of businesses during the pandemic our initiatives to reduce expenses, while accelerating our investment and the innovation of our products and service delivery.

<unk> has not only maintained our industry, leading profit margins, but has positioned us well for growth as the pandemic situation improves.

We have delivered solid client growth and demonstrated our unique value to our clients and partners through some of the most difficult times.

Throughout every stage of the pandemic, we have demonstrated our commitment to helping clients with our multifaceted approach response, which includes a comprehensive COVID-19 online and help center state specific resources educational Webinars product innovations and a paycheck protection program tools specialized employee.

And more of our efforts were recognized not only by our clients in the form of strong client satisfaction scores and retention, but we were also recently honored as a 2021 silver winner of a Stevie award for the most valuable COVID-19 response.

We continue to listen to and work with small and midsized businesses to provide the information resources and support they need.

A recent Paychex survey to these businesses revealed at three of the biggest obstacles facing small and mid sized business owners are financial instability planning the return to office and employer vaccination policies, while financial instability is the biggest concern the government stimulus paint plans have been very effective and helping small and midsized.

Businesses stay afloat Paychex has continued to build on its portfolio of P. P. P solutions and real time as new government relations are passed to date, we have assisted our clients and quickly applying for and obtaining over $60 billion and PPP loans. We have also help them.

Claim approximately one $5 billion and paid leave and employee retention tax credits pay.

Paychex Flex is the first HR software solutions to introduce integrated tools to help businesses maximize tax credits, while not impacting PPP loan forgiveness or.

Our experienced HR professionals help our clients by delivering effective recommendations based on our clients' unique circumstances and business needs.

These unique challenges include assisting and navigating the complex stimulus legislation developing return to office plans, creating vaccination policies and the data analytics and tools to support employee recruitment and retention and this difficult time.

The complexity of these issues as a resulted in higher demand for HR outsourcing has more clients recognize the advantage of putting our expertise to work for them and.

In recent months. This increased demand has contributed to strong growth and our ASO business as businesses are looking for more immediate HR support, but some reluctance to make changes to their employee benefits by selecting the PEO model, we do expect that as businesses begin to evaluate their options and implement benefit decisions there will be a more normalized.

Mix of ASO and PEO product selection.

We announced on the last call that we were introducing our new pooled employer plan or Pep. This new product is a is a cost effective retirement plan designed to expand retirement plan and access with reduced administration for employers. We have been very pleased with the reception of this new offering and the market and after just a few short months.

Approximately 2000, new clients on pet.

We believe that recent mandates and California, requiring retirement benefits for employees will lead to even more interest and our pet product and other retirement solutions Paychex remains the top record keeper for retirement plans originating the most new plans annually.

We also announced our integration with Fi service Clover point of sales systems, we offer integrated payroll and time and attendance for small business retailers via a new app and the Clover App market integration is now complete and existing paychex customers can download the app to allow for time and attendance to be handled within the clover system with seamless integration.

And with Paychex Flex this integration increases cross selling opportunities for both companies and significantly enhances the client experience for shared customers.

In addition, we launched several enhancements to our data analytics, and paychex flex, including a diversity and equal pay lie report that builds upon our recently released EEO, one compliance solutions to give administrators the ability to analyze their pay and diversity data, allowing businesses to uncover opportunities to create a more diverse and <unk>.

Equitable equitable workforce.

Our innovative solutions continue to receive industry recognition, we were recognized by the business Intelligence group, earning a 2021 big.

<unk> Innovation award for being a leader and real time payments and last May we were the first HR solutions provider to offer real time payments, giving businesses more freedom and flexibility.

I'm very proud of the two awards that Paychex has been honored with recently for the 13th time Ethisphere named US one of the world's 2021 world's most ethical companies and we are also on Fortune's list of world's most admired companies. These awards acknowledge our commitment to ethical business practices values based culture.

Innovation, social responsibility and leadership as well as our support for the business community and its employees throughout the COVID-19, pandemic I give credit to the innovation integrity and hard work of our employees, who have continued to show up for our clients, even while navigating the challenges of the pandemic and their own lives.

As we enter our second year with Covid, we remain diligent and helping businesses continue to navigate the pandemic and remain hopeful that the worst is behind US. We are confident that our resilient business model strong financial position and dedicated employees will help paychex to finished fiscal year 'twenty, one even stronger than we started it I.

I'll now turn the call over to Efrain to review our financial results for the third quarter Efrain. Thanks, Marty Hello, everyone on the call on good morning, I'd like to remind you that today's conference call will contain forward looking statements you know where to look for those disclosures and please refer to them.

And addition periodically refer to non-GAAP measures such as adjusted operating income adjusted EBITDA et cetera. Please refer to our press release again, and our investor presentation for more information on these measures.

I will start by providing some of the key points for the quarter.

And then I'll follow ups on CT greater detail on certain areas and then I'll wrap with a review of our fiscal 2020 one outlook.

And.

Some initial thoughts on fiscal 2020 two.

Our third quarter results reflect the impact of economic conditions, resulting from Covid for the third quarter service revenue of $1 1 billion decreased 2%.

Compared to the prior year, largely due to lower volume of client employees paid across our HCM solutions.

As a reminder, our third quarter include certain annual revenue streams that declined due to lower employment.

Yeah.

Total revenue declined 3% to $1 1 billion and impacted by a decline in interest on funds held for clients.

And then service revenue management solutions revenue was even at 847 million and PEO and insurance solutions revenue declined 8% to $250 million.

Interest on funds held for clients decreased 29% for the quarter to $15 million due to lower average interest rates and realized gains.

Average balances for interest on funds held for clients were consistent with the prior year.

Expenses were down 4%.

643 million and the decline in expenses was driven by lower discretionary spending reduced facilities cost and lower amortization of intangible assets.

Operating income was flat at $469 million and reflected an operating margin of 42, 2%.

The 100 basis point improvement from the prior year quarter.

Our effective income tax was 24, 2% for the third quarter compared to 23, 6% for the same period last year.

Both periods reflect net discrete tax benefits related to stock based compensation payments that occur with the exercise of stock option Awards.

Adjusted net income decreased 1% to $349 million for the quarter adjusted diluted earnings per share also decreased 1% during the quarter to 96 cents per share.

Year to date.

Service revenue declined 3% to $3 billion with management solutions revenue declining, 1% and PEO and insurance declining six interest on funds held for clients declined 27% to $45 million total revenue declined 3% to $3 billion.

Operating income decreased 5% to $1 1 billion and adjusted operating income decreased 2% to $1 1 billion, reflecting a margin of 37, 6%.

And an improvement of 50 basis points compared to the prior year period.

Adjusted operating margin excludes one time costs of $32 million related to acceleration of cost savings initiatives, including the long term strategy reduce our geographic footprint and head count optimization. The majority of which was recognized during the first quarter adjusted diluted earnings per share.

<unk>, 3% to $2.32.

Turning to our investment portfolio. Our primary goal is to protect principal and optimize liquidity as we mentioned frequently we continue to invest and high credit quality securities.

Our long term portfolio Hudson and average yield currently of one 9% and and average duration of three four years.

Our combined portfolios have earned an average rate of return on a one 1% for the quarter down from one 8% last year those were the good days.

I will now walk through the highlights of our financial position and it remains strong cash restricted cash and total corporate investments.

Our $1 1 billion and total borrowings were 804 million as of February 28, 2021.

Funds held for clients as of the same day and February 28, 2021 were $4 2 billion and increased from $3 4 billion as of May 31, 2020 funds held for client says you know vary widely on a day to day basis, and average $4 5 billion for the third quarter.

Our total available for sale investments, including corporate investments and funds held for clients reflected net unrealized gains of $82 million.

As of February 28, 2021 that compares to $100 million as of May 31, and 2020.

The decrease in net gain position resulted from increases and longer term yields during the nine months period.

Total stockholders' equity was $3 billion as of February 28th, reflecting $671 million and dividends paid and $78 million of shares repurchase during the first nine months a return on equity for the past 12 months was 37%.

Cash flows from operations were $871 million for the first nine months that was a decrease from the same period last year. The decrease was driven by lower net income and fluctuations in working capital, including an increase and purchased accounts receivables due to continued recover from recovery from COVID-19.

Team pandemic.

Pandemic.

And growth and the business the COVID-19 pandemic and growth of the business are offset by an increase and worksite employees.

Payroll related liabilities.

Now I'm going to turn to guidance for the current fiscal year, ending May 31, and 2021. The outlook reflects our current thinking regarding the speed and timing of the economic recovery. It does not assume any acceleration due to government stimulus rather assumes current course and speed of the recovery.

Results for the first nine months of the fiscal year exceeded expectations, However, and uncertainty about the pace of the recovery over the remainder of the year remains we have provided the following updates to our guidance.

After seeing the third quarter results.

Management solutions revenue growth year over year is expected to be and the range of flat to growth of 2%.

We previously guided to a range of decline to 1% to growth of 1%.

Oh and insurance solutions is expected to decline and the range of 2% to 5%. This is unchanged from prior guidance. We're now providing guidance on total service revenue through this as total service revenue total revenue.

Which is now expected to be and the range of a decline of 1% to growth of 1% inter.

Interest on funds held for clients is expected to be between $55 million to $65 million and this is unchanged from prior guidance.

Total revenue is expected to be and the range of a decline of 2% to flat. We previously guided to a range of a decline of 3% to flat.

Adjusted operating income as a percentage of total revenue is now anticipated to be and the range of 36% to 37%.

Up from previous guidance of approximately 36%.

Adjusted EBITDA margin for the full year fiscal 2021, and is expected to be and the range of 41% to 42% up from approximately 41%. Other expense net is anticipated to be in the range of $25 million to $30 million unchanged from previous guidance.

Our effective income tax rate is expected to be and the range of 23% to 24%, while we previously guided to approximately 24% and.

Adjusted diluted earnings per share is expected to be and the range of a decline of 2% to flat. We previously guided to a decline and the range of 1% to 4%, obviously, we need to go through the fourth quarter to see where the year ends, but we're really pleased with our ability to manage through the P&L impacts of the pan.

<unk>, especially loss variable revenue, which as you well know carries a high margin, we we offset much of that including a decline and interest on funds held for clients and if there is any doubt.

About our ability to manage the P&L I think that this year we showed.

Some some of the skeptics on that now turning to the fourth quarter and fiscal year were current we currently anticipated total service revenue growth will be and the range of 7% and 9% remember I said total service revenue growth to get total you need to understand.

And I understand and the next one which is interest on funds held for clients is expected to be approximately $15 million.

Consistent with previous quarters that as interest on funds held.

Consistent with previous quarters, obviously, and the fourth quarter, we expect to see a sharp rebound from what we've experienced and the first three quarters and a return to growth adjusted operating margin is expected to be and the range of 33% to 34%.

No.

So currently and the process of preparing our annual plan for fiscal year 2022, So and now will lead others have been talked about it we'll talk about it and.

And wanted to give you some indications of where our thinking is.

<unk>.

And we'll provide.

More complete guidance for fiscal 2022 during our fiscal 2021 and fourth quarter call in June, but I want to provide some very preliminary color on our initial thoughts around fiscal 2022 and this call.

With those caveat.

We believe that total service revenue growth will be in the range of 6% to 7%.

Interest on funds held for clients and is expected to be and the range of $55 million to $65 million and does not assume any significant change and interest rates. So obviously, we've got a lot of work to do with thinking about the right way to position and the portfolio, but this is where we're at right now.

We also anticipate anticipate that adjusted operating margin will be approximately 37% and.

And that the effective tax rate will be in the range of 24% to 25%. Let me just say one thing on that.

As you know, we typically will exclude.

Our.

Benefits from stock comp exercise at this point, we're not baking and and we probably will get some benefit but too early to call.

Now.

As if that wasn't enough of a caveat all of this is subject to our current assumptions, which are subject to change.

And we will update you again.

On the fourth quarter call. After we have gone through the fourth quarter.

For you to our Investor slides on our website for additional information and.

And with that I'll turn the call back to Martin. Thank you Efrain operator at this point, we will open it up for questions.

Thank you the floor is now open for questions and audits.

Ask a question simply press Star then the number one on your telephone keypad again that is star one if at any point. Your question has been answered and you wish to remove yourself on the Q press the pound key.

Our first question comes from the line of David <unk> of Evercore ISI.

Thank you good morning, Marty and Efrain.

Good morning too.

Two questions. Please first if you could.

Quantify some of the key performance indicators and little bit more for example client retention and Marty you are I think referred to some delays and sales cycles can you can you kind of walk through the booking trends you saw.

In the quarter and then my follow up is really around the receivables balance, which was up 81% versus the may balance sheet and.

Perhaps after and you can talk a little bit more about.

The purchased accounts receivable.

What are the terms around that.

Let me, let me talk to that David So as many of you know we have a business.

That.

Provides funding for staffing firms.

And those of you who cover the staffing industry. There is a number of you that know that in the last quarter of the year, let's call. It April may and June basically staffing was flat on its back.

That what happened was that we.

We werent, giving any providing any lending because there was no lending to be provided to staffing firms and as a consequence, the receivables balance was balanced with very low our cash flow was very dry and the quarter and the last quarter Whats happened is that trend persisted through the first.

Half of the year, and then staffing came roaring back starting in January and in particular, and particular really and the month of February as there was a ramp up and in a number of areas and staffing, including health care. So at the end of the quarter. We had we had.

Purchased <unk>.

Significantly more receivables than than we.

We had anticipated when the when the year started.

But on an average basis, we're about only about four 5% above where we were last year. So it's a little bit of an artifact of the decline and staffing followed by a sharp rebound that number will come down significantly and the fourth quarter. So that's what's happening on receivables. So you had three questions. There I think the other ones.

Retention and and <unk>.

Growth on.

David on the sales side, yes, I think what we felt what we've seen is a improvement.

Particularly towards the end of the quarter and which has continued now into March and sales opportunities, so moving and getting in front of clients for presentations, what we've seen throughout the first half of the year and into the selling season was really a lot of no decision. So we get in front of clients, but they're just not ready to make a move and.

And so we're starting to see now a little bit of that open up in the last month or so and so we're getting good opportunities in front of clients actually our win rates, where they make a decision we're doing better against competitors than we have and the past.

And sales results kind of year to date are pretty much on track for the year is to kind of what we expected.

But I think that we're seeing improvements now and things starting to open up one of the tough things that played against that was just not getting enough face to face with client certainly.

Put a little bit of a dampening effect on particularly on the selling season, where we have so many units that come in that way. The positives have been digital we increased our marketing and got a lot more digital.

Sales and so coming in over the web selling telephonic leads selling online.

So we've seen that and Thats helped that's really helped by new business starts which are up I think you know double digits year over year and so we're taking advantage of that so everything is improving but it did have some dampening effect on selling season and not getting in front of people. We're now opening that up and getting out with prospects face to face.

As they're comfortable and reps are comfortable that's starting to pick up ASO and very strong HR needs very strong.

And you would expect just and all the things that I already described how do I handle continue to handle work from home how do I handle returned to office, how do I handle a vaccination worldwide require internet. So big growth very strong double digit growth and ASO, but on the PEO side as I mentioned, a little bit slower because they haven't.

And really wanted to change you go back to this kind of no decision thing you haven't seen as many businesses wanting to get into insurance and changed their insurance right now or their benefit plans given that thats kind of the least of their concerns and so we.

We think that will normalize going forward, but very strong and HR performance HR sales on the ASO side very strong on the digital side and telephonic sales and starting to pick up on all of the opportunities and win rates on the client retention on track really for the best retention and our history.

We have very strong client retention again, I think some of that certainly we're getting help from client, saying hey.

I'm getting great value from paychex with the help on the PPP loans I mentioned, we've helped facilitate through bids to credit our partner and other and other banks and so forth with our innovation and the flex product, we've helped facilitate over $60 billion and our client clients to get loans from the PPP program.

And what's really picked up now and the last even few months is employee retention tax credits. We have helped tremendously that means we go back and re file some of the 940 <unk> to help them apply for those.

Credits and that has taken off very quickly as well. So clients are feeling it's a great time for us to show the complete value of what paychex expertise.

And it brings to them and that has really helped client retention to be extremely strong right. Now we have the best net client gain we don't give specific numbers on clients until the end of the year, but we had the best net net client gain and the third quarter, I think and our history at least and the last four or five years anyway, and the combination of the sales and retention.

Appreciate that thanks for all the helpful detail.

Hey, David.

Our next question comes from the line of Ramsey El <unk>.

<unk> of Barclays.

Hi, good morning, and thanks, so much for taking my question and also thanks for the early view on on fiscal 'twenty, two that's super appreciated.

Can you help us think through kind of the key drivers of PEO performance next year, what are the sort of pressure points and that business that need to lift to see it return to a sort of a more normalized growth profile and thank you just mentioned that we are ready for customers to change providers I think in the past you've mentioned some hospitality over indexing.

And that industry vertical sort of what are the what are the end market conditions have to be in order to see that that mark that that segment return to a more normalized growth profile.

Yes, I think one.

It is indexed a little higher on the hospitality side and particularly on the Oasis acquisition that we did and.

Concentrated and of course, Southern States and then and so I think as you see the hospitality come back and the stimulus.

And that are out there now and that are picking up the new grants and particular for restaurants and bars hotels et cetera that are out there they are now.

These grants net loans, but grants are going to be giving out I think all these things are going to help kind of bring hospitality back and of course, just the opening up of more states and more restaurants to full.

<unk> expanded capacity our full capacity.

Think we'll bring that back and that will drive.

More of the PEO, who tend to go those clients tend to go that way.

The other thing is I, just think more comfort and getting their their employees back into the business place now theyre going to be interested and okay. How do I get employees back.

<unk> retained them, how do I recruit them benefit plans are going to become very interesting again for them and I think the more complexity of those benefit plans and how competitive. They are is going to be very important to them. So I think the stimulus.

On the bounce back the opening and the bounce back and hospitality, which is coming towards the later and of some of the stimulus and.

And the need to have very strong.

<unk> plans I think we'll start to we'll start to see the PEO picked back up and a lot of interest from prospects.

Okay.

On a follow up for me is I Wonder if you could kind of update us on the relative importance and the business now and kind of cross selling to existing.

Our diverse and signing up new ones as the model kind of evolved and the context of the pandemic and being more reliant on expanding wallet share rather than signing up de novo client simply because theres been a lot of pressure and that area and the economy.

It's an interesting question I mean, we've gone.

The last number of years two to three years with really.

And about the power of 3000 and sales reps, which is our reps across all divisions and our traditional model of selling payroll and then coming back in after he has changed quite a lot and our go to market strategy, we've really see.

And that we saw that we were leaving money on the table and value for our clients on the table. So we sell HR complete benefit packages upfront for at least make sure that they are aware of that and that hasnt change.

Change all that dramatically during the pandemic, it's been harder to get full interest.

So I think we've been good about coming back around and selling other products, but I think leading with HR actually was very important during the pandemic and you can see that and really the double digit growth that we've seen and the sales of ASO because.

You can go in and talk if we were just going in and pushing payroll first over the last year. During the pandemic I don't think we would have been as successful as we've been trained and to have our salespeople talk about HR and how we can help them completely not just with payroll and that has really helped us so I'd say that actually.

We stayed with the full HR value and <unk>.

That has been a lot of our success during the pandemic because that was the real need.

For our clients and our prospects.

Yes.

Okay. Operator, our next question comes from the line of Kevin Mcveigh with Credit Suisse.

Great. Thank you Hey.

And Marty you talked about and increased win rates against competitors.

And just trying to understand that a little bit maybe how much of that EPS.

Yes sure.

So we see the pandemic versus more competitive product and.

Is there any target.

Client place you'd call out from just.

Yes.

And towards the lower and are kind of mid market just any thoughts on that.

<unk> developed.

Yes, I think Kevin and I think what we've seen is first of all the innovation and the products. We have such a complete product set now and SaaS based cloud flex platform and I think our document management has been very popular and we've.

Seen a big increase and that the mobile App being five star continues to be five start and increased use of that and self service by our clients.

And I think selling going back to the go to market of selling HR completely I think.

If you went back two years, they still saw selling payroll upfront versus our competitors selling and integrated HR and payroll and.

And the HR focus that we've put the last two years has really positioned us very well. We've also done more using sales engineers and the mid market to demo the product and have experts demo the product earlier in the process and I think that also as shown on the full value of flex and then just on top of it I just think our.

Employees response, both in our product development our marketing.

Two of the Covid and how we've helped clients. He has really positioned us well versus some of our competitors, who are just not as large and as fully capable.

You go back to that number I mean, we've helped our clients get 60 billion and PPP loans that was all responding to stimulus like the day. It was out of the day. After it was out partnering with bids to credit and other.

And our financial players, who could give them the loans quickly I think clients really saw the strength of our paychex brand.

And all the things that we're doing like that and that has helped us against competitors that may have been selling technology, but certainly didn't have the compliance over the experience and the wherewithal that our resources and.

Okay helpful. And then if and real quick if you think about the margin and thanks for the preliminary 2022 is that dialogue and some normalization of Costa.

And maybe some structural cost savings come and that whole David here.

Does that get it shapes up.

Taken cost coming back into the business share was there any weighted to fixed income.

Net.

Yes, Kevin So I get the question.

Early frequent basis. So yes, it does contemplate that some of the variable costs that came out of the business will go back and so.

So that's part of our thinking already but.

I think we've done a pretty responsible job this year and I think that we've already started to add back cost actually account for the year.

On to normalize our cost structure, so that next year wouldn't be quite as.

And as big and impact as it otherwise would be so we've taken that into account, but I would say this.

And I think one of the great lessons of this year for not only for us but for everyone is that.

There are pockets of costs that won't come back and that we don't need and and they're not coming back and they're not need it and they won't be in the P&L. So so I think that that's why you see.

We had we exceeded expectations, our own expectations and certainly external expectations on margins.

As I said a lot of the revenue that we're looking at.

Was marginal revenue dropped.

The to beat that number and and going into next year, we're expecting to leverage further so.

So I think.

We're comfortable with that cost structure moving forward. It does include.

It does include continued savings from actions that we took this year, but we've added back some costs I think just to add to that one of the things that we were already doing before the pandemic and it helped us a great deal.

Because some of the calls coming into payroll specialist and HR.

Specialists that we have we're very complex we've been able the last two years to really drive a lot of.

Easier task back to the client wanted to do them any way and a self service perspective. So when you think about we've talked about chat bots and 50% of those service questions that come in on line for US are now handled by and automated chatbot and respond to that now seven by 24 by 365 personal political but.

That has been a tremendous help the other thing that when you change your direct deposit.

<unk> or <unk>.

The address changes over 80% of those changes are now done by clients or their employees online through the mobile app or on the desktop and that has made a tremendous amount of difference and driving operational costs down and that's the innovation of our operations team and driven them to the client who wants to do them anyway. So it's freed up our people to do a lot.

And it's reduced cost.

Yeah.

And just any sense David.

Okay.

On the client should total DIY.

Okay.

Our total DIY.

Yes.

It's over certainly over 50% and.

And I think the way we think about it is you don't have to be totally DIY to be largely and a day.

And why service settings, so, it's probably the numbers higher than that.

Yes.

Thank you.

Okay.

And.

Our next question comes from the line of Bryan <unk> of Cowen.

Hi, guys. Good morning. Thank you Gary how are you thinking about the PPP impact on potential future switching behavior due to Reg and reporting requirements is there any dynamic that can leave the base potentially stickier for an extended period of time are you planning for a more normalized switching behavior and fiscal 'twenty.

To that you were seeing pre COVID-19.

Great question I think we're planning for more switching David just because I think we have found that many clients just because of our sales experience as well as client retention to be fair is that people are just kind of buttoned down and not making changes.

While they have got other things to worry about but I do think that there has been certainly a as I mentioned earlier, a great value that clients have seen that they wouldn't normally have been able to see from us how we facilitated their help or how we facilitated and helping them through the innovation of flex to really pre populate information file for their loans.

And be able to help them through difficult times I think that there is definitely going to have some retention impacts because we see it and the client satisfaction scores being at an all time high great feedback from clients Awards that we've won the help center online that we produce so I think there will be some stickiness, but we also know that.

And just the ability that people are more comfortable and they will now focus on do I need something else do I I grabbed a discount option to get three months free or something like that that's probably going to happen as people are more comfortable.

Let me just add one other thing because I think you raise a good point.

Those of you who've followed us for a while.

We tend to err on the side of being a bit conservative in terms of what we say.

And try not to get over our skis too much.

And I would say this if you look through the first three quarters and Marty mentioned that our net client gain was the highest that certainly it's been in recent memory and the third quarter.

If you look through three quarters, we're on a pace to really smash our retention records.

I mean significant improvements that frankly nine years ago I would never have thought was possible, but let's leave that to the side right.

Right now as we speak our rate of revenue retention and ignore client retention is verging on 90 plus percent.

That's a number given our client base, which is really pretty extraordinary so when I looked at those numbers and I say why is that.

It's all of those small actions seemingly small and helping clients that have driven them to stay with US now we end the year there.

I would say we have to see what happens in the fourth quarter, but we're on we're on.

And on record setting levels from the standpoint of both locking down the client base on.

On units and also.

In terms of.

In terms of revenue retention through the first three quarters of the year. So.

We're feeling pretty good we expect some slippage as we get into the summer and thats to be expected, but we've set ourselves up pretty well so.

If we can continue to derive benefit from all of the actions that are occurring.

And all of the packages that have been released and continue to serve clients well.

And we're well positioned for next year, Brian one other point just to be very clear on that too.

On the question that you had when you think about it they will need they will look for our support to file for forgiveness loan forgiveness as well as you know.

A lot of the stimulus things move through into our next fiscal year. So I do think it will have specific retention benefits based on the fact that they will need support on loan forgiveness that we have automated into the flex system that makes it easy for them to apply and also for things like the employee retention tax cred.

<unk>.

If they have to re file quarterly returns or file them correctly or go back and get data.

I think it will certainly help us there'll be a little bit of a tail on some of the stimulus piece of it.

Okay. That's really helpful. Thanks for all that color.

Just a follow up I wanted to dig in a little bit more around the demand and prevent by client size. So I heard the continuation of strong performance on the small and can you quantify anything around short payroll and then on your upper and anything around mid market that youre seeing different.

Sure payroll the low and has continued to be strong not as strong as it wasn't the first half day, there was a big bounce therefore.

Household employers like nanny payroll things like that but it is.

And that isn't that demand isn't as strong, but the demand coming in from a digital perspective through marketing and on the website and sales from a digital continue to be continue to be strong and consistent and persistent I would say on the mid market side, that's probably been more affected by the no decision. So we're getting in.

On the.

As I mentioned earlier, the key metrics of getting in front of more clients winning when there is a decision made against competitors is better.

And but we're not.

And I wouldn't say, we're as strong as we want it to be in the mid market more because of no decision that because of losing to a competitor.

Okay. Thank you very much.

Yes.

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

Hi, good morning.

Given the demand dynamics around the ASO and PEO businesses and I'm wondering how we should think about the likelihood of and Asl client eventually opting for the insurance benefit via the PEO offering.

Type of upsell frequency have you historically experienced and then if you could give any color on on what the economics look like.

And it client transitions from ASO to PEO that'd be helpful.

Yes, I think I'll start with the demand for it I think.

We do look at that I remember that we kind of go in and it can offer both upfront and many times.

And if they're not a good insurance risk.

Or fit the underwriting the ASO is a stronger platform for them.

Or we can take them through our agency I think that.

There is ups theres always availability of upsell ASO to PEO later, but it's not.

Not always as strong we make that available to them, we always are ready to offer that to them and.

And we keep an eye on that through the HR generalist that service them that if they have benefit and insurance needs, where we can supplant their ASO offering with the plan. We can do that but I would say that we do a pretty good job upfront of identifying whether the client for the client whether the better value is to go PEO or ASO and offer those.

<unk> to them as far as the.

And you want to catch on the on the economics that yes. There is a revenue uplift from PEO ASO and just just to.

Just to kind of build on what Marty said.

It's been an extraordinary year in terms of the.

Growth and the ASO offering and I think that would happened Andrew This year, we'll see how this trend plays out was because people were so interested and getting.

HR support quickly they opted for what ended up being the solution that gave them that support the quickest. We do think theres an opportunity for ISO to PEO conversion and there is revenue uplift and two areas one because the admin fee is higher and second because of course the attachment of insurance.

As would boost revenue so we think theres an opportunity there.

And we'll wait for the dust to settle and the fourth quarter see where that opportunity is and then and then see how we go after attacking that for now as Martin has been saying over the last three quarters.

Clients have a desire to get.

Net HR solution and placed quickly because of the changing landscape of regulations, and our HR specialist and terrific and guiding clients through that so more to come on that.

Got it.

And that's really helpful. And then for my follow up I was wondering if you could just speak to how health care utilization and claim costs are trending and your risk based plans and also whether your experience over the past 12, plus months is impacted how you're thinking about risk taking and the PEO business broadly if at all thank you.

Yes.

So short answer is really not much of a significant change I think that what youre continuing to see to be fair I would like to claim that was all superior management and I would say to my colleagues on the PEO of course and superior management for them, but the reality is also that theres a market component here, where people continue to defer elective surgeries.

So our elective medical procedures, not just surgeries so.

So costs have been very contained and I would say that's across a wide range of plans that we have it doesn't change our perspective on on risk on healthcare I think properly managed if you underwrite it correctly.

And you have a strong underwriting group, which we do.

Think that that our appetite for risk on healthcare remains unchanged. So I think that that that will continue and as Marty said earlier the value prop of healthcare.

We think that that will start to come back next year as conditions change the pandemic abates and people are looking at a little bit more normalized environment. So that's that's where those things stand.

Makes sense. Thank you.

Okay.

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

Hi, Good morning. This is mohit on for Jason Firstly, Thank you for taking my questions sure.

First I just wanted to ask can we just get the latest update on what youre seeing and different parts of the market just in terms of pricing in terms of promotional offers discounts and things like that.

Sure I think it's been pretty consistent with.

With what we've seen I don't think theres been any major changes from that we still feel like we have pricing power and can do the things that we normally do we do offer various.

On competitive.

Pricing tactics to win clients over but I don't think things have changed all that drastically out there.

Great. Thank.

Thank you and then just.

Question on the early view on you provided on fiscal 2022, Firstly I appreciate you providing that view, but maybe you could share just some of the underlying assumptions that are embedded in that guidance and just things like U S unemployment rate GDP growth on new business formation.

We expect on the competitive environment and things like that so.

I would say that our outlook at this stage and bodies continued gradual recovery into next year, we're not expecting some sort of sharp.

Decrease and unemployment.

We are wrestling with that.

And we're wrestling with the current environment now I would say that.

Fourth quarter is trending close to what we expected from a macro standpoint, but we're not expecting it to be dramatically different.

<unk> doesn't change.

Don't start to see a significant change until and.

Year, beginning of next year calendar.

Calendar 'twenty.

One into 'twenty two so.

The macro doesn't change significantly we are benefiting I would say, especially on the competitors not so much.

From a very robust environment in terms of new business formation. So our new business sales are up significantly that benefits more the lower and then the mid market.

Expect that it will continue.

Positive.

From an interest rate standpoint, it looks like we've had a sharp.

<unk> upwards, we don't expect it to be that significantly different and so.

So I think that we're expecting the trends that you start to see and the fourth quarter that were experiencing already in March are going to continue.

Hey.

But it will be more more gradual.

Got it thank you.

Youre welcome.

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

Thank you so much.

Talk a lot about what <unk> been doing for clients with some of the stimulus funds.

And pushing to the economy over the past year.

We had an announcement of and infrastructure plan and I don't know if youre going to be benefiting your clients are benefiting from directly but is there anything in there that you might be able to participate in.

Well I think I think probably more indirectly I think like if you think about a lot of the infrastructure going to construction and we benefit from construction.

When there is more construction, whether it's and.

And homebuilding or road construction or other facilities everything kind of around that there's a lot of small business around that small and mid sized businesses and I think definitely it provides more jobs and then we'll benefit from that I don't see it directly but indirectly I think certainly any boost like that too.

Construction to everything around it will be a positive for us still early to see exactly how that's going to play out and how long it takes to get that money into the economy, but we should be a benefactor of it.

Alright, Thats helpful and then Efrain.

The I guess the implied guidance for the fourth quarter is somewhat wide can you just give us any framework what should we expect on the high end and the low end and also what share count is embedded in that guidance. Thanks. So much.

So Jeff I think that.

Shares will move slightly lower than where they are right now.

But not a significant.

Change the service revenue.

I think I called it out at 7% and 9% for fourth quarter.

I would just add a little bit of color to that which is to say that management solutions will be will grow faster than PEO and the fourth quarter. So.

On.

Oh I guess that's.

I think that's enough to kind of at the at the points together that gets you to where you need when you couple it with the.

With the.

Your guidance I would say look.

It will be good.

To talk about growth, we've had pockets of growth and the last three quarters, but it will be good to resume.

On a period of more normalized growth and the fourth quarter. So that's what we're expecting at this stage.

Alright, Thats really helpful. Thanks, so much okay.

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

Hey, good morning, Efrain and Marty permanent.

Yes, I wanted to ask a little bit about payroll and I think you alluded to this a little bit Marty but.

And when Covid was originally occurring last year one of the issues that you had was not doing price increases are not putting that burden on your customers.

And we stand today do you think Youll go back to the normal cycle or how do you think that environment looks in terms of the ability to get some price increases.

I think.

The ability as they are in fact Kartik I think during this year is a lot of things that we've talked about.

We've shown a lot of value to our clients and I think we're probably and as good or better position than we've ever been.

One of the opportunities while its difficult on us and and our client is the ability to show how strong we are as a company and what we add to our clients and help them through a very difficult time. So I think the pricing power is very consistent and I think you'd see a more of a normalized moving.

Moving on that in that regard.

And then just second question upfront last question.

Any change and thoughts on how you will manage.

Float portfolio I know you kind of gave guidance for FY 'twenty, two but I'm wondering.

And what's happening with rates and how you might change the management of that.

Yes, I've got a long meeting and.

To discuss various scenarios.

And so the short answer is we're looking at that.

On the shape of the yield curve presents opportunities that wouldn't have been there several years ago. So we're looking at a range of options there and see if we can squeeze a bit more out of the out of the portfolio wouldn't expect anything significant but we were looking at opportunities to optimize that given the fact that.

And we now have.

On a steeper yield curve and it looks like.

And longer term rates may be heading higher.

I don't have a complete answer yet.

And that obviously and we get the fourth quarter.

Alright, Thank you very much appreciate it thanks Kurt.

Yeah.

Our next question comes from the line of Eugene Simonyi asthma.

Good morning, Thanks for taking my question sure.

And so I have to then I'll ask upfront both related to M&A.

We've closed on that position about two and a half years ago. So one question is is.

And the integration of that acquisition fully completed now and I know, obviously you went through the crisis.

Then on.

Is that the synergies left that might help.

And the recovery in the PEO the.

And the next 12 months or so.

And then I'll ask the second one right away just more broadly as we're coming out of the crisis is M&A again on consideration and if so what kind of assets could be attractive to you guys.

Okay I think.

And just integration, yes, it's gone very well.

John very well, particularly lately.

We've been in the PEO business for a long time, so that integration made sense, we made sure at the beginning.

When you think back now almost two years I mean, we had some bumps on the road from a combination of the sales teams and their compensation policies and all that stuff, but we're past that and.

I think that we've continued to see good synergies.

We expected Unfortunately, the pandemic, obviously put a damper on some of that from a sales perspective as you can see.

And so a little disappointing there, but generally I think we were on a good we were heading on a good path until the pandemic hit now over a year ago. I do think there is always still synergies that we can look forward to there.

We combine kind of our traditional our PEO business with Oasis and we continue to do that from a platform perspective look at the platform look at the way we are selling how we sell ASO to both markets and those things so.

There's still some things there and we can do but.

And we're very high on the PEO market and the ability of where it's going to come back as we come out of the pandemic again, all the things we talked about earlier, a little bit higher index and hospitality.

Some states and some areas of the <unk>.

<unk> that were hit a little bit harder I do think we have some opportunity to see that bounce back on M&A I think we've continued through the pandemic to continue to look at opportunities.

And that we see so there will still have the same kind of ideas in mind for that that can be the PEO business.

And we're obviously interested and from a product standpoint, if theres things that we need but we don't see a big need there right now always looking at payroll HR.

And anything else that we can do there and international we picked up a very small acquisition that we think will add to the product set internationally as well.

We did that.

And kind of under the radar and kind of as a small one but we think that could have some impact too. So yeah. We are still very interested and MMA. Obviously, we're in a good position from a cash standpoint.

If that opportunity comes up and we'll continue to watch for good valuations.

And that makes sense, particularly coming out of the pandemic.

Got it. Thank you very much very helpful. Okay.

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

Good morning, Thanks for taking my question. Good morning, I was wondering if you could talk about that.

Susan plate.

Discussions and we've been having here.

There's been a regional issue.

Given that some of the southern states have opened up and there is a lot of PEO.

A lot of new PEO business. There I was just curious if that's been a factor.

And certainly impacting face to face meetings, so on and so forth and then as a.

A follow up.

And for and I was wondering if you could talk about expectations for go to market spending and 'twenty two.

And if that is on.

Factor and then margin outlook. Thank you.

Yes.

I would say yes.

And as more businesses open up they're getting more comfortable.

And with the ability to have a rep come in and talk to them I think I do think as we look back at the year, we transitioned very quickly to virtual selling all telephonic course, we've been selling telephonic for many years and and.

And really maximizing the use of our marketing spend to bring more leads in to the website and into telephonic sales. So I think that really helps us kind of hold on.

Oh and her skills very quickly because we had already been on that path and actually got us there even faster.

But I think yes, we're really looking forward to where more businesses are comfortable we're already starting we've already started to open that back up to say that were available for face to face meetings, we do want the rep and the client has to be comfortable with it.

I think youre going to see that pick up quite quickly as youre seeing the states open up and people just get more comfortable with it from.

From a state from that standpoint that I think will drive an increase in certainly and close rate and then just a comfort level that their customers are coming back are our business. Our clients customers are coming back I think now there'll be more open to making a decision as to what they need and I think paychex has a full suite of products that can help them grow and as we come.

Out of the pandemic.

Yes.

With respect to go to market spending, we and the face of the.

And then Mike actually increased our marketing spend and.

We are going into next year, we will continue to spend against the opportunities that we see and <unk>.

So don't anticipate that that's going to get clawed back there is an opportunity in California on on retirement.

And retirement services on a business, we've talked about a lot, but a business that has done well and which we think theres an opportunity Marty mentioned pep, but there's also a mandate in California and around providing.

Our retirement services, we think that could be a nice opportunity and we're looking at ways to optimize that.

That opportunity going into 2020 two fiscal year 'twenty. Two so we will continue to spend at a at a.

Good clip to be able to address the market needs that.

And that we see.

Thank you.

Okay. Okay.

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

Hi, Thanks for taking my questions, maybe a follow up to the last question around go to market effort.

And how should we think about maybe the incremental cost to acquire a customer and how that's trended so not just the absolute spending, but the but the CAC for our customers, especially with.

Most of you and your competitors having to sell virtually still on this environment are you seeing day per unit costs go up or are they have they stayed relatively consistent can you give some color on that.

Yes, it depends on the channel some months, so I would say that where those leads are driven through our digital channels.

While I would say.

<unk> more.

We actually have gotten good economies of scale and our spending and I would say the marketing group has done a fantastic job of optimizing our marketing spend so I think in that sense.

And thats been good so I see as we pivot.

Field base resources into more digital or virtual.

And are realizing the savings that we've been plowed back into marketing.

And I think that we can make that equation work with some net savings with respect to the other channels. It's about the same it's not dramatically different from from what it was but as the business pivots more towards digital and it will continue to do that.

I think what youre going to see us and ability to to optimize spend and.

And to get better economies of scale and that and that.

In that trade.

Great and then maybe similarly on the retention side.

The number you called out was it was quite high.

Any trends now that we're a year and on the retention of.

Customers acquired more digital channels.

The last year or so versus maybe the historical base and and if theres any dispersion and the retention trends there. Yes. So two things I'll ask I'll answer a question you didn't ask and and all and.

And so the question you asked so first the question you asked the short the short.

Short answer to the question is the smaller of the client the more that the propensity to churn so that hasnt changed. So we would expect that we'll see a bit more churn as we get into next year simply because the survival rates on clients that are under four are typically not terrific, but we haven't seen any any significant increases.

And in that bucket of clients and we are certainly handily.

Losses, either through share payroll and or through our virtual sales so thats.

That's that's been a positive and we expect that a lot of those trends will continue into next year will it locked down to the extent, but locked on I mean, we have less churn and the way we've experienced this year going into next year.

And that's to be seen and I would certainly expect and the first half of the year, we're going to see see continued positive news on on retention and we'll see what happens in the back half of the year when things start to open on the second thing.

I'd say is that one of the things that we looked at very closely as well.

In terms of clients, who now have taken our HR solutions, how are they churning, we're not churning in the base and the short answer to that is they are not so they see a lot of value and what we're providing that's big revenue for us and I think that's helping to drive what are really good revenue retention numbers that and then I will.

As we as we get into into.

And into next year.

Great. Thank you guys I'll pass it along to the next analyst, but alright. Thank you.

Our next question comes from the line of Tien Tsin Huang.

J P Morgan.

And Jay.

Hey, good morning.

Always great to connect with a lot of great questions already I am just trying to think about.

Some of the answers you've given around the client and decisions and then.

I'm just trying to summarize on my head.

Or is it more structural or or slip call. It sounds like it's both but I just wanted to make sure.

One more so than the other if that makes sense.

I think the no decision.

If I get your question right attention and I think it's just I mean honestly I think it's just focus I think they are interested in the presentation. So our presentations are up our end user presentations and we're feeling very good about that and but what's happening is that the client is deciding well I'm just not ready to decide yet there's just too many things go.

And on either there.

Many getting alone.

They are finding out new ways to get employee retention tax credits, they've got an awful lot going on and I think what you are finding is that it's a no decision not a.

It's a net right now decision, let me put it that way versus and no decision, it's not losing to competitors as I said, what we're seeing is better competitor win rates when they are making a decision. So we feel good about from it for that from that standpoint. So I think it's more of a timing of what we're getting the feedback were getting and were seeing as it's more of a timing thing than anything.

So.

And we're hoping for a pickup.

And that's a big number and the selling season to produce and.

And that's a tough one and when youre not getting as many decisions being made and it's a little bit more obviously on the mid market side, where they have more complexity to their business that they are working on.

And I know you.

<unk> results have been great and I am sure you and outstanding by.

And from a sales perspective, but given what you've learned on selling so far do you anticipate changing your.

Traditional versus digital sales investments from a mixed perspective going into fiscal 'twenty, two or is it more you're just going to you're ready to catch it on the net here.

As things open up yes, no I think it's one of those things that's going to continue to evolve we were doing that beforehand.

Youre going to see more as Efrain said youre going to see more spend the shift in marketing and sales youre going to see more spend and marketing as we've already seen this year, it's just the way things clients.

Clients and prospects have gotten more used to saying Hey, I don't know if I have to see somebody and person right. So I can sell I mean, I don't want to give you the impression that we we still were pretty much year to date, where we thought we would be on sales. So.

It's worked this pivot of going and selling remotely has worked pretty well. So we're not going to go back to the full model but.

But we will certainly go back to more of the selling face to face, but we found a lot of new tools and a lot of new training and ways to sell online and frankly, it's more effective and you can you can spend more on marketing, but youre going to spend a little bit less a little bit less and sales direct sales kind of thing. So I don't think it's not going to go back to where we were it will continue to win.

Evolve as we need to do to sell the product.

No that's clear thank you for the insight.

Our next question comes from the line of Mark Mark home of Baird.

Good morning, Marty and Efrain on the Mark.

With regards to the to the win rates the improvement that Youre seeing who is that.

Merely coming against.

Do you have any any sense.

You would know them very well, there and the major competitors and the mid market space and what would be most.

Most of them.

The ones that we're seeing and it's pretty consistent it's not just one of them. It's it's Ben.

The top players and there that that you would know very well and cover.

Okay and with regards to.

And your assumptions for next for next year.

How do you think the how do you think it's going to end up trending in terms of the.

The client being distracted initially they're distracted because of.

Obviously, COVID-19 and the unprecedented nature now it looks like we're going to end up having.

<unk> a lot of stimulus combined with Covid fading.

Are they going to get overwhelmed with business and too busy to think about things or do you think if theyre really super busy.

And could actually be a spur too.

And two increasing decisions.

I think I think we expect and increasing and decisions you know Covid thing was how do I deal with first of all remote workforces. Many of them are closures, how do I deal with all of these rules and as those start to ease those are the major issues of why I wouldn't be buying HR or payroll or retirement and I think.

As that opens and the stimulus frankly have been a plus obviously they've kept a float a lot of businesses.

<unk> seen those those businesses that we saw is not processing, but and a hold pattern come down dramatically and I.

The stimulus has been a big help so as more stimulus comes out right now like these grants.

And that loans, but grants to restaurants I.

Think that will really stir some more interest and saying, okay. I got employees coming back I need help from an HR generalists that paychex provides and how do I bring them back how do I manage these how do I manage people how do I recruited.

So there is going to be some challenges here and recruiting retaining.

And I think that's going to increase the demand and is.

The kind of living day to day of Covid starts to ease through the vaccinations and so forth I think it's going to pick up as our expectation.

Got it and.

And with regards to the micro and of the market are you seeing any impact from a large competitor introducing and micro solutions.

We have not yet.

And.

I think.

It's going to be interesting, we're going to watch it obviously.

It's a very basic.

And.

Youre going to get what you pay for it is very basic theres not going to be personal support I don't believe.

As we've said we've moved a lot to self service, but at the same time, we're always ready seven by 24 by 365 to provide that support and we've found that to be very critical to our clients. During the pandemic in particular, if they get hung up on something and they need to talk to someone.

They don't want to wait for a text back.

Or a <unk> or someone to answer and E mail than when they can't talk to a live person just like how.

How many of us buying software support these days so.

It's going to be as good until you need something different and then it's could be a frustration so havent seen the impact yet, but we'll watch it.

Got it and then with regards to two things.

PEO.

And when.

Under what conditions do you think that that really does transition where people will.

And I will say ASO is great but.

Really what.

What would be better like how.

All.

Confident are you in terms of seeing that and then the second question is just on the service.

Footprint as you cut back on the geography.

And it seems like retention is doing extremely well so it seems like youre your client satisfaction and must be really doing well, but are you seeing any sort of.

Are there any negatives with regards to the cut back with regards to the geographic footprint on the service side.

And have not seen a lot of it mark it's really I attribute to the our operations leadership team and how we handle that many of those tenured employees that were in the offices that we closed are working from home. So the clients have not seen that disruption from losing their payroll specialists that they've had for many years, we've been able to transition.

To that work from home environment, which.

And was accelerated by the pandemic.

Had already planned on doing some of that over the next few years, but accelerated it and frankly my hats off to the technology teams here. The operations leadership that have really done a very good job and making sure that that continue to be handled and they have also positioned clients into the right service centers. So if they were normally calling in.

Transitioning them to different service centers that can handle them.

From that standpoint, so I think we've done a really good job and have not seen a fallout on that on the PEO question I think.

And it's going to come back to is people as clients feel a little bit more.

Things are calm down and now it's going to be again, Hawaii recruit retain.

And and really make sure I get the employees that I need while there is still.

And some disruption to the employees I think even through the summer with childcare with unemployment, having and additional higher rate payment to them. So they're going to be interested and hey, what are the benefit plans and I can offer them.

How am I going to be able to provide those benefit plans are they a good benefit plan I think the PEO interest will pick back up.

We get into the second half of the calendar year and into our next fiscal year, we expect that that will start to pick back up again.

Great and then last one for me.

Clover.

How does that partnership work have you seen much of an impact or do you expect to see more of an incremental impact.

Over the coming year.

And then coming up.

We have more of an impact coming up we finished the this integration where the app. The flex App is on the Clover platform. So on the Clover customer.

Fire up my point of sale terminal and I've got the marketplace from Clover Fi service Clover there.

Paychex is.

Right there is a preferred app and and once they realize that if the reflects customer.

From payroll paychex, and Pfizer appointed Culver customer. They can now have all of that information integrated the time and attendance will automatically populate from the point of sale terminal I think all of that integration has recently kind of gotten done now and so I think that we'll see more of an impact on the next fiscal year as that gets out there.

Theyre more and they start to see the combined benefits being together and Clover and flex.

Great. Thank you so much okay, thanks, Mark and Mark.

Your next question comes from the line of David Grossman of Stifel.

Hi, Good morning, Thanks for Indulging me this late on call it.

Kelly.

And just a couple of really quick ones. So there's a lot of noise and the market right now I mean, I think it's fair to say retention is going to be up for everybody and the industry.

Kris complexity definitely plays into the outsourcing theme.

And you've got really difficult comps this year transitioning obviously the more favorable comps next year. We all appreciate that fiscal 'twenty. Two early look however at the risk of sound and Greeley, perhaps you could help us sort through how to do more normalized growth when you get past these distortions.

The reopening and the compares.

You mean, what our expectations there.

Yes.

I wanted to ask you to get too granular there, obviously, but it's just a way to think about.

And I, thank all of that ex growth, yeah, what I'd say.

When I get asked that question is.

Pre pandemic management solutions is growing about 6%, we certainly expect management solutions will grow and the mid single digits maybe.

Here faster, we'd want it to grow faster and that and then.

We expect PEO to grow.

Double digit or around there.

Insurance is a little bit of a drag at this point.

Unfortunately, the workers comp market has not recovered, but but that's what we're that's what we expect and frankly in some ways. If you look at the guidance next year, that's sort of what Youre seeing right could we do better sure there is.

There is a possibility as we get through Q4 that would come out of it even stronger than we expected, but I think is a reasonable starting point, that's where we're at right now.

And then on the PEO.

I mean, obviously, you're underperforming and appears right now and that you gave us some of those reasons.

How impactful or the insurance and the sore.

Versus the over indexing, the hospitality and can you help us think through relative impact.

In fact, I think it's a mix of that and I think the insurance haven't helped you put your finger on Sui Sui is going to be and impact into Q4.

And.

And that's going to be and impact workers' comp has an impact too. So I think you've got a mix and <unk>.

And of different issues, there, but I think we start to anniversary those as we get into next year.

Alright, and then you mentioned one other interesting thing about self service characteristics of the platform.

I think you mentioned that in the context of your costs going down.

I guess my question is really more.

Competitively since that's one of the biggest criticism.

Throughout the spectrum of client size of kind of your model versus a software model. So.

And my reading too much into that or is there more to come here and where we'd be on that journey or that transformation.

And betting more self service characteristics.

And the client more control and just given the services when they need it.

Yes, no I think it's been very important to us it's actually something that innovation, we've been on a path for that for some time, and it's really and ability of getting the client and the and clients employees to see how easy. It is to do those things I think the pandemic has helped and the fact that while employees were away from <unk>.

Any work sites.

<unk>.

And it forced the clients to say Hey, you can do this yourself or I can do it for you, but we're not together so we can't be pass on paper around and there is no longer and need for that so as I mentioned and over 80% of changes like direct deposit changes address changes things like that are done by the clients or their employees now and.

And we see that continuing the next movement will continue to be self service even in <unk>.

Sales itself and setting up the client, allowing themselves to be set up much of that is done with share payroll now and that will continue on the flex platform.

Hey, you're there and we're always going to be available to them, if they need us, but definitely there is not only a cost saving but even probably more important there is a value to the client that want to do it themselves when they want to do it and we've been on that track for some time, we just probably you haven't talked about it as much.

From that standpoint, but.

I think we're well on that continuum and that will continue as an offering to clients, but always leaving that hey, if you want if you have an issue you can get to us any time to be able to get you through it if you need it the other thing I would say David is.

We're proudly of tech services firm.

And you cannot you can on when the awards that we won those arent paid or we didn't pay anyone.

To give us those awards unless independent third parties look at your platform and your service and say you know what.

And they do what they're going to do and clients agree with that look at those awards I would just say that people look at the prevalence of the model the strength of the model is shown by our retention numbers and the service we were able to deliver to client I would say this of course, there is an opportunity for pure software players and the market.

But if everyone drops out and provides no service that's great for us because you know what will be there to catch those clients because a lot of clients, especially in the SMB market need some element of service. So we're not going to run away from that how we deliver it.

That can change and frankly over the last since tax reform. Many of you know we made significant investments to accelerate the opportunity you want a low and solution, where you don't talk to anyone and you can onboard yourself by the way, let's talk about reality ask our competitors, who can do that.

Can ask them if they can do it and I think youre going to get some funding stairs on but my point is we don't seed our tech chops to anyone we're as good as anyone else, but what we do is we also give you a value added service and this year was a year, where you saw the benefit of that and what we're seeing the reason we're seeing.

Our retention numbers and revenue retention numbers at the levels. They are is because we did it with excellence.

Alright, very good well, thank you very much.

Alright, David thinking.

And.

Our last question comes from the line of James Faucette of Morgan Stanley.

Hey, Marty Hey, Efrain, thanks, so much for Jonathan.

And today.

I wanted to follow up just on on that last comment on.

Obviously, you guys have been very successful and adding capabilities and that event and I just evidenced by the awards, but also by the capabilities and new products et cetera.

How are you feeling now about kind of the pace of innovation and the industry and and.

What are you feeling in terms of what paychex needs to do to match that or exceed that both from an R&D perspective. It seems like you are pretty comfortable from that perspective, but is there some supplementation and youre looking at from an M&A, where it makes sense to go out and acquire capabilities or technologies or do you feel like most of what youre seeing.

And what you need to do can be handled through internal development.

I think most of it can be done by internal development.

Just following up on efforts passionate speech, there I mean, I think we under it probably undersold the technology side of us over the years, because we're so proud of the service side as well and when you think about things like the.

The loans when that stimulus when the cares Act first came out the next day, we had and we introduced a product that said all of your information is pre populated and flex. If you are a client of ours. All of your payroll information is and there you can apply for the loan and then we shortly said you can now send your information the best the credit and it will automatically apply out.

You have to add as a few things and we have signature ready forms for you to apply for forgiveness as well so I'm very proud of the fact of what our I T and.

On the technology team have done I think we've added those things and over the years that we needed time and attendance. We bought is a very small add on product and have now turned that into a very large business growing extremely strong now as part of our revenue stream for us and we've integrated that into the SaaS cloud based.

Flex product the mobile App as I mentioned, a few times still a five star App.

It is getting increased usage and has a lot of ways to go so I'm very comfortable now we're always looking probably from an M&A standpoint, also or even partnership standpoint, like the Clover and <unk>.

Example, we have the technology, but when you integrate that now with a point of sale platform. That's best on the business.

Now you really have some additional power that youre, putting the technology. So I've got a point of sale, but boy now I've got a great time and attendance solution and payroll solutions Thats all integrated.

With seamless connection that's really powerful so it's probably more partnership than it is even M&A, but we're always interested in that but we've built out most of our technology and we're very proud of it.

That's great color there Marty and then my last question here is just.

We've talked about over the last of course of the last year, some variances from John and geographies in terms of pace of recovery et cetera does that continue to be the case and and what key things are you watching for two to measure and try to forecast that recovery, particularly and maybe.

Some of the regions. If there are differences that are a little bit behind.

Our own small business index that we've that paychex puts out with IHS Markit every month I mean, we've seen this last month, we saw the best one month gain and jobs and about eight years and it was across all regions. So thats very positive the south has been the strongest.

As you would expect their lower wages, but they've had more growth just exited to the south and just more construction commercial and residential but right now in March anyway, we saw growth in every region and I think 18 out of the 20 states that we look at for the best growth. So we're seeing pretty growth across that.

We use our own metrics that way, we're seeing that.

And we're seeing a bounce back and employees a little bit, but it's going to be interesting through the summer I think youre really going to see the bounce in September as people start saying, Okay schools are back in people are coming back full time into work there may be still flexible work conditions, but that's one I think.

As you see the summer and.

And Ah.

Be ready for all of that our clients are going to start picking up on the decision making.

That's great. Thank you so much you guys for your generosity.

Alright, thank you.

Okay.

That's all the questions right.

That's correct, Sir Alright at this point, we will close the call if you're interested and are replaying. The webcast of this conference call it'll be archived for about 90 days. Thank you for taking the time to participate and our third quarter Press release conference call and your interest and Paychex. We greatly appreciate it I hope you all continue to remain safe and healthy. Thank you very much.

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

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