Q4 2021 Paychex Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Paychex Q4 fiscal year 'twenty 1 earnings conference call on.
All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
If you would like to ask a question at that time. Please press star 1 on your Touchtone phone I will now turn the call over to Mr. Martin.
And you see president and CEO. Please go ahead.
Thank you and thank you for joining us for our discussion of the Paychex fourth quarter and fiscal 'twenty..1 earnings release, joining me today is Efrain Rivera, our Chief Financial Officer, Hey, This morning before the market opened we released our financial results for the fourth quarter and full year ended March 31, and 2021, you can access our earnings release on our Investor Relations.
Site and our form 10-K will be filed with the SEC before the end of July. 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 an update on our business highlights for the fourth quarter Efrain will review our financial results for both the fourth quarter and.
The full year and discuss our guidance for the upcoming fiscal 2020.2 and then we'll open it up for your questions.
Before I comment on our results I just wanted to take a moment to note that paychex is celebrating its 50th anniversary. This year. We are proud of our 50 years of innovation and support of small and medium sized businesses from the payroll services provided to our first client and $19.71 to the critical care, we gave our clients through the unprecedented and.
And make environment over the last 15 months.
We are excited to continue to build on this legacy of technology enabled service that keeps it simple for our clients and gives them the freedom to succeed and their businesses.
2020, 1 presented 1 of the most challenging periods and our history, yet our commitment to servicing our clients with innovative products made it a very successful year, we finished the year reporting.
Excuse me positive growth of 1% for both service revenue and adjusted diluted earnings per share in the midst of a pandemic with almost 15000 employees working remotely.
The results of the past year are a testament to our resilient business model and the hard work and dedication of all of our employees, who made sure that our clients were well informed and have the technology products and resources needed. During this challenging time, many times for the actual survival of our clients' businesses.
We achieved record fourth quarter revenue and earnings and we began to see positive as we began to see positive Mike macroeconomic impacts from the economic stimulus and an increase and vaccinations that have allowed businesses to reopen and begin adding employees. This was evidenced in our check volume trends are increase in time and attendance activity.
And strong sequential growth in both PEO and ASO Worksite employees.
We ended the year with 4% growth and our payroll client base the highest organic growth rate, we have seen and a number of years. This was driven by both solid sales performance and a record level of client retention of approximately 85% of our beginning client base. We also grew total worksite employees, 18% to 1.
7 million.
We achieved growth and total sales revenue for the year quite an accomplishment given the impact of the pandemic on the business environment and with all of our sales teams selling virtually throughout fiscal 'twenty 'twenty..1 we have seen strength and our virtual sales retirement services and HR solutions, all of which experienced double digit growth for the year.
This growth was fueled by a record high fourth quarter and new sales revenue.
These positive results, coupled with signs of continuing momentum and sales lead generation and nurturing campaigns leaves us well positioned for a strong sales here in fiscal 'twenty 2.
Our unique.
Our unique combination of innovative products and services are designed to meet the evolving needs of employers and their employees the strength of our technology backed by our HR and compliance expertise and personalized service continues to be recognized by industry experts the.
And the SAPIEN and insights group annual HR survey ranked paychex flex number 1 among all solution providers as rated by their voice of the customer report and both user experience and client satisfaction scores and.
In addition, lighthouse research and advisory announced Paychex Flex 1 and second annual HR Tech Award for the best small and medium business focused solution and the core HR.
Workforce category.
We were recognized for the strength of our technology and service and providing support to our clients during the pandemic and particular, our ongoing federal stimulus support HR services team and digital communication solutions have proven valuable during this challenging time.
Looking ahead, there will be continued challenges for employers as Americans continue to get vaccinated state restrictions relax and businesses fully reopened the war for talent has intensified.
And we are well positioned with our fully integrated flex recruiting and applicant tracking module and our partnership and integration with indeed, the world's largest job board to help businesses find higher engage and retain employees quickly and easily.
Recently, we released additional self service capabilities, which accelerate the speed to hire and lessen the administrative burden on businesses. This tool simplifies the experience and includes the ability to invite the new hire to onboard and complete documentation digitally.
We are in and earlier in the early days, but reception of this tool has been very positive census, re leased 80% of the transactions and this new solutions have been completed using a mobile device, reflecting on the strength of our mobile and self service capabilities.
Retaining talent in today's environment requires a comprehensive benefits package the latest innovation and our retirement services offering our pooled employer plan as quickly surpassed 4000 clients since our January release, just a few months ago with strong activity and the pipeline.
Managing cash flow and labor expenses continues to be important.
And as the economy ramps up the new Paychex flex labor cost hub Gibbs clients, a holistic real time view of total job costing and labor distribution expenses to drive greater insights to manage their workforce.
This is in addition to our suite of data analytics capabilities that provide our clients with advanced features typically reserved for larger companies and.
And we continue to update our paycheck protection program solutions, and near real time and allow clients to easily navigate the complexities of the PPP and employee retention tax credit concurrently.
And I quickly developing and deploying these updates and paychex flex we have helped our clients secure over $65 billion and.
And payroll protection loans, and $2.5 billion and employee retention and paid sick leave credits combined.
And I'd also like to provide updates on a few other areas, where we continue to invest.
Near the end of fiscal 2020, we launched our real time payment solutions and since then and processed over 50000 payroll funding over $200 million decline employees. This provides clients the ability to process payroll on check date and fund direct deposit transactions within 15 seconds, a true cash management.
Unity for businesses of all sizes.
Our paychex Flex intelligence engine, our AI and machine learning Chatbot is now trained to successfully answer over 340 questions.
While also providing users access to our help center inventory of 800 instructional and educational materials. This past fiscal year, our automated help solutions have a service approximately $1.8 million client and employee users handling over 60% of the questions and and automated fashion.
And we have seen double digit increases and the number of sessions on our 5 star Paychex Flex mobile App and the use of our self service functionality continues to grow.
Just 2 weeks ago, we just 2 weeks ago, we hosted thousands of clients at our first ever exclusive virtual Paychex business conference. We brought together experts insights resources and solutions that clients need to build a better workplace increased productivity and thrive in 2021 and beyond it was an important way to think.
Our clients for their tremendous loyalty as reflected in our historic levels of client retention.
And the post pandemic future of work is still evolving we remain focused on helping our clients adapt near term. This includes <unk>.
<unk> forgiveness employee retention tax credits rebuilding workforces and managing the return to work environment.
While we are very proud of the performance during fiscal 2021, we are even more excited about how well positioned we are for growth in fiscal 'twenty..2 the combination of our sales momentum client base growth and satisfaction and industry, leading operating margin and increased investment and our marketing lead generation and product development.
Has us well positioned for another year of strong financial performance and fiscal 2022.
I will now turn the call over to Efrain Rivera to review, our financial results for the fourth quarter and fiscal year as well as our guidance in fiscal 'twenty 2 efrain.
Thanks, Marty Thanks to everyone who's on the call I would like to remind you that today's conference call.
We will contain forward looking statements that refer to future events and therefore involve risks.
Please refer to our earnings release that has all of the disclosure on these issues. In addition.
Let me start by providing some of the key points for the quarter, the hub and followed greater detail on certain areas and I'll discuss our full year fiscal 2021 results.
For the fourth quarter.
Strong what can you say total revenue increased 12% to $1 billion and service revenue increased 14% to 1.1 billion.
As we benefited from improved employment levels and higher client counts across all of our solutions growth rates were bolstered by an easier compared to the prior year fourth quarter.
That was significantly impacted by the pandemic and remember last year, we had a fairly strong quarter in terms of interest on funds held for clients were battling that headwind and deliver the results that you see.
Within service revenue management solutions revenue increased 14% to $756 million and PEO and insurance solutions revenue increased 13% to $258 million Inc.
On funds held as I, just mentioned decreased 43%.
Lower average interest rates and realized gains were partially offset by higher average investment balances.
Expenses increased 10% to $675 million.
The growth was the growth and expenses was driven by higher performance based comp, which compared to a prior year quarter that reflected a sharp decline due to the pandemic and higher PEO direct insurance costs.
Operating income increased 18% to $254 million with an operating margin of 34, 4% and 160 basis point improvement from the prior year fourth quarter. Our effective income tax rate was 24% for the fourth quarter compared to $24.3 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.
And we do call those out.
Adjusted net income and adjusted diluted earnings per share both increased 18% for the fourth quarter.
$261 million.72 per share respectively.
Let me touch quickly on full year results service revenue as Marty indicated.
Increased 1% to $4 billion.
Management solutions revenue increased 2% and PEO and insurance solutions revenue declined 2%.
Interest on funds declined 32% to $59 million due to lower average interest rates and realized gains and total revenue was flat year over year at $4.1 billion on.
Operating income was flat year over year at $1.5 billion adjusted operating income increased 2% to $1.5 billion with a margin of $36.8 and expansion of 70 basis points compared to the prior year adjusted.
Operating margin and excludes onetime costs of $32 million related to acceleration of cost savings initiatives, including the long term strategy too.
To reduce our geographic footprint and head count optimization and the majority of which was recognized during the force.
The first quarter I should say as you know adjusted.
Diluted earnings per share increased 1% to $3.04.
Turning to our investment portfolio. Our primary goal as you know is to protect principal and optimize liquidity.
We continue to invest and high credit quality securities. The long term portfolio and that has an average yield of 1.9%.
And and average duration of 3.3 years, our combined portfolios have earned an average rate that we are.
And at 1.1 and 1.2% for the fourth quarter and fiscal year, respectively down from the 1.5 and $1.8 for the same periods last year.
Financial position and walk you through or the highlights of our financial position and obviously remains pretty strong or very strong since we have over $1.1 billion.
With total borrowings of 805 million as of May 31, 2020.1.
And hope for clients were $3.8 billion and.
And increased from $3.4 billion as of May 31, and 2020 as you know they vary widely on a day to day basis.
And the average $4.2 billion for the fourth quarter and $3.9 billion for the fiscal year.
Our total available for sale investments, including corporate investments and funds held for clients reflected net unrealized gains of $79 million as of May 31, 2021, compared with 100 million as at May 31, 2020 and.
This decrease in net gain position resulted from increases and longer term yields during the year.
Stockholders' equity was $2.9 billion as of May 31, and 2021 and reflect a $909 million and dividends paid and $156 million of shares repurchased a return for equity for the past 12 months was 38% cash.
Cash flows from operations were $1.3 billion for the fiscal year that actually was a decrease from the same period last year. The decrease was driven by fluctuations in working capital including.
And increase in purchased accounts receivables due to the continued recover from recovery from the COVID-19 pandemic, we just simply then.
Purchase a lot of receivables last year and the same quarter and also it was influenced by the growth and the business offset by an increase and Worksite employees and.
Payroll related liabilities now, let me turn to guidance for the upcoming fiscal year, ending May 31, and 2022. The outlook reflects the current macroeconomic environment, which continues to show gradual recovery.
Our outlook will be as follows and let me just make this comment before we do that and 1 of the things that we're really proud of is if you go back to what we said.
And.
And in April of last year before.
Before we knew everything that we know now.
We've got some things wrong, but we got a lot of things right and we also were.
Very very transparent with the investment community around what we expected to happen.
I think if you look at what happened and the year, we were a lot more wrong than right.
And we're right and wrong there were things that we couldnt have peg which was the.
Speed of the recovery the sharpness of it we've got the direction, we got the shape of it correctly.
We knew the year hinged on the fourth quarter being better we looked at the macroeconomic data and put that what happened and fourth quarter would happen and it was stronger than we expected, but the point I want to make is simply that we communicated along all of those steps and we did it and very transparent fashion, we didn't we didn't say.
We didn't know we told you what we knew we told you what we didn't know and this is where we ended so with that and the spirit of those comments, here's where we are.
And where we're landing for 'twenty 2.
Management solutions revenue is now expected to grow approximately 7%.
And insurance solutions is expected to grow and the range of 8% to 10% interest on funds held for clients is expected to be even with this year total revenue is expected to grow approximately 7%.
Adjusted operating income margin is expected to be approximately 38% and increase of approximately 120 basis points, let me pause on net.
If you look at what happened just happen.
I would say we are among the few come.
Companies that debt not only grew margins and the middle of a pandemic, but then raise them and the following year and Thats. A result of a lot of hard work here not only on <unk>, but also and services and across the entire organization a lot of the initiatives that we took are paying dividend going into next.
Here and we have more than we can do.
Adjusted EBITDA margin for the full year fiscal 2021 is expected to be again approximately 42% other.
Other expense net is expected to be and the range of $33 million to $37 million.
The effective income tax rate is expected to be and the range of 24% to 25%.
And adjusted diluted earnings per share is expected to grow and the range of 10% to 12%. We will have some benefit from stock comp exercises. We don't know what that is so we don't bake it into the guidance.
Given the shape of the recovery during fiscal 2021, we expect fiscal 2022 to have stronger growth and the first half of the year and then moderate and the second half. The first half of the year is anticipated to have total revenue growth and the high single digits and and adjusted operating margin and the range of 37% to 38%.
To give you some more color on expectations for the first quarter, we anticipate strong year over year growth as the fiscal 2021 first quarter was significantly impacted by the pandemic.
We currently anticipate total revenue growth will be and the low double digits I'd say, it's probably in the 11% to 13% range.
But certainly low double digits adjusted operating margin is expected to be approximately 38%.
And of course, all of this is subject to our current assumptions, which are subject to change and we'll update you again on the first quarter call and then on just final comment as we as we wrap up the prepared remarks I would just say this debt when the pandemic started I fielded a lot of calls from investors and.
And this about how we would fare and the pandemic.
I think this quarter.
This quarter shows how we fared and the pandemic, we are a very very resilient business and even during a downturn no unexpected and we did some things that were pretty extraordinary.
We take pride and that that was the work of every single employee and paychex from sales to ops.
<unk> et cetera, and you know what as Marty said, we think the best is yet to come and so with that I'll turn it back to Marty great. Thank you Efrain operator, we'll now open it up for questions comments.
And you would know.
Like to ask and Oneill question. Please press star 1 on your Touchtone phone once again that is star 1.
Ask an audio question.
Your first question comes from the line of David to debt.
And with Evercore.
Thank you good morning.
And Europe changed David.
What's that.
You changed your name she announced she is David <unk>.
And Tom and I make sure we get it right.
Yes, the same person.
And your fiscal 'twenty 2 guidance for 7% management solutions revenue growth what are your what are you forecasting for client retention.
And payroll client base growth.
So with respect to payroll client base growth.
David we expect it to be and the normal range of.
1% to 3%.
Hopefully, we do better than that and we certainly did better than that this year.
On <unk>.
Because retention was so strong this year, we expect that it will not reach the level that Marty mentioned.
So we ended the year at 85% if you look at flex revenue retention, we were almost 90% those are really ex.
Troy Denary numbers, we expect some.
Some loose.
<unk> of those are numbers, but.
Not significant but we expect it to be down a little bit.
Understood just as a follow up accounts receivable growth remains elevated at 51% versus the May 2020 balance sheet debt can you dig into the purchased accounts receivable.
Tail that you signaled and your comments and and is there a collectability issue here.
Non zero, Hey, David I mean, I think many people on the call with no debt 1 of our businesses 1 of our businesses is funding staffing firms.
We don't do staffing, but we funds staffing. So it was an anomaly in the fourth quarter of last year staffing was down 20% those of you who cover staffing firms no debt when staffing declines at that level. Then there is simply no nothing to fund and Theres No Theres no receivables to fund and so.
If you look at last year, our cash flow was 144 billion that is that was much higher than even I expected, but that's because we didn't put out any money.
To funds staffing this year, we had a really sharp rebound and the first and the in the back half of the year and in the fourth quarter.
And that was a very very good performer for us.
But that means that we purchase more receivables, we get we get obviously some benefit from doing that the way it is.
Selected and the statement of cash flows is that that shows the growth and receivables. So I would say those numbers are now more normalized versus a year last year that was that was artificially depressed.
So on the August quarter should we expect receivable growth to track revenue growth.
It still will probably not track it completely because the recovery on.
On <unk>.
Staffing really is more of a second half.
Second half phenomenon. This year staffing was still weak into the into the first and first quarter of last year.
Understood. Thank you very much okay. Thanks.
Your next question comes from the line of Ramsey El <unk>.
And with Barclays.
Hi, gentlemen, thanks for taking my question today I wanted to.
Ask about the debt.
Fiscal 'twenty, 2 margin guidance, which came in and really nicely above our model Efrain I know you mentioned that it was due to some initiatives that you guys had laid in and it was kind of a group effort, but could you give us a little more color on what the what those initiatives might be what are the primary drivers of that of that outperformance GAAP.
So I'd say the first thing Ramsey is that when we took the.
Took the charge last year.
Knew that it would produce or we believe and model, but it will produce a certain return and it produced that return and probably a little bit more so kudos to the team that did that.
I think that we continue to evaluate what the right footprint is theres no theres no additional charges contemplated, but as we examine that debt.
Debt footprint, we're looking for ways to become more efficient debt.
Number 1 number 2.1 of the things that a pandemic produces as it produces a keen focus on every single line of expense and the P&L and I would say that for a company like ours that is built on the idea that debt.
We have to operate very efficiently.
We looked at.
And not every single dollar of cost that was in the model pre pandemic needs to be and the model post pandemic and so we thought we could comfortably manage with with a slightly different level of expenses and so the expense growth.
Not much the revenue growth. So the third thing is a sharp rebound in revenue then produces the ability to leverage further than you would if if those costs came in or you didn't have that level of revenue growth I would say this I get the question many many.
Times, what's the what's the theoretical Max for how our margins can grow the short answer is that.
We don't have an answer on that.
Obviously, there is a theoretical max but the point is that that increasingly we are look we look for more and more operating efficiencies as our systems get better and better and they have gotten better and better and.
And our operating model has gotten more and more efficient. So it's really a combination of all of those are sustainable and.
And all of those things are influencing that number.
Okay.
That's terrific and interesting.
Also I wanted to follow up on David's prior question on revenue retention, it's been impressive this year, obviously impressive in the quarter.
And I think you also mentioned there was a bunch of drivers there, whether it's product service levels, Boston and tackling et cetera, but can you also call out a couple of things there that have really made made the difference and then maybe also just tack on there is the PPP.
Servicing in terms of the PPP loans made a difference there are your clients sort of locked in a little more now because they have to unwind all that process or is that big enough to move the needle on your business.
I think right and I think that is definitely helped I think clients learned that there was a great value more value than maybe you had thought.
And having us and the experts that the expertise that we have with compliance and so forth the ability to be able to provide them access to those PPP loans. The day, they were available and giving them a pre populated kind of an application that they can file for the loan a pre populated application that was signature ready for the FERC.
Given this the ability that we linked with 3 fintech providers to help them facilitate loans and when they couldnt get the interest from the banks.
It was really very helpful and I think that has contributed a lot. They are at a stage now where they are and.
Theres still finding debt with the employee retention tax credit, we're doing a tremendous service to them by helping them understand that they're even is and employee retention tax credits and how big that can be to support them from a cash flow perspective. So I think all of those things and in addition to the strength of the product and the service already is real.
<unk> contributed to people, saying, hey, I'm not going to leave to save 10% or a free month of service when I see the benefits that the paychex and the team at provided me the other thing and that just to build on that just.
Kind of add some some some numbers to that.
Marty mentioned it earlier in his comments.
Look.
And doing things on a on a 1 year or half year basis is 1 thing doing it on a sustainable basis is another thing I would say 1 other thing that we're very very proud of is that through the pandemic when.
When there was an unprecedented level of demand on our service providers.
We met that we met that need and our net promoter scores hit their highest levels ever and the company. So when you look at all of those things that that really plays into the retention number of course, the economy has something to do with it but I think the combination of that leads us to believe that this is a.
Sustainable trend going forward.
Great. Thank you so much okay.
Your next question comes from the line of Jason Cooper Becker with Bank of America.
Hey, guys. Good morning, Thanks for taking the questions here I.
I wanted to ask a follow up just in terms of some underlying assumptions and that FY 'twenty 2 guide specifically on pricing as well as checks per client and and sort of as part of that what are you kind of assuming in your base case for where the U S. Unemployment rate goes during the course of of your fiscal year.
Yeah.
So pricing I think we assume that we returned to a more normal pricing environment.
Jason We did we delayed price increases at the beginning of last year, we thought that was the right thing to do it impacted us and.
But we thought it was the right thing to do for clients, but we resume a more normal.
Cadence of pricing increases, maybe a little bit.
Slightly off from what we would do and atypical year, but but pretty close.
I think that debt.
Way, we have pegged our.
And our plans is that again, we expect and in the second half of the year a return to more normal.
Normal unemployment rates for first half will still continue to be impacted by what we see which many of you know.
As difficulty in hiring.
<unk> struggling to fill positions I would say that this this forecast that we have does not assume even that were at the same level of checks per payroll or pays per control that we were pre pandemic.
And through through all of next year, if we get to that point that would be upside to this model, but that's not where we.
We're expecting we obviously believe it will.
True, although I would say if you if you looked at the underlying data that that that forms a plant it's pretty modest improvement at this point so.
<unk> are those are some of the key assumptions underlying the forecast or the plan.
That's helpful. I know you've also been talking in the past couple of quarters about a healthier backdrop for new business creation wanted to get the latest there has that continued in recent months any type of quantification you might be able to provide for example that percentage of your new wins coming from newly formed businesses are your win rates and competing for it.
These new businesses.
Yes, we're still seeing new business formation.
You would see from the economic numbers are still up very strong.
I think they're up 70% year to date over last year brand new business startups and.
I think that we've done a very good job of capturing those through the products that we have both flex and share payroll and payroll had a very has had a very strong year and.
And as well and especially at the beginning of the year, where they picked up a lot of work at home kind of nanny payroll and things like that flex and also picked up a lot of new startup businesses of various sizes and I think that we expect that to continue I think a lot of it has been the self service the way we have the marketing we have.
Done to get the web leads and then be able to respond to them very quickly even virtually.
And.
From home and from the our virtual sales forces and then the ability the amount of self service that clients can do that theyre looking forward to now on a brand new business. So it is definitely continued we expect it to continue and I think we performed very well from a close rate perspective.
Okay, well thanks for the comments I appreciate it.
Alright. Thanks.
Your next question comes from the line of Bryan Bergin with Cowen.
Hey, guys. Good morning, Thank you.
Wanted to ask on the record new sales and in the quarter can you just talk about where you saw that as it relates to client size any areas and the market you saw more strength I just heard the comments you made on the on the smaller on but just more broadly on <unk>.
Client size and demand there and then what solutions are you seeing the strongest demanded.
Yes, I think on this.
From a size perspective, it was definitely a lot of the new business startups. So it was on the smaller size and mid market did okay.
But it was more it was a little bit more difficult there, where the decisions where they were making no decisions kind of thing or delaying decisions were starting to see that pick up now as we transition into the new fiscal year I think.
And they're seeing more need for some of the products and services as they try to hire back and build their teams backup and so we're definitely I think sought their retirement and HR was very strong and our retirement was very weak and the first quarter as you would expect going through the beginning of the pandemic people werent talking about retirement, we shifted some of those resources.
As towards HR outsourcing they did a great job than as we saw more interest and retirement they shifted back we introduced the pooled employer plan in January as I mentioned that took off and theres been a very strong need for the pooled employer plan.
That has really helped support retirement by retirement, ASO and particular HR outsourcing under the ASO model PEO has been good it hasnt been as strong and the insurance needs and changes I think will come along now as people are looking for comprehensive benefit packages to retain and attract employees, but HR outsourcing.
And retirement.
And certainly sure payroll.
All were very very strong.
Okay, and then just PEO versus insurance performance can you can you kind of break down how each of those businesses performed and <unk> and then how you're building those into your fiscal 'twenty 2 outlook.
Yes.
The growth.
Performance in the quarter was pretty comparable.
And fourth quarter.
At this stage, we think that going into next year.
And that the PEO.
And it's going to grow a little bit faster than than insurance.
Think that I'd love to say finally after about 4 years that.
Workers' comp drag is behind us.
<unk> behind us is a drag, but it's not behind us in terms of.
Growth that isn't really strong I would say 1 thing that was.
Interesting about the quarter was that health and benefits, which we still do a fair amount of sales.
And the under 50 space had a strong quarter, so theres interesting pockets of demand and the economy.
And above and below 50, and there seems to be a pretty strong demand still for insurance health.
Health and benefits insurance.
For in the under 50 space. In addition, obviously PEO this.
And this is now I'm talking more standalone on health and <unk>.
So.
So.
In summary, going into next year, we think PEO is going to grow a bit faster than the insurance part and I think Brian the on when I left out was time and attendance, we've had tremendous consistent growth and time and attendance and I think.
Ability for us the technology that we've continued to innovate there from regular time clogs. The retina scan time clocks to punching and on your mobile phone and your watch has really driven a lot of support their time and attendance as he has got a lot of demand that continues to grow at a double digit.
Space penetration into our base and new clients I think a lot of it being that there's going to be a lot more part time employees <unk> got flexible work schedules time and attendance is really critical so we're seeing a lot of strength there as well.
Okay understood. Thank you for all car.
Thank you.
Your next question comes from the line of Bryan Keane with Deutsche Bank.
Hi, guys good morning.
I wanted to ask about digital sales do you think the market's changed more permanently now and the go to market strategy changes for everybody and now that people realize some of the efficiencies there and just thinking about the cost structure for you guys as a result of that.
Yes, I think it has I mean I just think it's 1 of those things that people have gotten client prospects have gotten more used to we were already and virtual sales and and lead generation and nurturing programs over particularly over the last few years and that has continued to grow for us as well as flex and <unk> payroll and Theres a lot more self service.
And our capabilities that we've introduced as well so not only can you research demo and.
And decided to buy the product you can do a lot more of its self service not only.
Through buying the product depending on your size, but then as sales person can jump in and help you anywhere along the way and people want to do things more themselves.
And then as I.
I think I've mentioned and my earlier comments that we're introducing more self service to where the once you onboard a new employee they can do their own self service setup and everything and this is helping a lot of clients that are used to doing things online. They are used to doing it on a mobile phone and of course, we've been developing all of our products mobile first design so that it is.
Built for the mobile phone.
Years ago, and that has continued to pay off a lot of the investments we made in self service and in technology over the last few years really paid off during the pandemic.
From a standpoint of clients being able to go online and buy and self serve and setup and our self service has picked up dramatically for existing clients for example, and employee and do it changing their own direct deposit bank account changing their address over 80% of those last year were done.
By the client or the employee now self service most of them on a mobile app on our mobile app, so things have changed and.
And they were they sped up during the pandemic and I think they'll continue to do that yeah, Brian the other thing I'd add is.
Our marketing group has really done a good.
Good job in terms of identifying sources of leads and optimizing our models so that our.
Or really efficiently spend.
And on the web, but the point you make is a very good 1 I think that we've evolved into a world where.
There is much more digital sales digital capability and when Youre in front of the client and frequently is going to be on a hybrid model. It was interesting to hear some of our top salespeople and basically some of the really.
Hi, dollar producers talk about how.
How they were able to pivot and.
And hybrid fashion to sell when they hit they hadn't done it before and.
I think that it's weighted to the future of the positive on that I would say is that obviously, we can we can get more efficient in terms of our dollar spend but there is an offset to that because you have to spend more on on digital marketing and Theres no way to avoid it 1 of the things that we're very very proud of this years, if you look at us.
Look at what we did from the beginning of the pandemic, we did our first TV advertising.
We increased our marketing spend we didn't decrease.
This year so.
But thats going to be a more of a permanent feature of the way the the way the business operates.
Got it that's really helpful. And then just as a quick follow up after and when I think about the cadence of service revenue you talked about the high water Mark being in the first quarter.
Just trying to think about the model so the second and third quarter and look more equal and then the.
And the tougher comp in Q4 that will be probably the lowest growth rate I just want to make sure. We get the models right I would say directionally you're correct.
Now.
Just I just wanted to caution.
1 thing.
And which is 22 will be another year, where every quarter, we'll call out what we're seeing.
I mentioned earlier, and it's not a throwaway statement that and I.
I think Jason asked earlier, what are your assumptions about and unemployment.
Play into what happens so we still have we still from our pays per control.
Perspective are down from where we were pre pandemic and we're not expecting and complete recovery of the question is how quickly that occurs as we go through the year that'll be that'll be something we need to see but I would say directionally you're correct.
Great. Thanks for taking the questions okay.
Your next question comes from the line of Eugene Jim O'neil with Moffett Nathanson.
Hi, good.
Good morning, good margin. Thank you for taking my question.
First I wanted to come back more second PEO outlook and.
And on that quickly.
And so great bounce back this quarter, 13% growth.
Yes.
And with sound like going forward very significant tailwind continue.
On the <unk> recovery, which I know.
And both 2 general secular demand, which you can highlight what the outsourced product and.
Thank you channel strength deal, we think your outlook is for 8% to 10% growth. So it would be to bang on.
13%.
Can you maybe talk through some of the puts and takes that went into that outlook kind of what makes it perhaps a bit conservative.
[laughter].
Jim.
Chuckling a little bit.
Yes look.
And.
The.
Anyone who goes to a restaurant these days or it goes to 2 any hospitality provider and noticed that the challenges that the industry still faces in terms of completely reopening we just don't see that.
That debt.
And starting to charge ahead until sometime in the fall so that will be of course, the compare will be easier as we start the year, but theres still a lot of work to be done and hospitality and accommodations and and the state of Florida, where we.
A lot of our businesses.
We're going to we're playing that a little bit more cautiously in terms of that debt.
Part of the business so to the extent that that turns very quickly and they can find the workers.
Maybe maybe we get more and more positive we go through the year, but at this point, we think that debt that's what makes sense.
Got it understood. Thank you and then on my follow up very interested in the.
But you think you guys have and growing revenues still getting greater share of wallet with existing customers you guys highlighted it quite a bit with that.
And retirement on the product and can you just elaborate on that a little bit more what are the odd there may be in addition to these 2 what are the other area and services product, where you're seeing a lot of opportunity perhaps over.
Over the medium term next couple of years, where you can just grab a larger share of the HR budget, which we think there is debt.
David White space.
Yes, I think the biggest 1 that is of course, the HR outsourcing that's had double digit growth from the ASO model I think clients realized and.
The year, particularly with the pandemic that they had so many questions on how to handle remote workforces.
Do you handle vaccine policy, how do you handle.
And how youre going to flexible work schedules and things.
Things that they've never addressed before we saw great demand for HR, it and it all sizes of clients and how to handle federal and state regulations. So I think we opened up a whole and.
A number of clients, who hadn't thought that they needed it maybe.
And to realize that Theres a lot of ongoing support that they get gained from HR services now we have over 600 HR specialists across the country that provided some great expertise.
Even remotely to these clients and a huge compliance team behind them and legal and marketing that would take the rules and regulations coming out of the fed and the state governments boils down make them understandable and train our <unk> with and train those clients on how to handle it and I think thats not going to go backwards I think for especially even for the.
And next year now the issue is how do I hire someone how do I retain them, how do I, how do I keep them and my company with career Pathing and development and how do I use are our products like data analytics that would show you. This is what the pay might you might want to charter pay someone this is how you might want to handle their development and do it all.
By the way remotely through our flex app.
And paperless on boarding and so forth I think that's going to be the biggest demand and growth Besides retirement and time and attendance and of course insurances and even beyond that of course, there is merchant services.
That we sell through partnerships.
There's going to be pay on demand options that we already offer that will continue to grow all of those things. There is a tremendous once they see the value that we have that we can provide them.
There is tremendous upside and the penetration, yes, just to build on that Marty mentioned it in his comments, but I wanted to make sure people did not overlook it we talked about 3.
3 really important metrics that that make us very.
And constructive on on.
Our results going forward 1 was client.
Retention was at 85% I mentioned revenue retention ran about 400 basis points ahead of that.
The client base grew 4%, which was which was.
Recent and recent years 1 of the highest.
Had.
And that by the way as people pivoted to selling virtually and the first half of the year.
The third 1, which we which Marty mentioned, which is important as we had 18% growth and worksite employees and HR related services and we now are at $1.7 million Worksite employees served.
And we dwarf anyone else and the industry.
So.
And we think we are still only scratching the surface. So.
And the revenue opportunity is multiples of payroll as I've mentioned to you all of you before and we think we still have a lot of opportunity. So so just to bolster in addition to everything else as Marty said, the HR part of that that equation and Thats important.
Great. Thank you very much.
Okay. Thanks.
Your next question comes from the line of Kurt.
NATO with Northcoast research.
Hey, good morning, Marty and Efrain Rivera.
Hey, Efrain, you talked a little above what youre expecting from a pricing standpoint, maybe a little bit less than normal.
Just wondering.
Day has the pricing competition changed at all are you seeing aggressive pricing anywhere or has it been fairly normal.
I think kartik I'll take the start of that 1 I think it's been fairly normal I think we really haven't seen.
As I mentioned earlier, I think value and.
Focus for our clients have been so much on the pandemic and the value that they're getting from our support.
During the pandemic and its been so critical to them.
We have not seen.
And we've certainly seen a much better retention from going to competitors and so we're not seeing people leave to go to competitors and so.
So I think.
Even as the pricing has gotten for a little while there was seemed to be a little bit of a step up and a number of free months and stuff like that but again, that's quieted back down and really don't see much change and the and the competitive environment, Yes, Kartik and if you look over a multiyear period and certainly look at where the trends land and we look at retention by reason codes we call.
Got it.
Price value losses, we would call backs and not just price to book value with the client getting there are significantly down. So so irrespective of what the environment is and pricing the V.
Value that we're delivering and certainly we know that anecdotally.
And our Tech services model has been well received by clients and and.
Seem to be voting.
Voting this day.
And then after and just on the float portfolio. I think you said can I expect flat interest on funds held for clients are you.
We're anticipating any growth and the.
Portfolio.
As we have wage inflation and maybe pays per control improve a little bit and as this is a reflection on the yield or are you anticipating and upload portfolio growth to be flat or down.
No.
And the portfolio itself, we expect modest growth and because of what you said Kartik. We expect the pace per control are going to grow we would say it's modest growth.
And then the other components.
At least stay at current levels.
I think we're a little bit cautious just on the interest rate environment at 1 <unk>.
Sometimes we see the 10 year going up to 106, 7 and then it bounces back down to 1.4 so I think we're a little bit cautious.
About getting more aggressive either on positioning or on on calling out a higher increase and the flow portfolio, but we expect increases and.
And the underlying funds and modest.
Modest improvement from where we are but we're not we're not ready to get aggressive in terms of positioning and the portfolio or our assumptions on interest rates.
Perfect. Thank you both I appreciate it.
Your next question comes from the line of Matt Samana with Jefferies.
Hi, Good morning, Thanks for taking my question and get to see the strong close to the fiscal year, maybe efrain if.
If I could ask I know, we've asked a lot of questions about that pays for controls and assumptions and the strong bookings, but how about the company's oh and hiring and what seems to be just a tight labor market. How should we think about where paychex is in terms of direct sales capacity and has your ability to hire and retain and sales right now.
Yes, so on I'll take I'll take that 1 to start anyway.
Ben Good I mean, it's we certainly have had some challenge I think on the front and from a service perspective in some locations, but generally we've really picked up and the last we've done a couple of things that have really picked up our hiring and filling those spots. We think we're in good shape from a sales perspective, we're in very good shape from.
From starting the year at at full capacity with everybody and the seats well trained on.
And the products that we're offering and I think we feel good about that we are seeing it as a very big challenge for our clients and that's providing some opportunities.
Through again, the employee retention tax credit and telling them. How we can help them get dollars there that will help not only retain their employees, but they could use those some of those dollars toward forward hiring 2 youre seeing a lot of upfront bonuses and things like that that clients have never even considered before that we're helping advise them might.
Be a good trend to start.
Great and then maybe on the strong new bookings I know it was asked but maybe if we could double click how should we think about it maybe stratify and by by customer size and everything and maybe kind of sub 20, and where are you seeing strong business formation Sept, 20 employees versus kind of more and that upper end of your of your SMB focused on <unk>.
Like that 50 to 100 employee I wanted to play plus segment.
Yes that under <unk> and has been strong just like you said because of new formation of businesses and we've picked up very well there I think on the mid market. The fourth quarter saw good increase and we looked at it over even 19, because it was a tough compare.
And easy compare I guess, I'd say last year, because there wasn't as much activity and the fourth quarter, we looked at it over 19 and were up and the mid market over pre pandemic levels and and in total our power number hit.
5 year high on the most on the overall par that we sold so we feel good really kind of across the board mid market and more coming and the last quarter and as we start this year.
But fully staffed and ready to go and really seeing.
Now, they're really trained on on how to sell from home and now of course. The visits are opening back up we're getting back out to the referral channels and the <unk>.
And at current clients and we've also introduced some technology last year on the client side and that helped us.
And mostly on the sub 20 or on the <unk> I guess I would say yes.
And the automated referral network that we introduce through the marketing team and the sales team, which sells clients hey, Here's how far you are from a free payroll or from other things that you can get by turning on and 1 more referral and it's very easy to do so we view some technology to pick up on the referrals as well and give better leads.
And in addition to the normal methods.
By the way refers to our internal acronym for bookings sorry, yes, Okay I get that question Mark.
Annualized revenue.
Great. Thanks, again for taking my questions and get to see the strong execution.
Great. Thank you.
Your next question comes from the line of Andrew Nicholas with William Blair.
Hey, good morning, Thanks for taking my question.
I guess the first 1 on I wanted to ask was was it just a numbers 1 after and you you noted up $1.7 million Worksite employees.
And we've talked about kind of 18% year over year growth in and that metric and the fourth quarter I'm. Just wondering if we could drill into kind of those same metrics on PEO, specifically do you have kind of a ballpark WMC number there and maybe the magnitude of growth on that metric year over year and the fourth quarter. So we combined both and the res.
And we did we're not we're not splitting it out Andrew is that from our perspective.
And we go in front of a client if they want to pivot to an ASR model. So.
And that gives us comparable revenue not quite as much as PEO, depending on whether they take insurance as you know on.
Or they don't.
So the 18% is where we grew year over year. It wasn't a Q4 number.
And.
And.
The combination of both were very strong and the year.
Okay, and maybe as a follow up to that have you noticed any kind of material change in client preference between and.
And so and PEO over the past couple of months I think.
And they've generally.
Lean towards debt so since.
Since the pandemic started but just wondering if theres any evolution of that demand balance here since we last spoke.
Yes, Andrew I think I think the PEO side, we saw strong coming on stronger.
Towards the end of the year I think again, the big challenge out there now for businesses as hiring and retaining employees and and benefits.
Benefits package and a very solid benefits package and easy to enroll is all is going to become part of all of that.
Package that you are trying to get to attract employees and keep them. So we do see insurance picking up some now we can provide insurance through the agency directly or through the PEO, but and Youre also seeing.
Texas and Florida picking.
Picking up speed as well as you would expect since they've been pretty open.
But again, it's a challenge to find people, although it is a little easier to find them there and those 2 states frankly than in other areas of the state. So I think PEO will pick up some it's just been slower to pick up because the focus has been more on the HR need now the HR need beat and the HR need being how do I handle.
Things like I mentioned like vaccination policy people working from home new flexible schedules.
Now, it's shifting to not only that but also how do I hire and retain and a really tough market to find people and I think 1 of those things is going to be benefits and insurance.
Great. Thanks, Steve.
Okay. Thank you.
Your next question comes from the line of Jeff Silber with BMO capital markets.
And that's close enough, Jeff silver and good morning.
Yes.
No worries.
And I know, it's late I'll just ask 1.
Marty you had talked a little bit about the challenges that youre seeing in terms of your own internal hiring on the service side and then throughout the comments and we've talked about some of the challenges that your own clients are seeing.
And just curious I know theres been a lot of study that to why folks are seeing those challenges. What are you hearing and what are you seeing why are people not taking these jobs.
Yes, I think you heard certainly the unemployment benefits being high until labor day at least in most areas of the country I think thats..1 I do think there is still a lot of confusion about COVID-19 and Theres health concerns that people are afraid like coming back as everyone vaccinated or not do I have to sit and near someone whats the risks I also.
Think that Theres still a lot of childcare issues as well we hear that from clients that schools are still kind of and day carriers are open or partially open but there may be going now to summer schedules as well and I think people are just kind of playing it kind of careful to come back and there's cash account bank.
And whether youre in the market or not and figure and the market the market's way up and Youre feeling pretty confident of your financial position if youre not in the market, but you have stimulus payments.
<unk> still got some of the highest cash accounts I think if you look at the stats across the country that we've had in years. So people are feeling like they've got some financial wherewithal at least temporarily.
<unk> get through the next couple of months and then I think honestly, it's going to open up pretty drastically in the fall would be might take because the unemployment is going to come back down as well as the rules are looking for work the schools should be back open and full hopefully and day cares.
We even more will be known obviously about COVID-19 and the impacts of vaccinations, hopefully vaccinations are up strongly as well by all of those now you start to get the September October I think things are going to open and people are going to be getting back to work as cash accounts start drifting down a little bit.
Okay. That's really helpful. Thanks, so much alright sure.
Your next question comes from the line of Kevin Mcveigh with Credit Suisse.
Great. Thanks, and congrats Hey, I wonder from a margin perspective as opposed to <unk>.
And Furthermore, each and when you think about price.
What the client.
And she can mean to the business longer term and.
And you've seen the margin investment.
And that's where there is some of that also the 1 off from some of the corporate tax reform investments you made back into 17, and so I guess.
Jim we just frame how much of the cloud transition and ultimately some of that run off from 17 and Thats whats actually meet the Mark just over the next 3 years and just.
Obviously, there's other puts and takes there Jim.
Yes, Kevin.
Yes, So let me address that.
Jim.
I think that very little of it was run off from the 17 investments are actually a few projects that are still continuing that we started and that time. So we're longer range projects, so very very little of it.
Is the run off and what I mean by that Kevin as debt some of that had to be incorporated in the business in order to drive the efficiency that income.
And part of the way some of those investments were structured were that we would accept higher higher.
And spending in exchange for efficiencies and other parts of the organization and I think that what you've seen is on the operations side significant efficiencies and the team has done a great job of.
Leveraging the investments we've made I would say that on 1.
I think the second part is simply that I.
And I mentioned earlier when you go through 1 of these experiences.
And do some geographic optimization that help.
But you also look at what expense you actually need.
And you realize you don't need 100 cents on the dollar maybe you need 99 and.
And I think that where we had that opportunity we spoke to the opportunity to.
Eliminating the cost side of the models.
That's helpful and then.
We have already and you feel more DIY smaller average client size is somewhat and months dependent.
Depending on where the average client size and is today and the reason I'm trying to make that 0.8, obviously, all things equal smaller client to higher retention.
More on turnover, but youre getting better retention and overall, so maybe help us reconcile those dynamics a little bit.
Yes, so I'll start with it's still in the mid teens for the average client size and some areas, it's gone up a little bit actually and and others. It's decreased but I think we're still hanging in that mid teens timeframe or in that mid teens size and and I think that it has.
And that had a big impact on retention I think what's really had the big impact on our retention as the value. We've delivered during the pandemic in particular and of course, certainly some macroeconomic effects of people just wanting to say, hey, I'm going to focus on kind of battened down the business and that and that's not do a lot of change right now and we expect.
Net to continue based on the value we provided them during the pandemic that they've seen and experienced.
Great. Thank you.
Alright, Thanks Youre welcome.
Your next question comes from the line of James <unk> with Morgan Stanley.
Hey, Thank you very much Marty average for all the details and color I'm wondering if.
On this point of hiring and recruiting et cetera, how youre feeling about the debt.
The current product and services that paychex can offer and that I know that that can be a contributor but I'm. Just wondering if there is incremental opportunity to expand and improve those are tied them and other services. Just just trying to think about kind of this bottleneck that everybody seems to be dealing with right now and and how you can help address that.
The investments we've made over the last couple of years really making onboarding of new employees very easy for our clients.
Have been really important it's all paperless and it can all be done online.
And the partnership with indeed.
Really picked up very well the fact that indeed gives credits to our clients for their early postings and so forth and get some of that kind of to the top of the list for posting so from this from the standpoint of as soon as you. Let someone go we can alert you to the fact that you can post that job now and indeed, which is integrated with paychex.
<unk>, Indeed, we'll post that job if someone.
As candidates apply for that job you can now see all of that through flex you can do video interviews you can onboard that employee and all of their information that frankly, they can self setup by themselves.
<unk>.
The person that is applying for the job and all of that can be done and then approved and setup and run on payroll and all of their other HR products from us all paperless without ever anyone touching.
Anything so I think that has continued that is going to help a lot and the hiring process and the integration with indeed.
He's going to help people get posted out on the biggest job board frankly, and the world. So we feel very good about the partnerships and then about all of the process being.
Clearly paperless and and.
And on boarding and then once they are in all of the career development the data analytics that we provide.
The ability to communicate remotely through HR conversations where you can text within the app back and forth or message within the App back and forth. All is very strong for hiring and retaining your employees.
That's great. Thanks, a lot and good luck.
And <unk>.
Your next question comes from the line of Mark Mckenna with Baird.
Good morning, Marty and Efrain and congrats on a on a strong quarter and the positive outlook I'm wondering if you and talk a little bit about where you feel like you might be.
Gaining share when we talk about like obviously, the new business formations are helpful. But it sounds like you are probably getting more than your fair share within new business formations and then.
And how can you how would you describe the competitive environment in terms of where some of the gains are coming from and where things are still challenging and then I've got a follow on.
Okay.
I think the gains obviously as you mentioned mark are from new business formation, but also we're retaining.
<unk> clients from from that standpoint, we're retaining more clients that would've gone to competition, we have not seen the losses as efrain mentioned from price value that's improved.
And to go to competitors that has improved particularly our largest competitor I think we've done extremely well there from holding on to clients. The sales have also I think we're picking up much more from an HR perspective, a couple of years ago, we started selling really not from just the payroll perspective, but from an HR perspective.
We saw we were leaving value on the table for what the client really needed and I think that has helped us a tremendous amount to us for a client to say, hey, I'm not just looking for payroll and I'm looking for and HR need and when you sell the HR need and as time and attendance, which then leads to the payroll and its a total package. So I think we've seen a nice pickup from the <unk>.
We sell.
The way we market our leads are up double digits from last year from from the way, we're marketing on social media through the thrive Conference business Conference. We just had I mean, we have gotten much more sophisticated and the marketing and making the leads that we're getting much more efficient for the sales teams to be able to go out and sell and then.
We're not ready to buy we have a great nurturing process of that lead that we have started a few years ago that I think has really matured extremely well.
It sounds like the leads are up and clearly new business formations and I'm on.
Wondering like within new business formation, and once you get the lead.
It seems like the win rates are probably going up and I'm wondering like how do you feel like you're winning more against.
And so youre going head to head.
Yes, I think.
I would say local certainly as always it's been local competitors to that are not offering the value. That's 1 of the things local regional competitors smaller payroll companies, but some of our major competition too I don't think have done as good a job and showing both the technology as well as the fact that hey, we are.
<unk> 365, 7 days, a week 24 hours a day, if you need something you can do self service you can do it yourself, it's a great from a technology standpoint, but we're not trying to push you away from calling us when you need us with a specific question anytime of the day or night.
And that's that's been very important.
As opposed to some debt I think are trying to push into total self service and becoming more of a.
Microsoft or Apple that it's too difficult to call them, if you really need them and the jam, but so they can have the full options available to us. So I think we are winning against local competitors. We're also winning against our major competitor.
Through through the breadth of products, we're offering and the value and the client referrals have been very strong, particularly.
And the existing clients that we've helped through some of the pandemic and coming in.
Great and then.
And that segways into just what the what the incremental.
Efforts are going to be like over the course of this coming year can you talk a little bit about what you would anticipate in terms of sales force additions and also.
And you know.
Marketing spend both in traditional as well as digital it seems like all of the competitors are picking up.
Their media presence. So I'm, just wondering how youre thinking about that particularly in context of the really nice operating margin expansion.
Items that youre, giving.
Yes, I think as Efrain said I think we've done a good job and some of the things, we did particularly and some of the facilities.
Initiatives and so forth to reduce costs that allowed us to not only again the margins, but keep the investment and marketing going certainly we've done as Efrain mentioned some brand work this year, a lot of pickup and the social media from that standpoint.
We found I think very effective ways to spend our dollars and social and and SCM and SCO to be able to get a lot more attention and again to get more productive leads that are more efficient for our sales team.
As opposed to just a wide spread.
And any warmly that comes in these are much more efficient from that standpoint.
Sales growth and I think we'd be pretty normal from a sales team perspective, and the good news is that we're pretty much fully staffed pretty close to being fully staffed and ready to go.
As we begin this fiscal year, we're seeing a good start to the year that came right out of the fourth quarter.
Great and then last question, obviously, you've got a really strong balance sheet youre going on.
Throw awful lot of free cash flow.
Should we think about capital allocation any areas of interest from an M&A perspective or.
Obviously, you've got the.
It's a stellar track record in terms of returning cash to shareholders, but just thinking about the balance between the 2 and also capex.
Yes, sure. We just obviously just increase the dividend feeling confident here and the last 1.
Month, or so and increase the dividend on a normal basis still got a very strong yield obviously and and we always continue to look at M&A from a debt M&A standpoint, continuing to look at all kinds of <unk>.
Product tuck ins PEO.
PEO everything Thats out there valuations are pretty high we're pretty particular as to what we're looking for it but we're certainly feel good that we're in a solid cash position and gives them a lot of flexibility.
And you want to add market.
The only thing I'd add is.
Thing 2.
2 things.
And but.
With respect to Capex, we generally target about 3.5% to 4% of sales.
Level of Capex will be around there this year.
And then.
We're keenly interested and the right technology. So we do not have the attitude.
And that.
And the advantage here, we're not interested in it and we're actually interested in anyone's garage idea, if it's better than what we got so so we.
Peer into garages and see what people are doing.
It is interesting, but some of it is so well.
We will look for technology and obviously in <unk>.
And to the areas that Marty mentioned.
Great look forward to talking to you again, a little bit later today efrain okay. Thanks.
Thanks Martin.
Your next question comes from the line of Matt Oneill with Goldman Sachs.
Yes, hi, good morning, gentlemen, thanks, so much for squeezing me and I know it's late.
And from.
Just a quick 1.
This is probably 1 of the annual guidance is that you guys have issued debt had a good deal.
Upside versus consensus and historically, you guys have been pretty conservative and.
Consistently able to kind of increased guidance throughout the year, so with the amount of uncertainty that probably still remains as it is it safe to assume that the same principles that you guys use when setting annual guide and cold than that.
And client here remains conservative and your mind.
I would say this Matt that's a good question.
Euphemistically.
There is an element of conservatism and our guidance I mean look.
The good thing about having been here 10 years and the bad thing about having been here 10 years at the same thing everyone knows my MMO.
And so so we will issue guidance that we hope we can do a bit better than but but we also want to make sure that women and investor mix and decision about whether they want a whole paychex versus something else. They know what they can expect and I think over the last decade, that's exactly what we've delivered.
Understood. Thanks, so much.
Okay. Thanks Brent.
Your next question comes from the line of Duane Zheng Huang with JP Morgan.
Hey, Thanks real quick on to say congrats on the 50 year anniversary. This.
Crazy Stat, especially and tech so if Tom GUL sales listening congrats I wanted to.
Wanted to quickly I know, if and you guys and are you guys covered a ton and I know just on the debt.
The payroll client growth of 4% against service revenue being 1% and I know Theres a lot of factors that drive the delta there, but just thinking about that incremental 4% and perhaps skewing smaller with smaller revenue per client is that something you saw coming out of the other day.
And they make and as short payroll, maybe contributing a little bit more to the client growth and how might that evolve as we look at fiscal 'twenty 2.
Yes, and Thats. Good question, So, yes, I think it's fair.
And to say that debt.
And skewed a bit smaller having said that on.
And our model is we take we take clients of all levels and as Marty mentioned in the first half.
The mid market.
More challenging because of driving everyone to virtual and then we had strength as we came out of the year I think we've optimized our model.
And to produce margins that are really pretty impressive even when the clients are small.
I think that.
And for example, a sure payroll client is a surprisingly high level of.
And of lifetime value.
And part because they are being on boarded on too.
Onto our platform Thats optimized for that side of the client and so when we look at the portfolio. We're looking at everything from very low and clients to hire and clients and trying to get the mix right and we feel comfortable that we've got that right and that next year, maybe you will skew a little bit less to the small and a little bit.
A little bit bigger so average client size and maybe it's a chance.
To pick up but despite all of that despite all of that.
We.
<unk>.
We had a good year overall from a client growth standpoint.
Okay, great thoughtful thank you.
Okay. Thanks.
Your last question comes from the line of Peter Christiansen with Citi.
Good morning, Thank you.
And the chance to bat clean up today also.
And as I say great execution.
<unk> and <unk>.
Top here certainties.
I appreciate it Mark Martin as I was just.
It was also a strong year on the product and development front you had the PPP program, we acted fast on the PPP program.
<unk> integration and a bunch of other things that you mentioned.
And from the product development point of view.
What are some of the priorities that you're thinking about over the next 12 to 18 months where are you spending.
The bulk of your resources.
On in that Avenue that'd be helpful. Thank you.
I think.
Peter what Youre going to see is a lot more self service.
Seeing with it was accelerated a lot with the with the pandemic that people, we always had been moving that way and have done a lot of work as I've mentioned, a number of times on the call about self service, but I think youll see even more of that clients want the ability to be able to do things and their employees and want their employees to be able to do things on their own and.
It's probably no surprise and Youll see us continue to offer that and to work to continue to make that simple and.
On our mobile App. The App is still a 5 star mobile App, we're very proud of that we keep things as simple as we can and it as I said, it's everything has developed mobile first so we design it for the mobile App and that has continued to pay off for us and I think you'll see things like the fact that employees of our clients are now making all.
These changes for their or their bank accounts and their address changes.
And that happened relatively quickly over the last year or so that that has gotten over 80%.
Usage by the employees of the client that helps the client that helps us to focus our service people on more value added conversations and so forth.
Ladies and gentlemen on the clean.
The next day and technical difficulties.
And generally.
Okay.
Yeah.
Ladies and gentlemen, and your conference will resume momentarily please standby.
Okay.
Yeah.
And ladies and gentlemen, please standby.
Your conference will resume momentarily.
Ladies and gentlemen, please standby your conference will resume momentarily.
Ladies and gentlemen, please standby your conference will resume momentarily.
Ladies and gentlemen.
We did experienced technical difficulties they did I lose power. This will conclude today's conference call. Once again this will conclude today's conference call.
[laughter].
Okay.
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And.
Okay.
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Okay.
Okay.
Okay.
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